03 May 2019

The role of After the Event insurance in class action funding: 5 years on

This article was written by Justin McDonnell and Rebecca LeBherz.

Since our last article “ATE insurance and implications for class actions in Australia”, published in 2014, filing rates for class actions in Australia have steadily increased year on year.[1] [2] Third party funding of class actions has also increased significantly.[3] 58% of class actions filed in 2016/17 were supported by litigation funding.[4] This figure increased to 66% in 2017/18.[5]

Alongside these trends, the Australian market for ATE insurance as a means of funding, and providing security for, adverse costs orders in class actions has also increased and matured. As funding agreements most frequently indemnify the representative party against adverse cost orders[6], many funders will require ATE insurance against adverse cost orders.

At the date of our last article, use of ATE insurance was gaining traction in Australia but the industry was very much still in its infancy. This article looks at the Australian ATE insurance experience 5 years on.

Availability of cover in Australia

Many UK based insurers now offer ATE policies in the Australian market. The principal insurer writing policies onshore in Australia is Liberty Insurance.

It will be interesting to see whether more ATE insurers commence writing policies locally in coming years. While Australia is commonly seen as a plaintiff-friendly jurisdiction which should be attractive to insurers, there is yet to be any indication of a change in the largely London based market for ATE policies.

Premium pricing

Competition has applied downward pricing pressure on both litigation funders and ATE insurers alike. There are now both more funders and ATE insurers in the Australian market and the plaintiff firm customer base appear to be becoming more sophisticated consumers.

We last reported that the ATE premium charged was generally 20-40% of the policy indemnity limit, with almost all policies being written on a wholly deferred premium basis[7]. ATE premiums are now more flexible. The following premium options are now available in Australia:

  1. Wholly up front premiums paid when the policy is taken out. The premium for this model is usually 20-35% of the policy limit;
  2. Staged premiums paid at milestones during the life of the matter – i.e. 5-15% upfront when the policy is taken out, a further 10-15% at the mediation, 5-45% if the matter has not settled within 8 weeks of trial;
  3. The traditional wholly deferred premiums (i.e. the insured pays the premium when judgment is delivered or settlement occurs). This is now the least utilised of the pricing options and insured defendants need to pay 60-80% of the indemnity limit as premium if successful at trial or in settlement; and
  4. A blend of options 2 and 3, with approximately 10% paid upfront and an agreement to pay the remainder on a deferred basis if the matter does not settle at mediation.

Insurers generally require a copy of counsel’s advice to the plaintiff and/or funder on both prospects of success and prospects of recovery. The insurer’s lawyers will generally do a desktop analysis on these advices before the policy is issued to check issues such as the underlying assumptions of the advice. The plaintiff’s cost estimate is also often requested as a matter specific guide. The status of these documents as privileged material is yet to be definitively tested.

Increased prevalence of ATE policies have allowed insurers to develop better claims data for more accurate calculation of quantum exposure and premium calculation.

Interesting developments

AmTrust deeds as security for costs and the torts of champerty and maintenance – a further role for ATE insurance?

“AmTrust deeds” have gained popularity among plaintiffs in class actions seeking to meet a security for costs orders. An AmTrust deed is a deed of indemnity offered by UK based insurer AmTrust in exchange for a small fee upfront and a return contingent on the quantum of any judgment in favour of the Plaintiff in the proceedings. The AmTrust deed is proffered as security to the defendant for the adverse cost order instead of the plaintiff paying money into court.

AmTrust deeds have been widely accepted by courts and defendants as security for costs (especially in New South Wales and Victoria)[8] . However, recently there has been discussion regarding whether these arrangements offend the torts of champerty (supporting litigation in exchange for a share of profits) and maintenance (involvement by a party without an interest to encourage litigation) in Queensland, WA, Tasmania and NT where these torts have not yet been abolished by statute. This issue has come into focus in Queensland since the introduction of its class action regime.

Two cases have been handed down by the Supreme Court of Queensland this year which have considered AmTrust deeds as a means of providing security for costs. One of these raised the torts of champerty and maintenance. In Murphy Operator Pty Ltd and ors v Gladstone Ports Corporation Limited[9] , the defendant to a class action sought security for costs which was offered by the plaintiff by way of an AmTrust deed. The defendant challenged the AmTrust deed as form of the security on, inter alia, the basis it:

 

“has concerns that the deed may not be enforceable if AmTrust receives, as consideration providing it a share of the proceeds of any successful settlement of judgment. In that event, the deed may form part of a champertous funding arrangement in circumstances where maintenance and champerty are torts in Queensland”.

The court held with respect to the AmTrust deed that that a finding of champerty was possible if the deed entitled the funder to a percentage interest in the litigation and an entitlement to be involved. However, in this particular case, the Court accepted deed along with $30,000 cash security as a cost to enforcing the deed in the UK. The Judge found that was a straight call on the deed for payment.

While not on champerty and maintenance grounds, in Equitrust v Tucker and others[10] , the plaintiff offered to provide its security for costs by an AmTrust deed. The defendant challenged the form of security and sought payment into court. Bowskill J refused the AmTrust deed as security and required payment of funds into court. Bowskill J held at [138] – [140]:

 

“…AmTrust is a foreign third party to the proceeding, the terms of the proposed deed of indemnity in some respects require the applicants to depend upon AmTrust’s cooperation (in respect of which it has “absolute discretion”), and if the deed is not voluntarily responded to upon a request for payment, would involve the applicants in further proceedings to enforce a costs judgment against AmTrust overseas. Those matters raise the considerations referred to in the Trailer Trash case referred to above.

As against that, there is no basis in the evidence to conclude that there would be any impediment to the plaintiff, or its litigation funder, providing the security by payment into court, or a bank guarantee. 

On balance, I am not satisfied the plaintiff has discharged its practical onus of establishing that the proposed security, in the form of a deed of indemnity, is adequate and does not impose an unacceptable disadvantage on the applicants (defendants)…”

We question whether, should an anti-AmTrust trend develop in champerty and maintenance States, if ATE insurance has a role to step in and take over from AmTrust deeds in security for costs situations? This has implications beyond the class action context and may see an increased role for ATE insurance policies in security for costs applications more generally.

ATE insurers would need to address the issues highlighted by the Federal Court in Peterson[11] to ensure enforceability and certainty for defendants, i.e. identify the defendants as named insureds on the policy, or reach a separate agreement with the defendant/provide undertakings to purse a claim for the costs against the insurer and limit recourse for non-disclosure.

UK case law initially cautioned the use of ATE policies as security for costs, primarily due to the potential for an insurer to avoid the policy for example, by reasons of non-disclosure by the plaintiff[12] – an issue outside the control of the plaintiff. However, ATE policies have more recently been held to be adequate to satisfy the requirement for security for costs. In Geophysical Service Centre Company Ltd v Dowell Schlumberger (Middle East) Inc[13]. , the ATE policy was held to be adequate security. This judgment made clear that alleged inadequacies or gaps in the policy needed to be real not theoretical.

Narrowing of the claim appetite?

There has now been in excess of 80 securities class actions filed in Australian courts, yet not one of these actions has made it to judgment. On face value this looks to be a very lucrative areas for insurers to focus when compared to trial rates for other types of class actions and insolvency actions. It is possible that we see a narrowing of the risk appetite to certain types of low risk claims and defendants (and their insurers) prepared to take matters to trial, especially if they seek to attack funding of the class.

Portfolio funding

The Australian market is starting to see ATE insurance offered over “case portfolios” rather than on a case by case basis. This may result in insurers taking on smaller claim quantum if grouped in a portfolio by the firm. Portfolio ATE policies are typically offered on condition that the firm agrees to bear the first loss or only have a proportion of each loss covered. It will no doubt be popular with firms who do small volume, speculative work.


[1]Save for 2014/15 which was saw very high filing rates which fell back into line with the trend in 2015/2016. See The Review: Class Actions in Australia 2016/2017, King & Wood Mallesons.

[2]In particular, since our last publication there has been a significant increase in security class actions as shareholders look to D&O insurers for recovery where companies are in financial distress. Queensland has also introduced a class action regime.

[3]The Review: Class Actions in Australia 2016/2017, King & Wood Mallesons.

[4]Ibid.

[5]Ibid.

[6]Costs, if awarded, are against the representative party not distributed amongst the class: see for example, Supreme Court Act 1986 (Vic) s33ZD, Federal Court of Australia Act 1976 (Cth) s 43(1A), Civil Procedure Act 2005 (NSW) s 181. The named representative party will likely requires these to be indemnified as part of any funding agreement.

[7]Standing Committee of Attorneys-General, May 2006, ‘Litigation funding in Australia’, Discussion Paper, page 15 quoted in Rebecca LeBherz and Justin McDonnell, 2014, ‘ATE insurance and implications for class actions in Australia’.

[8]See DIF III Global Co-Investment Fund LP & Anor v BBLP LLC & ors [2016] VSC 401 and Australian Property Custodian Holdings Ltd (in liq) (rec and mgr appted) v Pitcher Partners [2016] VSC 399 (appeals heard together).

[9][2019] QSC 12.

[10][2019] QSC 51.

[11]Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited [2017] FCA 699.

[12]For example, see Michael Phillips Architects Ltd b Riklin and anor [2010] EWHC 834 (TCC).

[13][2013] EWHC 147 (TCC).

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