Protecting Trustees and Pension Schemes
No-one wants to become embroiled in litigation, particularly when an unsuccessful outcome could result in significant expense and put pension fund assets at risk.
Trustees are of course obligated to investigate any such claims. However, such financial risks can often be a barrier to pursuing litigation altogether, meaning that losses suffered as a result of the actions of a third party are simply written off.
Fortunately, there are solutions available to mitigate some or all of the cost risk of pursuing a recovery, namely by the application of after the event ('ATE') insurance and Third Party Funding.
ATE insurance is a policy of indemnity that protects a client from the cost consequences of an unsuccessful outcome in legal proceedings. Accordingly, the insurer does not pay the legal fees on a day to day basis but rather indemnifies the cost incurred in the event that the case is unsuccessful.
Whether the trustees are pursuing a third party in relation to negligent advice, breach of contract, misrepresent-ations or fraudulent activity, ATE insurance will cover the potential adverse costs that the trustees could face in the event that the legal proceed-ings are lost. In addition, coverage can normally be extended to insure some or all of the insured’s own side legal costs in the event that the case is lost.
Applications for this specialist class of insurance can be made at any point once a prospective insured (pension trustee) becomes aware they have a legal claim which they wish to pursue. Accordingly, the insurer’s decision as to whether or not to offer coverage is solely based on the prospects of succeeding in relation to that particular dispute.
Albeit in a very different form, this class of insurance was historically limited to small value personal injury and clinical negligence claims. The market has widened substantially in the past five years however, as a result of more and more large insurance companies entering the ATE market with a primary focus and specialism on commercial litigation.
Whilst there are obvious benefits to ATE insurance policies for financially distressed clients who seek to ‘level the playing field’ with a well-resourced opponent, many of the world’s largest companies have used ATE insurance as a hedge on their legal cost exposure in order to bring balance sheet certainty to their legal spend.
With regards to the indemnities available, these can range from less than £250,000 up to more than £20,000,000 in respect of any one case.
A key advantage of ATE Insurance is that the premium payable is deferred to the conclusion of the case and is contingent upon success. In other words, a trustee pays nothing upfront in return for the cover and nothing in the event that the case is unsuccessful i.e. if the case loses; the insurer pays a claim and does not receive a premium.
Where the litigation is pursued in England and Wales, an additional benefit exists in that the ATE premium is deemed a recoverable cost under section 29 of the Access to Justice Act 1999, subject to reasonableness.
A fair degree of sophistication applies to the pricing of insurance premiums. For example, to combat the risk of an insured paying too much (i.e. because the case settled early), insurers will typically offer generous discounts in the event of an early conclusion to the claim, to reflect the reduced costs exposure faced by the insurer at that point.
ATE insurance policies will provide costs protection in the event of an unsuccessful outcome. However, they will not finance costs on an interim basis, save for any interim adverse costs which may be ordered.
To combat this issue, a Third Party Funding model has evolved whereby an external investor provides the necessary cash-flow in order to pursue the litigation or arbitration. In return for this investment, the funders will charge a financing fee.
Similarly, to the ATE insurance premium, this financing fee is typically payable at the conclusion of the dispute and only in the event that the trustees are successful. However, unlike the ATE premium, the financing fee is not a recoverable cost in England & Wales and will therefore inevitably be paid from the damages recovered by the trustees.
One similarity that exists between both insurers and funders is that neither will take any active involve-ment in the running of the litigation. The obligations on the claimants are predominantly limited to reporting material developments, e.g. the receipt of settlement offers from the opponent.
Any individual or organisation which is contemplating legal proceedings has a lot to consider in terms of the potential cost consequences. These risks can be particularly significant with regards to pension litigation where the trustees have to consider the potential adverse effects that the litigation could have on the pension fund assets.
The types of pension litigation claims that are typically considered by the market of litigation insurers and funders is diverse and ranges from interpretation of pension scheme documents, breach of trust claims, constructive trust, breach of fiduciary duty, insurance coverage and prof-essional negligence.
The mix of risk transfer options that might exist for a given case can vary. Funding and insurance arrangements will be tailored to the case in question. For example, well resourced litigants may not require litigation funding. However, having an insurance policy that will reimburse the costs expended if the case loses remains an attractive risk mitigation tool.
It could be that some litigants are comfortable in taking the risk on their own fees but are solely seeking to insulate themselves against the risk of having to pay opponent’s costs, the level of which can be less predictable. Adverse costs only insurance affords this protection and is readily available within the marketplace.
There are other potential benefits to having an arrangement with a litigation insurer/funder beyond the obvious risk mitigation advantages.
A trustee who secures an after the event insurance policy is obliged to notify the opponent of the existence of the same, assuming that the policyholder wishes to seek to recover the insurance premium inter partes, upon success.
Not only does this notification put the opponent on notice of a potential additional liability they will face if they lose, it can also serve to reinforce the perceived strength of the claimant’s case. For example, it could indicate that a large A-rated insurance company has independently considered the merits of the case and, having done so, has agreed to commit them-selves to risk. This can serve to make even the most entrenched defendant question their own advisors assessment. Quite often the mere serving of Notice of Funding to an opponent can initiate a channel of communication towards settlement.
Within the Notice of Funding to be served on the opponent notifying them of the existence of the policy, the trustee would also be obliged to disclose the staging of the premium itself. Whilst avoiding informing the opponent of any pricing details, any settlement discounts in the premium or increases triggered by certain stages within the litigation need to be disclosed. This can often focus the opponent’s mind in terms of timing a settlement offer; they shall be aware that an early settlement will result in a lower premium payment.
There are two principal methods available to secure ATE insurance or third party funding. Via their lawyers, a prospective litigant can either apply directly to insurers and funders or alternatively engage a specialist broker.
Whichever option a claimant chooses, it is prudent to ensure that multiple markets are approached. Not only does this ensure the trustees can determine the most competitive offer, it also protects them against the adverse effects of approaching one insurer and then another. Taking the latter approach can prejudice the ability to secure an offer since, if the first insurer declines to offer terms, that decline needs to be disclosed to the next insurer which can be prejudicial to the chances of securing an offer of cover. The safest way to combat this issue, unless there are compelling reasons to do otherwise, is to approach providers simultaneously. As the largest specialist broker in the industry, we always approach multiple markets simultaneously for this very reason.
Once the route to market has been determined it will be necessary to complete an application pack for the insurance and funding providers. This pack will typically include:
A detailed Case Summary
Copies of any Pleadings and/or Counsel’s Advice will naturally provide some background information into the dispute in question and may even give a helpful chronology, meaning that insurers and funders can bring themselves up to speed very quickly.
Our extensive experience suggests however that a case summary from the engaged legal team, outlining the current procedural position, the strengths and weaknesses of the case and their tactical plan going forward can be invaluable. It can serve as a useful tool for the lawyer to navigate the assessor to relevant documents.
We often find that pre-empting any arguments from the opponent and providing counter-arguments in response to the same can mitigate the number of further information requests an underwriter or funder needs to make.
Ultimately insurers and funders need to form their own view on merits before agreeing to offer terms, and therefore any assistance that can be given by the engaged lawyers can vastly speed up the due diligence process.
Provide an assessment of likely claim value and the prospects of enforcement
A realistic estimate of the likely damages award will always be requested. Funding providers in particular will likely require quantum evidence detailing the calculations carried out and the verification behind them.
Both insurers and funders will be interested in what investigations have been undertaken regarding the financial viability of the opponent, particularly as it will ultimately be the funder and/or insurer carrying the enforcement risk. For example, if a case succeeds at trial but it proves impossible to enforce against the opponent due to their insolvency, most insurance policies would treat such an eventuality as a loss under the policy and therefore pay a claim in relation to the insured costs.
Other supporting documents and cost budget
In addition to the case summary, the markets will typically want sight of any material documentation that exists.
Whilst they will not typically need to consider all of the documentation available, they will require copies of pleadings, expert reports, material pre-action correspondence and anything else that an independent third party would reasonably need to form their own view of merits.
A detailed cost budget from the engaged legal team will also provide confidence that the estimates given are well reasoned, albeit the markets appreciate that these approximations will be under constant review.
Any trustees considering pursuing a legal claim against a third party ought to be alive to modern risk transfer options in order to mitigate the legal cost exposure of doing so.
Some lawyers are still struggling to keep up with available options in what is a fast developing marketplace; it is therefore imperative that prospective claimants insist on an informed discussion on the subject at the outset, particularly where the claimant owes a duty to others to mitigate the risks and costs of a particular course of action.
If there is one key message to take away it is this; regardless of the size of the case, if it enjoys good prospects of succeeding (typically 60%+) then there is likely to be a variety of products available to remove some or all of the trustees’ cost exposure and crucially without costing anything at the outset. Fees are typically only payable if and when the case succeeds and the litigant has actually recovered monies.
OPDU protects pension schemes by providing unique insurance cover to trustees, administrators and sponsoring employers.
Pension funds holding total combined assets in excess of £180 billion have joined OPDU.