Appeal court ruling raises questions, concerns about ATE insurance

By LegalMatters Staff • A recent Ontario Court of Appeal decision “raises more questions than answers and highlights the landmines” associated with after-the-event (ATE) legal protection insurance, says Barrie-area litigator Steve Rastin.

In the case, the plaintiff lost at trial and a dispute afterward as to who was entitled to a $100,000 ATE policy. “After-the-event policies are intended to cover a plaintiff against the risk of an adverse costs award in litigation and also provide coverage for disbursements incurred by their lawyer.

Rastin, managing partner with Rastin Law, says while ATE insurance can be beneficial in bringing a case to trial there needs to be more understanding of how they work and who is really intended to benefit from such policies.

Needs review

“Legal protection insurance, in general, is not a bad idea because it mitigates against the risk of taking a case to trial,” he tells LegalMattersCanada.ca. “However, before this product becomes a standard of care in the legal profession it would benefit from some sort of review or discussion to make sure that it protects people as intended.” 

The court of appeal decision considered a case where a man filed a lawsuit following an automobile accident. On his lawyer’s advice, the man obtained an ATE policy, also known as adverse costs insurance. It does not appear that the plaintiff had legal capacity.

After losing at trial, the plaintiff was ordered to pay more than $161,000 in costs to the defendant. A dispute then arose between plaintiff’s counsel and the defendant’s insurer over who should receive the proceeds of the insurance policy. Plaintiff’s counsel wanted to use the majority of the insurance to cover incurred disbursements; the insurance company wanted the insurance to satisfy part of the $161,000 cost award.

The plaintiff’s lawyer brought an application to access the proceeds of the policy under the Contingency Fee Agreement, (CFA), which was dismissed because he had not sought court approval for the agreement. In rejecting the application, the judge ruled that the lawyer’s client was a person with a disability and his litigation guardian was not present when he entered into the CFA.

Raises concerns

Rastin says the question of what would have happened if the CFA had not been invalidated raises concerns in his mind.

“There was a $100,000 policy. The defendant won the trial and costs were ordered for almost $162,000,” he says. “What the plaintiff’s law firm wanted to do was keep $68,000 with the rest going for the costs awarded. 

“Let’s assume that the agreement had been valid. Now the plaintiff owes almost $132,000. How does that protect the plaintiff?” Rastin asks. 

He says the issue raises the question of the validity of some contingency fee agreements.

“One has to worry that some cost protection agreements run the risk of being held invalid because I don’t think all law firms are going to court and saying ‘I have this CPA with a person with a disability or a minor, will you validate it?’” he adds. “I would think there are some cases out there where the plaintiffs are either minors or otherwise don’t have capacity.”

Charging order

The court of appeal heard the law firm then brought a motion seeking a charging order over the proceeds of the ATE policy to secure their outstanding legal fees and disbursements. However, the application judge found that the lawyer had merely served as an insurance intermediary and failed to meet the test to claim the order.

“If I take a case to trial and get a $200,000 award, arguably my client wouldn’t have gotten that verdict if I hadn’t worked on it. So I should be entitled to a charging order,” Rastin explains. “In this case, the lawyer lost because the court would not conclude that his actions gave his client value.”

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He says the idea behind ATE insurance is to allow people to advance a case to trial without incurring crippling financial debt but it does have its drawbacks.

“The concept of being able to level the playing field is a good thing,” Rastin says. “But it’s not without risk. Some people may reject a reasonable settlement offer because they have insurance so they think they may as well swing for the fences.” 

‘Peace of mind’

He says ideally adverse cost insurance “provides certainty, protection and peace of mind to plaintiffs engaged in contentious litigation.”

“What this case underlines is that there’s a risk that none of those things are going to flow,” Rastin says. “There has to be clarity as to who is buying the product and why. What’s the priority going to be for paying out the money?”

He notes that under the new Simplifed Procedure where there’s a cap on disbursements of $75,000 and $50,000 for legal costs, “a product like this could work well” but there needs to be a re-examination of insurance when looking at larger cases.

Rastin says he rarely uses ATE policies because of the sorts of concerns raised by this case. There are also a number of process concerns.

For one, insurers generally prefer lawyers to cover all their files and he does not think that is necessary.

“If you have a slam dunk case do you really need adverse costs insurance?” Rastin asks.

He says insurance can be voided if a reasonable offer has been made and the client rejects it.

‘Too subjective’

“Who defines whether that offer is reasonable? That’s too subjective,” Rastin argues.

He also says the insured must certify that there’s a 51 per cent chance of success to obtain a policy.

“If you certify there’s more than a 50 per cent chance of winning and the other side comes out with some devastating new evidence four years into a five-year lawsuit does the insurance disappear?” Rastin asks. “The question then becomes would you have taken the case from the beginning if you knew you didn’t have the insurance?”

He says ATE insurance is an access-to-justice issue that needs further examination.

“I am not saying it’s a bad idea. What I am saying is that as a profession we need to turn our minds to better answer these questions,” Rastin says. “There should be definite rules about the priority in terms of the money and it should be disclosed to the client.

“This issue reminds me of the government saying they were acting for youth in the WE Charity affair but the prime minister’s mother gets hundreds of thousands of dollars for speaking engagements,” he adds. “You can say it’s one thing but does the rhetoric really match the protection on the ground?”