The Federal Court of Australia considered whether it was fair and reasonable to deduct the premiums associated with after the event (ATE) insurance taken out by the applicants' solicitors, from the funds to be paid in settlement of a class action.
In issue
- Whether the Court should approve the deduction of $1.76 million from the funds to be paid in settlement of a representative proceeding (i.e. a class action), reflecting premiums associated with after the event (ATE) insurance taken out by the applicants' solicitors.
The background
The applicants commenced a representative proceeding (i.e. a class action) against certain entities, regarding interest rates paid on certain investment options in pension and superannuation products, along with fees charged to members of certain funds. The proceedings resolved prior to trial, for $50 million 'all in'.
As part of the settlement approval process, the Court was called upon to consider whether it was fair and reasonable for the costs associated with procuring ATE insurance to be approved as deductions against the settlement sum. Such costs comprised an initial deposit premium of $440,000 (which had been paid) and a deferred and contingent premium of $1.32 million (which was due but had not been paid).
The decision at trial
In considering whether it was fair and reasonable for the costs associated with ATE insurance to be approved as deductions against the settlement sum, the Court noted a number of relevant matters.
In a Notice of Proposed Settlement sent to Group Members, the applicants' solicitors stated that:
- the applicants would 'seek reimbursement' of the ATE premiums, in the sum of 'approximately $1.7 million', and
- the ATE insurance had been obtained 'to cover the applicants' risk of being ordered to pay the respondents' legal costs in the event of an unsuccessful outcome'.
However, the Court was of the view that:
- the reference to 'reimbursement' was not accurate, as only the initial premium of $440,000 had been paid, and
- the reference to ATE insurance having been taken out to protect the applicants against a personal risk of being ordered to pay the respondents' legal costs was also not entirely accurate, in light of the indemnity provided by the applicants’ solicitors.
Further, in circumstances where the applicants' solicitors funded the proceedings, there was a need to consider the potential for funders of litigation to 'double dip', or 'have it both ways' – that is, justify a funding commission by reference to the exposure to an adverse costs order, whilst simultaneously seeking the reimbursement of the cost of defraying that very risk through ATE insurance.
In the end, the Court formed the view that the payment of the initial deposit premium should be allowed as a fair and reasonable deduction. That said, the Court also formed the view that a 'modest' discount ought to be applied to the balance of the ATE insurance deduction, which would take the total allowed to $880,000; being, 50% of the total deduction sought. This was not only in light of the issues outlined above, but also the fact that the applicants' solicitors' claim for deductions in respect of professional fees (excluding disbursements) exceeded $10 million, in any event.
Implications for you
Although the Court noted that the facts of this case were 'unusual' and 'not that simple', it also took the opportunity to comment on the 'economic dynamics of ATE insurance'. This included the potential for a conflict of interest to arise between the interests of solicitors acting on a ‘no win, no fee’ basis (on the one hand) and the interests of Group Members in such proceedings (on the other hand).
Further, as noted by the Court, a 'split premium structure renders the ATE insurer a contingent beneficiary of the outcome of the litigation. It is not just a service provider, but becomes a stakeholder in the success of the litigation: if the case loses, it pays out on the policy having only received the initial premium; or the case wins and it receives a significantly higher sum for having carried the risk'.
Whilst these issues have been identified in previous cases, the Court noted that there was 'no indication that this conflict of interest ha[d] been recognised or addressed in any way'. The Court, therefore, expected that 'future applications for deductions for ATE insurance will pay closer attention to many of these issues'.
In light of these comments, we anticipate that, going forward, when considering whether to approve the settlement of representative proceedings seeking deductions for the costs of ATE insurance, Courts will focus on whether efforts have been made to: (a) minimise the cost outlays associated with ATE insurance; and (b) pay sufficient regard to the interests of Group Members (which may not always be aligned with the interests of any applicable funders).
The Barry Nilsson Transaction Liability Team is not only well placed to advise insurers – and those involved in the development and placement of ATE insurance – on these issues, but remains ready, willing and able to assist market participants to address those issues, on a proactive basis.
