Developments in After the Event Insurance
With the proliferation of after the event litigation insurance (ATE) in personal injury claims, I have observed that insurers are now pushing ever harder to recover their litigation costs. I believe this to be an unintended consequence of ATE but it is a new reality in the practice of personal injury law. In cases where costs and disbursements sought by the defense and the disbursements incurred by plaintiff’s counsel exceed the ATE policy limits, insurers are seeking priority of payment at the expense of plaintiff’s counsel.
In the decision Peter B. Cozzi Professional Corp. v. Szot [2019} O.J. No. 921, the issue was who is entitled to the proceeds of the ATE policy. In Cozzi, the matter went to trial and the Plaintiff did not recover any damages. Counsel for the Plaintiff applied to the ATE carrier and received $100,000 pursuant to the terms of the policy. After obtaining a direction from his client, counsel for the Plaintiff applied the monies from trust to pay out his disbursements.
Counsel for the insurer brought an urgent motion to have the funds put back into the trust account, which was granted. The parties then proceeded via application to determine priority of payment. The court considered the entitlement to the proceeds made by Plaintiff’s counsel and the Defendant insurer. This article will focus on the decision vis a vis the Defendant insurer.
The court found the Plaintiff’s counsel was not entitled to the proceeds due to deficiencies in the retainer agreement. However, the court held that this did not necessarily mean that the insurer was entitled to the proceeds to satisfy its cost award. In fact, the court found there was no legal basis for the insurer to assert a claim to the proceeds. After reviewing relevant case law, the judge held the following at para. 54:
Nothing in the language of the ATE Policy requires that an adverse costs order be paid before the disbursements owed to the insured’s lawyer. The issue of priority does not arise because the only beneficiary of the ATE Policy was Mr. Nguyen. According to DAS, once the Proceeds are paid to the beneficiary, the beneficiary can decide how to apply the proceeds. Based on the terms of the ATE Policy, this is the only logical result.
Moreover, Aviva’s claim does not fall within the limited circumstances under the Insurance Act, R.S.O. 1990, c. I.8, where a non-party is entitled to pursue a claim against the insurer. (Insurance Act ss. 132 and 258). The statutory exceptions to the requirement of privity support an interpretation of the ATE Policy that is consistent with its terms.
In support of its entitlement to the Proceeds, Aviva relies upon case law where security for costs was not ordered in reliance upon the existence of an ATE Policy. Although the ability to recover costs from an ATE Policy may be a relevant factor on a motion for security for costs, this does not entitle the adverse party to the Proceeds. That will depend upon the specific terms of the policy and the circumstances of the case. In Hontaru v. Doe, 2018 ONSC 1014 at paras. 38 to 43, the policy at issue provided that the opponent could be named as beneficiary under the policy, at the court’s discretion. In Frantz v. NB Thrilling Films 4 Inc., 2017 ONSC 4637 at para. 7, the court noted that adverse costs insurance was a factor to be considered on security for costs motions, but each case has its own circumstances and the unique terms of the policy should be reviewed. In this case, Aviva did not bring a motion for security for costs. There was no order or undertaking that would entitle Aviva to the Proceeds.
Ultimately, the court did not award costs to either Plaintiff’s counsel or the insurer until the appointment of an active Litigation Guardian. The ultimate outcome remains to be seen.
Given the decision in Cozzi, I believe it is necessary to take the following steps to minimize yourself in similar circumstances:
- If you are dealing with a party under a disability, you should have the contingency fee arrangement approved by the court before it is finalized. I would recommend that this be done at the outset of the litigation.
- The contingency agreement should include an explicit reference to priority of entitlement to the proceeds of the ATE policy.
Given that there is the potential of personal exposure to the Plaintiff if his or her counsel’s disbursements and defense costs exceed the policy amount, it is necessary to recommend that the client seek and obtain independent legal advice on this issue.