Post Dispute Insurance

SYNOPSIS OF POST DISPUTE INSURANCE

LITIGATION EXPENSE COVER COMES OF AGE IN SOUTH AFRICA

INTRODUCTION

The high cost of litigation and arbitration is a matter of concern to all parties faced with the probability of formal dispute resolution procedures. Many liquidators and other corporate entities have been forced to abandon solidly based actions as a result of inadequate funds to cash flow their action. A "post dispute" insurance policy is now available in South Africa to protect plaintiff or respondent from an adverse award of costs. In addition, the policy may be ceded to a financial institution as collateral security to enable a facility to be made available to cash flow the litigation. The policy may also be used to provide security for costs.

"POST DISPUTE" INSURANCE

This policy is available to litigants once an arbitration or litigation has commenced. It provides a pool of funds to protect the insured in the event of an adverse award of costs. Primarily it does not cash flow the litigation but it may be used as an instrument to act as collateral security to raise funds to cash flow the litigation.

The policy will cover either the insured's own costs including all the actual attorney's disbursements, that is, not related to any tariff or scale of fees, and/or the opponents taxed or agreed costs.

The limits of indemnity are extremely wide, commencing at R50 000 up to R10m. Higher limits would be available on special application.

Premiums are in the range of 15% to 25% for personal injury and 30% to 40% for other matters, based upon the indemnity offered, however, very flexible premium payments are available. Premiums are divided into a minimum of two payments and a maximum of four payments. Underwriters will consider waiving subsequent payments where the matter settles without an adverse award providing the policy has been taken out at least six months prior to the date for the hearing. Fully deferred premiums may also be arranged.

Prior to inception underwriters require a report on the prospects of there being an adverse award of costs. Underwriters require at least a 50% chance that there will be no adverse award of costs. This is not an in-depth analysis and usually underwriters will accept the opinion of the attorney or counsel already briefed in the matter.

Where claims and counter claims are in the same action the policy underwrites the nett effect of an adverse award of costs. Any adverse award of costs arising out of interlocutories is also covered save in respect of an application for security for costs.

TYPES OF LITIGATION COVERED

Virtually all types of litigation and arbitration may be covered whether the insured is plaintiff or respondent. However, specific exclusions apply to defamation cases and the lower limit of indemnity is R50 000.

SECONDARY ADVANTAGES

Although designed primarily to pay out against an adverse award of costs, the policy has been accepted by certain registrars of courts as appropriate security for costs.

The use of the policy as collateral security can create a pool of funds to cash flow the litigation. Agreements in principle have been concluded with several financial institutions.

The policy should be of particular interest to attorneys handling a matter on a contingency fee basis. Save in respect of the premium, the policy would effectively cover the attorney's fees and disbursements if the action were to be unsuccessful.

CONCLUSION

It is believed that this policy will offer litigants powerful new options to mitigate the potential costs of litigations. The secondary advantages mentioned above are also clearly beneficial in appropriate circumstances. Premiums are obviously higher than forward looking "before the event" types of cover. However, in relation to the downside risk, the opportunity to limit the financial implications is clearly advantageous. Companies can now budget with reasonable certainty the costs of losing a litigation and, perhaps more importantly, cash flow the action.

Cover is also available on a forward looking annual basis for the construction industry, as well as cover for Intellectual Property rights, also "before the event". These "before the event" policies actually cash flow litigations directly and for Intellectual Property disputes limits of indemnity up to R20m are available where international litigation might be encountered.