Frequently Asked Questions (FAQ)

1 CONFIDENTIALITY

1.1 IS THE INFORMATION BETWEEN THE CLIENT AND LPS CONFIDENTIAL?

All information and documentation supplied to LPS and to underwriters will be treated in absolute confidence. Some cases will be accepted only on the basis that a code name is agreed with LPS.

All quotations for PDI are confidential and intended for the proposer and/or the proposer's attorneys only. They should not be read by, copied to, discussed or used in negotiations with, any other person or organisation without the express written authority of LPS.

2 THE ESSENTIAL NATURE OF PDI

2.1 What is PDI?

PDI insures a plaintiff against the legal costs arising out of pursuing, and losing, litigation or arbitration proceedings.

PDI is known as an "after the event" insurance because, unlike other forms of legal expense insurance, the cover can only be purchased once litigation or arbitration has commenced.

2.2 How Does PDI Assist A Losing Plaintiff?

PDI indemnifies the insured against an award of costs ("Opponent's Costs") and may also be taken out to cover the losing plaintiff's attorney's costs and disbursements ("Own Costs") or may be extended to cover both Own and Opponent's costs.

2.3 What is PDI?

PDI is designed for the larger cases where the total cost insured is between R50 000 and R10 000 000.

2.4 Can PDI Be Purchased in Respect of All Litigation?

PDI provides insurance to a plaintiff and on a more restrictive basis to a defendant. Where the litigation is based on defending a counter-claim, underwriters' specific authority to include this in the cover will be required.

PDI can be purchased by individuals as well as corporate plaintiffs and insolvency practitioners.

PDI cannot be purchased in defamation cases but virtually all other types of commercial litigation and arbitration can be covered including personal injury.

2.5 How Much Cover Can Be Purchased?

The amount of cover that is proposed for in any one case is calculated by reference to an estimate of the Own Costs up to and including trial.

LPS can provide limits of indemnity up to R10m. Additional insurance capacity is available in appropriate cases.

2.6 Is There A Policy Document Setting Out the Scope of Cover?

In each category of PDI, a policy document is issued setting out the scope of cover, conditions, exclusions and other terms of the insurance.

A specimen policy wording is available from LPS upon request. This will form the basis of the insurance cover with amendments being made following negotiation with LPS prior to inception.

2.7 Does LPS Fund the Ongoing Costs of Pursuing the Litigation?

Not generally. The plaintiff must be capable of funding the ongoing costs of pursuing the litigation. LPS does not provide any funds until the litigation is lost and an order for costs is made in favour of the defendant, whereupon the insured plaintiff will seek an indemnity in accordance with the terms and conditions of the insurance.

However, since PDI provides an indemnity for the legal costs if a plaintiff were to lose the litigation, the policy document may assist in providing security to a bank or other lender who is prepared to fund the ongoing costs of the litigation. Furthermore, LPS has negotiated lending facilities whereby bank funding may be made available, on normal commercial terms, to an insured plaintiff who is able to offer as collateral security the PDI policy document.

2.8 To What Extent Does PDI Assist in the Provision of Security for Costs That May Be Ordered by the Court in Favour of the Defendant?

Since PDI indemnifies Opponent's Costs and the benefit of the policy document is capable of being assigned, the courts in England and Wales have accepted that an assignment to the defendants or their attorneys satisfies an order for security for costs made against the plaintiff. The position in South Africa is still being explored, but presently the High Court Registrar of the Eastern Cape Division has accepted the policy.

Alternatively, the PDI policy document can be used to secure the provision of a bond issued by a financial institution which is lodged with the court as security for costs.

It is worth noting that if cash has already been paid into court to satisfy a previous order for security for costs, it is possible in England and Wales to replace such cash with the PDI policy document thereby freeing up funds which could be used to better effect in terms of pursuing the proceedings.

3 THE UNDERWRITING OF PDI

3.1 How is PDI Underwritten?

LPS is the Insurance Manager and it is LPS's task to obtain from the PDI underwriters a quotation of terms for PDI.

In considering the risk, PDI underwriters will have regard to the merits of the case by reference to the opinion of the plaintiff's attorneys and counsel. In complicated matters, the underwriters may require the opinion of an independent counsel to review the case including the prospects of success. The cost of obtaining this opinion is payable by the proposer and is generally not refundable.

3.2 Why is it Not Possible for PDI Underwriters to Rely on the Legal Opinions Provided by the Proposer Rather Than Instruct An Independent Counsel?

The assessment of risk by LPS underwriters depends entirely on their perception of the prospects of success of the litigation which is the subject matter of the proposal. Whilst they will give considerable weight to the opinions provided by the proposer's own legal advisers PDI underwriters may require a review of the larger risks which will provide them with an overall view and independent opinion on the prospects of success. Such an underwriting approach has proved very beneficial in past cases where the prospects of success have been questioned although, in the majority of cases, independent counsel has agreed with the opinion of the proposer's own legal advisers. It also provides valuable reassurance to the plaintiff.

3.3 Will the Proposer Be Able to See A Copy of the Opinion of Independent Counsel?

In normal circumstances, a copy of the opinion of independent counsel can be made available to the proposer.

3.4 How Long Does it Take for A Quotation to Be Available?

The underwriting process normally takes approximately two weeks from the date the proposal and opinion are forwarded to LPS. In the meantime, LPS is able to provide a rough indication of terms, which will of course be subject to confirmation by PDI underwriters once they have considered the proposal.

4 THE COST OF PDI

4.1 What Are the Premium Costs?

Experience to date indicates that premium rates for PDI vary between 15% to 20% for personal injury and 25% to 35% for other matters, based upon the limit of indemnity, dependent on underwriters' perception of the risk. The premium is generally payable in several tranches depending on the time available from inception of the policy through to the anticipated date of the litigation. Fully deferred premiums may also be arranged.

4.2 If the Litigation Settles Early, Will PDI Underwriters Refund Any Part of the Premium?

Prior to inception underwriters may agree to rebate part of, or all of, the outstanding premium where the litigation is settled or discontinued at an early stage of the proceedings at no cost to underwriters.

4.3 Can An Insured Plaintiff Who is Successful and in Receipt of An Award of Costs Against the Defendant Include the PDI Premium As A Cost Payable by the Defendant?

The scope of an award of costs made by a court extends strictly to the attendant legal expenses only and is unlikely at present to include the PDI premium. However an insured plaintiff who is in settlement negotiations with the defendant may require the defendant to contribute to the cost of the insurance as part of the overall settlement.

4.4 Can A Proposer Agree to Accept An Excess Or Co-insurance Proportion As A Way of Reducing the Cost of the Premium?

Yes. A premium reduction can be achieved by agreeing to include an excess or co-insurance in the terms of the PDI. Moreover, in certain cases, underwriters may require such a contribution in any event.

4.5 When is the premium payable?

Normally a minimum of 20% of the premium is payable in order to incept the policy. Flexible premium payment terms are however available, including fully deferred payments (to date of award or judgement) as well as "no win-no premium".

5 THE INCEPTION OF THE INSURANCE

5.1 What Else Has to Be Done If A Quotation Has Been Given and is Acceptable?

Quotations for PDI will be subject to certain conditions which will require fulfilment before inception. Typically these will include:

5.1.1 The receipt by underwriters of confirmation that there are adequate funds available to meet the ongoing costs of litigation - so that the litigation will not be discontinued due to a lack of funds on the part of the proposer;

5.1.2 An agreement with underwriters as to the level of settlement that would be acceptable to the plaintiff ("the acceptable sum") - so that the litigation does not carry on needlessly in the event of a payment into court or a settlement offer being made by the defendant;

5.1.3 An undertaking has to be provided by the plaintiff's attorneys to underwriters that they will keep LPS fully advised on material developments that occur during the course of the proceedings.

5.2 When Does Inception Take Place?

LPS will incept the insurance when all outstanding conditions have been fulfilled and the initial portion of the premium has been paid. LPS will issue immediately a cover/debit note and arrange for the certificate of insurance to be issued as soon as practicable thereafter.

6 PDI DURING THE PROCEEDINGS

6.1 How Involved Are the Underwriters in the Conduct of the Case?

Underwriters do not wish to become involved in the handling of the case; instead, the insured's attorneys are free to conduct the litigation in the normal way. However, the underwriters, via LPS as the Insurance Manager, will require direct access to the insured's attorneys who will be obliged to keep LPS informed promptly of all material developments during the course of the legal action. The insured's attorneys will also be obliged to provide LPS with a detailed assessment of the merits of the case at regular intervals during the proceedings.

6.2 What Happens If the Other Side Offers A Settlement?

Settlement proposals, or a payment into court by the defendant, amount to a material development which must be reported promptly to LPS.

6.3 In What Circumstances Will Underwriters Require the Insured to Accept A Settlement, Or Payment Into Court, and Discontinue the Proceedings?

Before the PDI incepts, underwriters and the proposer will have agreed a level of settlement which would be acceptable to the plaintiff ("the acceptable sum"). If the level of settlement offer or payment into court is equal to or exceeds the acceptable sum, underwriters will expect the insured to accept the settlement, the proceedings to be discontinued and the insurance cancelled.

If however the insured's counsel's opinion is that a sum greater than the acceptable sum may be obtainable by continuing the proceedings - notwithstanding an offer or payment into court of an amount equal to or in excess of the acceptable sum - underwriters may, in the light of that opinion, agree to continue support with a possible increase in premium. If underwriters increase the premium the insured may cancel the insurance and continue uninsured.

In the event of the PDI being cancelled:

6.3.1 Underwriters will not indemnify legal costs incurred after cancellation, and

6.3.2 Underwriters will require the proceedings to be discontinued at once where the benefit of the insurance has been assigned to the defendant as security for costs.

Where there has been a material development in the course of the proceedings which adversely affects the insured's prospects of success, underwriters will wish to be informed promptly and to review with the insured the level of the acceptable sum to reflect the changed prospects of success.

6.4 What Happens If the Insured Has Misled His Advisers, And/or Underwriters, As to the Facts of the Case?

Where an insured misleads or is guilty of deliberate non disclosure to his attorneys and/or underwriters, underwriters will be entitled to avoid the cover. However, if the insurance extends to include Own Costs, provided the attorneys are able to demonstrate that they exercised all due diligence prior to the inception of the insurance, underwriters will pay the attorneys their costs, less any profit element, subject to underwriters retaining rights of recovery against the insured.

6.5 Sometimes the Defendant Will Issue A Counter-claim As Part of His Defence. Will PDI Include Own Costs in Respect of Defending the Counter-claim?

PDI will normally indemnify the costs of unsuccessfully defending a counter-claim provided full details have been disclosed before inception. Where a counter-claim is made after inception, the scope of the insurance can be extended to include the defence costs for an additional premium.

6.6 What Happens If the Insured Wishes to Discontinue?

Underwriters enter into these insurance contracts on the basis of the case proceeding to trial. There is therefore no return of premium if the insured elects to discontinue the case unless it is as a result of settlement negotiations or by prior agreement as part of the terms of payment.

6.7 What Happens If There is A Dispute Between the Insured and Underwriters?

Many of the decisions made by the insured and/or his attorneys during the course of the proceedings will require the concurrence of the insured's leading counsel prior to receiving the consent of underwriters in accordance with the terms and conditions of PDI. This means that it is less likely that there will be disputes between underwriters and the insured over the conduct of the proceedings. In the rare event of there being any dispute between the insured and underwriters, the matter would have to be referred to Court due to the restriction on arbitration in the South African Insurance Act.

6.8 What Happens If the Limit of Indemnity Becomes Too Low (Eg. Where Senior Counsel is Brought in to the Matter After the Policy Has Incepted)?

Underwriters will usually allow an increase in the limit of indemnity against a pro-rata increase in the premium.

7 PDI CLAIMS

7.1 When Does A Claim Arise Under PDI?

A claim arises under PDI when an insured loses the case against the defendant and the court makes an order for costs against the insured. A claim never arises under the insurance where the insured has won.

It should be noted that PDI does not insure (or guarantee) the credit worthiness of the losing defendant who is not able to satisfy an order for costs made in favour of the insured.

PDI underwriters respond to a claim under the insurance where the court makes an order for costs against the insured. Sometimes an order for costs may be made against the insured before the trial of the action. PDI provides an indemnity for such interlocutory orders by the court, unless the costs were incurred in connection with an excluded event eg. costs incurred in connection with an application by the defendant for security for costs which are normally excluded specifically by underwriters.

7.2 What Happens If the Proceedings Are Settled Prior to the Trial of the Action in Court?

If the proceedings are settled, or discontinued for whatever reason, there is no claim under the insurance unless underwriters have agreed in writing to contribute towards a settlement.

7.3 Does PDI Indemnify All Legal Expenses?

Opponent's Costs - Underwriters will provide an indemnity for taxed costs, subject otherwise to the policy terms and conditions including any excess or other deduction and also the limit of indemnity. The insured's attorneys shall arrange for the taxation of the other side's costs unless underwriters agree to waive the right to taxation.

Own Costs - Where PDI is extended to include Own Costs, underwriters will indemnify the insured's attorney's costs, subject as always to the policy terms and conditions including any excess or other deduction and also the limit of indemnity. Underwriters will be entitled to inspect the insured's attorney's files and will require the taxation of Own Costs only in rare circumstances. No cover is provided in respect of the amount of Own Costs that may be disallowed on a taxation following an order for costs against the Opponent.

If the legal expenses payable by the insured at the conclusion of the proceedings exceed any damages and costs awarded by the court to the insured, underwriters will only indemnify the difference.

7.4 Are Bills Submitted to Underwriters During the Course of the Proceedings?

Where the cover extends to include Own Costs, the insured must submit to underwriters all bills received from the insured's attorneys promptly on their receipt. However, it should be noted that underwriters will only provide an indemnity in respect of such bills, if at all, at the conclusion of the proceedings.

7.5 When Will Underwriters Pay Claims?

The insured is entitled to an indemnity immediately where the court makes an order for costs in favour of the defendant. Where such costs are subject to taxation, underwriters may make an interim payment on account of costs if the insured's counsel so advises.

7.6 What Exclusions Normally Apply?

The policy document contains exclusions where underwriters will not provide an indemnity. Excluded matters include:

7.6.1 Any costs incurred by the insured before inception where arrangements to include these costs in the limit of indemnity have not been made prior to inception;

7.6.2 Any increased costs resulting from the insured acting contrary to the views and advice of his legal advisers or where the insured is responsible for delay or fails to co-operate with his advisers;

7.6.3 Any increased costs resulting from the death or disability of the judge or arbitrator - this risk can be separately insured;

7.6.4 Any costs that may be covered under another insurance policy;

7.6.5 Witness costs incurred by any person who is an employee of the insured;

7.6.6 The amount of any excess or contribution payable by the insured;

7.6.7 Costs incurred after the discovery of any fact that materially affects the prospect of successful enforcement of any judgment against the Opponent;

7.6.8 Costs incurred in connection with any application by the Opponent for security for costs;

7.6.9 Costs incurred if the proceedings are discontinued due to the insured's lack of funds.

8 The Company

8.1 WHO ARE LPS?

LPS is a company owned jointly by Legal Risks Management PLC of London and Binnington Copeland & Associates (Pty) Ltd of South Africa. LPS specialises in providing legal expense insurance in the fields of construction, intellectual property and litigation generally.