Is it safe?

You know the scene – you have a claim for significant loss and expense arising from your latest project. You think it is a good claim. You have retained programming experts who have carefully linked the effect of relevant events with the financial consequences. Your project team has been closely involved in preparing the claim and filling in the gaps as to what happened on site. The construction director has given it the thumbs-up. Even the lawyers have given the claim a good bill of health.

Then along comes the finance director to spoil the party. They want to know how much all of this will cost to take to trial. They want to know how much the other side's costs will be, and you have to tell them that they will be responsible for up to 70% of the other side's costs if your firm loses. The finance director concludes that if disaster strikes and the claim fails, the overall cost makes the whole business look decidedly risky. Glum faces all round the boardroom.

There may be sunshine around the corner. "After-the-event" litigation insurance, or "ATE", has been around for some time. The trouble with ATE is that it is usually prohibitively expensive (typical premiums are 30% of the sum assured) and often is only obtainable if the claim is a certainty. However, "financed-after-the-event insurance", or "FATE", may come to the rescue.

It's still expensive, but the beauty of the product appears to be that you do not pay any of the premiums up front.

Here is how it appears to work. Say you require £300,000 worth of cover. You fill in a form that details the claim, the expert evidence you have received, plus any legal advice. You have to pay insurers an investigation fee of about £1500 to see if they are prepared to take on the risk. If they do, they will quote you a premium. They will also lay down the benchmark for establishing whether you have "won" your claim for the purposes of the cover.

FATE is still expensive, but the beauty of it is that you do not have to pay the premiums up front

The premium for this would be about £100,000 (the first premium). This is still very expensive. However you can insure the first premium against losing the claim and not therefore being able to recover it. Accordingly this "second premium" is itself insured. This might cost a further £30,000. However, the second premium is financed so that it only becomes payable if you win the claim. The only amounts that you pay upfront are the investigation fee.

If you "win" your claim you will have to pay the premiums. There is also a "success fee" that insurers can charge. However, under the Access to Justice Act, some of the premium may be recoverable from the losing party. The trouble is that you can only recover a "reasonable" premium. The only cases to date on what is meant by "reasonable" relate to insurance for personal injury cases – much less than the cover referred to above. However if the premium for this type of insurance is in line with the market rate, then there seems no reason why at least the first premium should not be recoverable. It is debatable whether the second premium would be. And there seems little prospect of recovering the "success fee" charged by insurers.

ATE's problems were not only that cover was so restricted and expensive but also that it involved substantial cash flow problems through having to pay a large premium up front. FATE seems to have solved the latter. However, the insurer and you may have very different ideas as to the amount of your claim. If insurers set a relatively modest figure by which you will be deemed to have "won" under the policy, then if you are offered that amount, but want to press on, the offer will trigger the payment of the premiums and from then on you are on your own with no further insurance cover.