Litigation is often framed as a question of legal merit. In practice, however, whether a dispute ever reaches court can depend on something far less visible: whether an insurer is prepared to take the risk.
For providers of after-the-event (ATE) insurance, underwriting decisions can determine whether claimants are willing to pursue a case at all. Without adverse costs cover, which protects against paying the opponent’s legal fees if a claim fails, many litigants simply cannot justify the exposure.
“If you cannot persuade an underwriter to insure adverse costs… the exposure may be just too great,” said Rocco Pirozzolo (pictured), managing director and underwriting director at Harbour Underwriting. “It might mean that what appears to be a meritorious case cannot progress.”
The difficulty for insurers is that those decisions are often made at a very early stage of a dispute, before the evidential picture has fully developed.
In court, claimants must prove their case on the balance of probabilities, effectively a 51% likelihood of success. Insurers typically look for stronger prospects before agreeing to provide cover, often around “60% prospects of success,” Pirozzolo said.
Even then, assessing litigation risk is far from precise. “It is not a mathematical formula,” he said. “What we are trying to articulate is that we feel confident the case is going to win.”
That judgement frequently has to be made before proceedings have even begun. At that stage the material available may be limited to a barrister’s opinion, some pre-action correspondence and perhaps an expert report. Pirozzolo said, “we are very conscious that we are seeing most cases early… you might have a barrister’s opinion… you are unlikely to have witness statements.”
In practice, that means insurers are often assessing disputes that will continue to evolve as litigation progresses. The question inevitably arises whether some potentially viable claims are left behind if insurers are too cautious.
The environment in which dispute insurance operates is also evolving. The UK’s Competition Appeal Tribunal (CAT), which handles collective competition claims, remains a relatively young regime. As Pirozzolo said, “CAT cases are still in their infancy in legal terms.”
Early collective actions attracted strong interest from litigation funders and insurers, but uncertainty around how damages are ultimately distributed has complicated the economics of those cases.
“If you lose, you lose – that is the deal,” he said. “The problem is that if you win, you do not necessarily know what you are going to get.”
Funding models themselves are also shifting. Increasingly, litigation funders are seeking capital protection insurance to cover the money they invest in cases, a development that changes the traditional alignment between funders and insurers.
“Once upon a time you got comfort from the fact that they had money exposed,” Pirozzolo said. “If they insure their capital, you have less risk alignment than before.”
That change means examining cases even more closely before agreeing to provide cover.
Despite the close relationship between ATE insurance and litigation funding, Pirozzolo said the market has become too dependent on funded cases.
“When we started this journey back in 2000, the idea was that this insurance was for run-of-the-mill cases, cases that do not have litigation funding at all.”
Today, however, insurance is often only considered once a funder is already involved. In many commercial disputes, the option may never be explored.
“The number of times I hear solicitors say ‘my client would not be interested’ or ‘my client does not need it’ makes me wonder whether that has really been explored,” he said.
Part of the challenge lies in how litigation risk is discussed with clients. Lawyers may hesitate to spell out the financial exposure involved in bringing a claim. Yet even a strong case carries meaningful downside risk. Pirozzolo said, “if you say a client has a 60% chance of winning, that also means they have a 40% chance of losing… a 40% chance of paying adverse costs and 40% chance of losing the fees that they have paid to progress their case.”
For that reason, he believes brokers and solicitors have a larger role to play in helping clients understand how litigation risk can be managed. “If solicitors do not feel comfortable having that conversation, get a broker involved.”
In many disputes, the practical question is not simply whether a claim has legal merit, but whether the financial risks of pursuing it can be managed.
