In litigation, there are no guarantees of success and failure can be prohibitively expensive for those involved in a legal proceeding. Even the best cases are faced with uncertainty and risk when a dispute proceeds to trial and the decision is ultimately left in the hands of a judge or jury. While attempts can be made to gaze into the crystal ball and predict what decision will ultimately be rendered, such efforts provide no concrete assurance to litigants of their chances of success nor any protection from the financial risks associated with litigation. Perhaps the greatest risk is the prospect of a court ordering costs against an unsuccessful litigant. Given that the general cost principle followed by the courts has been that the cost follows the event, this financial risk looms over all litigation.
As legal costs soar, there is an increasing market for insurance products that shield litigants from adverse cost awards. After-the-Event Insurance, often called Adverse Cost Insurance, has been taking the legal industry by storm since its introduction into the Canadian marketplace in 2009. However, as litigants, their counsel and law firms take advantage of this insurance coverage, courts across the country have increasingly been required to deal with its implications in legal proceedings. In recent years, the Ontario Superior Court and the British Columbia Supreme Court have provided some direction with respect to many of the procedural and legal issues associated with its use in litigation.
What is After-the-Event Insurance
After-the-Event Insurance (“ATE Insurance”) is an insurance policy that covers the legal costs and expenses that are incurred in litigation. It is typically purchased by a plaintiff to provide coverage in the event of a judgment for costs against them if they are unsuccessful at trial. While many view ATE Insurance as a powerful tool for access to justice, allowing plaintiffs of limited financial means to advance claims while protecting themselves from exposure to cost orders, its opponents view it as raising many procedural and ethical issues related to disclosure and solicitor-client privilege.
In this paper we will examine recent case law that addresses three issues:
- Are ATE Premiums recoverable as a disbursement;
- Does an ATE Insurance policy need to be disclosed in a legal proceeding; and
- How do the courts deal with ATE insurance in addressing security for costs.
Recovery as a Disbursement
Just as with other insurance products, ATE insurance policies require the insured to pay premiums in exchange for coverage. As such, courts have been required to address whether premium payments for ATE Insurance are a disbursement and recoverable as a legal cost.
This issue was first addressed by the Ontario Superior Court in Markovic v. Richards, 2015 ONSC 6983. In ordering costs in this personal injury lawsuit, Justice Milanetti rejected the plaintiff’s position that ATE insurance premiums were a recoverable disbursement. It was noted by Justice Milanetti at paragraph 7:
Such disbursements have not, as far as I am aware, ever been entertained in Canada and have certainly not been the subject of legislative reform as was the case in the UK. I can think of no policy reason that such should be compensated as a taxable disbursement. Existence of the policy may well provide comfort to the plaintiff, it is however an expense that is entirely discretionary, does nothing to advance the litigation, and may in fact even act as a disincentive to thoughtful, well-reasoned resolution of claims. I do not think it fair and reasonable that an insurer be expected to cover the disbursement for this payment of premiums.
In rendering her decision, Justice Milanetti confirmed that such an expense was wholly discretionary and not a cost that was necessitated by the litigation itself. While the coverage provided peace of mind to the plaintiff, it was not required to proceed with the legal action.
Justice Milanetti’s reasoning was followed in subsequent Ontario Superior Court decisions including Valentine v. Rodriguez-Elizalde, 2016 ONSC 6395, as well as in the British Columbia Supreme Court decision of Wynia v Soviskov, 2017 BCSC 195. In following the reasoning of the Ontario Superior Court, and adopting this legal proposition into British Columbia, Registrar Nielsen noted that although ATE insurance provided a degree of comfort to plaintiffs, it did not arise from the exigencies of the proceeding or relate directly to the direction, management or control of the litigation to prove a claim against the defendant. In reaching this decision, Registrar Nielsen referenced British Columbia Supreme Court Civil Rule 14-1(5), which provided that all disbursements must be, “necessary or properly incurred” in the conduct of the proceeding. As stated in paragraphs 78 and 79 of the British Columbia Court of Appeal decision in Mackenzie v. Rogalasky, 2014 BCCA 446, expenses that are, “necessarily and properly incurred” are those that are inherent in the particular litigation and do not arise from the circumstances or choices of the party.
This line of case law from Ontario and British Columbia seemed to suggest that the status of ATE Insurance premiums as a non-recoverable disbursement was a shut and closed issue. However, in 2017, in the Ontario Superior Court case Armstrong v. Lakeridge Resort Ltd., 2017 ONSC 6565, these earlier decisions were distinguished, and it was held that an ATE premium was recoverable as a disbursement. In rendering this decision, Justice Salmers stressed that ATE Insurance provided increased access to justice to litigants given that the plaintiff’s costs of advancing this litigation were significant, and without cost insurance, this plaintiff (and other litigants of limited financial means) would be discouraged from pursuing their claims or enforcing their legal rights in a court of law. As such, it was held to be in the public interest to allow such expenses to be framed as a disbursement so as to allow plaintiffs to, “pursue meritorious claims without fear of a potentially devastating adverse costs award”.
These conflicting decisions indicate that courts have some discretion in choosing whether or not to allow for ATE premiums to be recovered as a disbursement in litigation. A choice that is likely to be driven by the financial means of the plaintiff, their ability to pursue the litigation in the absence of ATE Insurance and whether or not the trier of fact views such insurance as ameliorating some of the barriers to access to justice.
In British Columbia, Rule 7-1(3) of the Supreme Court Civil Rules provides that a party must disclose any insurance policy under which an insurer may be liable to satisfy all or part of a judgment. Similarly, Rule 30.02(3) of the Ontario Rules of Civil Procedure requires parties to produce any policy under which an insurer may be liable. In Abu-Hmaid v. Napar, 2016 ONSC 2894, Master Short of the Ontario Superior Court considered an application brought for an order to compel a plaintiff to disclose whether he had obtained ATE Insurance and held that an ATE policy was an insurance policy covered by the Ontario Rule 30.02(3). Further, the master held that the existence of an ATE policy was relevant and it was necessary to disclose its existence. However, the specifics of the policy were viewed as having no probative value to the case and therefore were not compellable to disclose. It is often the case that ATE Insurance is not held by an individual plaintiff but is instead held by a law firm and used to insure multiple clients under the same policy. When this occurs ethical issues emerge with respect to the disclosure of such policies and the effect that doing so may have on solicitor-client privilege. This issue was addressed by the Ontario Superior Court in Jamieson v. Kapashesit, 2017 ONSC 5784, where Justice Cornell referenced at paragraph 22, factors that distinguished this matter from previous case law.
This case can be distinguished from Fleming as the policy is that of Orendorff & Associates and not the plaintiffs. Given the terms of the policy and its application to other clients, the issue of solicitor/client privilege arises. The ACP in this case does not lie within the possession, control or power of a party. In view of this, the motion is dismissed.
Because the policy provided blanket coverage to the law firm, its lawyers and clients, the issue was whether solicitor-client privilege could be breached if the policy was disclosed. Justice Cornell emphasized that the policy was not in the possession, control or power of the party as it was not their insurance policy. It was that of the law firm and therefore it could not be ordered that the plaintiff produce the policy as it did not belong to the plaintiff. This case highlights that courts are alive to whether the policy is held by the plaintiff or the law firm when considering whether to grant an order compelling disclosure of the policy. If the policy is ordered to be disclosed, it appears that only the existence of and who is covered needs to be made known rather than the terms or particulars of the coverage itself. The case law however is still evolving.
Security for Costs
When applications are brought seeking an order from the court for security for costs, the existence of an ATE Insurance policy has been deemed to be a “factor to consider” by the courts in deciding whether to grant such an order. In the Ontario Superior Court case of Alary v. Brown, 2015 ONSC 3021, an order for costs was brought against the plaintiffs, as they were ordinarily residents outside of Ontario, primarily residing in Winnipeg, Manitoba. The plaintiffs had obtained ATE Insurance coverage and argued that the policy provided adequate security for the costs of the defendant and that such an order was unnecessary. The court noted that the ATE policy provided for a number of circumstances under which it would not pay out on the policy including:
(a) If the plaintiff does not accept their counsel’s recommendation to accept an offer to settle;
(b) If the plaintiff changes counsel and the company does not agree with the new counsel
(c) The plaintiffs decide to represent themselves;
(d) Failure to attend medical examinations;
(e) Failure to advise of an adverse costs award within 15 days;
(f) Failure to inform the company of any offer to settle within 30 days of its receipt or 5 days of expiry;
(g) If the policy is assigned.
Given that there were situations in which no payment for an adverse cost award would be provided for under the policy, it could not be said that maintaining ATE Insurance would negate the need of the party to obtain an order for security for costs. While it would be a factor to consider that may mitigate against the need for such an Order, this will largely be dependent upon the provision within the policy itself. Justice Smith said at paragraph 24:
The availability of an adverse costs insurance policy is not equivalent to the payment of a fixed amount of money into Court, but I find that it is a factor which mitigates against ordering security for costs. The Bridgewater insurance policy purchased by Alary does not contain a term stating that the insurer would pay for legal costs incurred by the defendant seeking security for costs up until the policy was cancelled or terminated. Notwithstanding, I find that the existence of the adverse insurance policy, even without the term that the insurer would be pay costs for a defendant up until it was cancelled, is still a factor to be considered.
The fact that a party maintains an ATE policy, while a factor, will not necessarily provide that an order for security for costs is unnecessary. As pointed out by Justice Hackland in Frantz v NB Thrilling Films 4 Inc., 2017 ONSC 4637, defendants are not a party to the ATE Insurance policy and therefore cannot sue on it as there is no privity of contract. Such Orders may be necessary so that defendants may enforce their right to costs should be it be necessary to do so. Given the representations in ATE polices that insurers will provide coverage for a cost award, should an insurer fail to provide payment for costs, the insurer may open themselves up to a novel claim in tort or for other equitable remedies if the policy is not honoured. While such a claim has yet to be brought in a Canadian court, Justice Hackland’s comments appear to have opened the door to such a claim being advanced in the appropriate circumstances.
At this point in time, the case law on ATE Insurance has provided limited direction on a few procedural issues and is largely confined to a few jurisdictions within Canada. This should be of no surprise given its recent introduction into the Canadian insurance marketplace and legal landscape. Nonetheless, it is evident that as this product continues to gain popularity amongst plaintiffs and their counsel, courts across the country will be required to address the many concerns faced by the adoption of this innovative product in legal proceedings. Whether ATE Insurance will adequately address access to justice concerns by providing litigants with needed coverage from cost awards or merely require the courts to tread carefully when dealing with its disclosure and the privacy concerns entailed when doing so remains to be seen. It is certain, however, that both counsel, clients and the courts will continue to make note of and consider the implications of ATE Insurance in litigation.