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Adverse Cost Insurance for Personal Injury Cases in Ontario

Over the past decade, personal injury lawyers have seen an explosion of a new insurance product offered to their law firms and to their personal injury clients. It’s called Adverse Cost Insurance or After-The Event Insurance.

How does it work and what does it do?

Adverse Cost Insurance or After-The Event Insurance serves to protect a Plaintiff from an adverse cost award following an unsuccessful trial.  At trial, if a party loses, the Judge will generally order that the losing party pay the winning party’s legal fees. Those legal fees, especially after a trial can be very high. This insurance product is there to cover all, or part, of those legal fees which the losing party is ordered to pay by the Judge.

What are the benefits to this insurance?

In theory, the insurance will pay for part, or all of the legal costs if you’re unable to do so on your own.

Let’s imagine a scenario whereby a Plaintiff in a car accident case loses his/her case. After the lengthy trial, the Judge dismisses the Plaintiff’s case, and orders that the Plaintiff pay the Defendant’s legal costs in the amount of $500,000. This is entirely possible. In fact, it recently happened in the case of Belton v. Spencer. In that case, Belton sued Spencer for damages as against Spencer as a result of an accident that he sustained while walking Spencer’s horse .

Following a trial lasting over eight weeks, Belton’s action was dismissed as against Spencer. The Judge ordered that the Plaintiff Belton to pay $350,000 in legal fees plus HST, and $74,472.52 in disbursements, for a total of $469,972.52 to the Defendant Spencer. Ouch!

Here are the issues which any Plaintiff should be concerned with:

Issue #1: There was a policy limit of just $100,000 for a $469,972.52 cost award. If the Plaintiff was concerned about adverse costs, this policy limit was clearly inadequate for an 8 week trial.

Issue #2: Does the cost insurance first get paid to the Plaintiff law firm for their disbursements incurred in pursuing the case; or does it first get paid out to the Defendants for their cost award at trial? Either way, payment priority becomes a big issue. Will the Plaintiff personal injury lawyers have priority for their lost fees and disbursements (or disbursements alone), vs. the defence lawyers who will seek priority on the policy in securing a cost award at trial. My guess is that a Judge will have to decide this issue based on the specific wording of the policy. It likely wasn’t the personal injury law firm’s intention to provide security for a Defendant’s cost award over their own security when taking out this insurance policy.linkedin-2-300x300

Issue #3: This is the elephant in the room and needs to be considered by every personal injury law firm in assessing which cases to get insurance on, and which cases not to get insurance on. Is the cost of the insurance worth it to begin with? Litigants across the board from around 1930-2010 did just fine without adverse costs insurance or after the event insurance. So why the boom in the industry?

Does the product really save the clients money and headaches; or does it just create an incentive for Defendants to run a trial to get their hands on the proceeds of the adverse cost insurance?

If a Plaintiff is on ODSP, OW, or Disability, or does not own any property; or their property has little to no equity in it; then what is a Plaintiff seeking to protect by taking out such a policy when they are basically judgment proof to begin with? When there is no realistic chance for a Plaintiff to pay an adverse cost award after loosing a trial in the first place, you are disarming a Plaintiff of a tactical advantage by taking out this sort of policy. It is not illegal for a Plaintiff to be judgment proof.  A person without any assets can have the same legitimate cause of action as anyone else. The threat of a cost award against a Plaintiff who cannot afford to pay it is an empty threat, which Defendants know is an empty threat when a Plaintiff is judgment proof. Now, with the popularity of these insurance products which are being taken out either blindly or without thought by plaintiff law firms, that threat is no longer an empty one.

This is exactly why at examinations for discovery, we are seeing more and more defence lawyers asking whether or not any adverse costs insurance has been taken out for the claim. They want to know if the case goes to trial, whether or not there is a real prospect of recovery for their legal costs should they be successful in defending the case. This sort of approach emboldens a Defendant to try the case; and disincentives pre-trial settlement.

Make no mistake. It’s far easier and less expensive for a Defendant to access adverse cost insurance money than it is for a Defendant to commence a collection proceeding against a losing Plaintiff. The collection proceeding is long, frustrating, expensive, and rarely produces the rewards which they are seeking. On the other hand, collecting from a policy of adverse cost insurance is far easier, cleaner, and guaranteed secure money.

So, while a Plaintiff might believe that they are protecting themselves when taking out these sort of policies, what they are really doing is providing a secured pot of money for a Defendant to collect upon following trial. This does not encourage any sort of out of court settlement. It does the exact opposite when it comes to settlement. It acts as a monetary incentive for a Defendant to go to trial. Even worse, these policies don’t even cover the entire cost award, as we saw in the case illustrated above where the policy limits were $100,000 on a cost award of $469,972.52! So, the question begs to be asked: Are these policies just for show for a personal injury law firm to provide a false sense of security that Plaintiffs are protected from adverse costs awards? Do these policies do more harm than good in the grand scheme of things for a Plaintiff?

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