As its name suggests, this is insurance that can be obtained after a dispute has arisen. Cover can be obtained either to protect you from paying your own or the other party's legal fees if you lose. Usually, you can only get cover for your own fees if you also cover against paying your opponent's fees. However, cover against having to pay the other party's fees is available on its own.
The cover is very expensive, but the point of it is that it enables a party to limit its exposure for costs in the event of losing. Premiums range from about 15% of the sum insured to about 30%. Thus, to obtain cover for £100,000 worth of legal fees (whether your own or the other side's) will cost anything from £15,000 to £30,000.
The underwriter calculates the premium on the basis of the chances of your success in court. Some ask for a substantial non-refundable fee to meet the cost of investigation – as much as £10,000 or £15,000 – whereas others are happy to rely on information provided by the insured party's legal team and a relatively small fee.
This is all fairly straightforward, but the clever bits come in the optional extras that are available. For example, it is possible to agree that the premium will be paid in stages by reference to particular points in the procedure of the case, so that if the case settles before it gets to trial, not all of the premium will be paid. A different way of doing this is a "no claim" bonus, in which the premium is paid in full up-front, but it provides for part repayment if the claim settles before certain stages are reached.
Under new rules introduced last year, a premium paid for after-the-event insurance can be recovered from your opponent if you are successful. The downside is, of course, that if you lose the action, you have to bear the cost of the premium, but that's less than the legal costs you would have incurred.
Now we come to the really clever bit. It is also possible to insure the premium itself. This rate would usually be the same as the premium payable on the principal insurance. For instance, if one insures £1m of legal fees with a £200,000 premium, the premium insurance cover will cost £40,000, which will repay the premium on the principal insurance if you lose the action.
This second premium is not recoverable from your opponent, so that if you win, they pay your costs and the premium on the principal insurance, leaving you with the premium of £40,000. If you lose the action, your insurance will pay your opponent's costs (and your own if you have taken out that insurance) and the secondary insurance will pay the premium, leaving you with a cost of £40,000. Thus the effective premium rate is reduced to 4%.
The underwriters, as one would expect, want to take a fairly close interest in the case and your ability to accept or reject an offer of settlement may be restricted. Alternatively, the underwriters may reserve the right to cancel the policy, subject to payment only of the costs incurred up to the date of the settlement offer. The need to liaise with the underwriters will undoubtedly increase the cost of claims, and it is not clear whether these costs can be recovered from your opponent or under the insurance. My belief is that they will not be. All this is a small price to pay for the security offered.
One final point is that this insurance does not provide any protection against insolvency. If you manage to win but your opponent goes bust before you collect the money, that will be your problem. The insurance will not pay out in these circumstances.
But overall, with the great many different deals available, after-the-event insurance is definitely worth considering.
Postscript
Neil White is head of dispute resolution at solicitor Taylor Joynson Garrett.
