The Do’s and Don’ts of Cost Protection/Litigation Financing

In our current litigation environment, the ability to take cases to trial is a critical skill. Make no mistake, Ontario insurance companies are keeping track of whether you have the skills and resources to litigate a file to the bitter end, or whether you are likely to just cave and take a nuisance offer. It goes without saying that a good trial lawyer must understand the rules of evidence, the law, human nature and how to conduct herself in the courtroom. Unfortunately, those skills by themselves are no longer sufficient to allow you to begin to take cases to trial regularly.

In addition to professional skills and experience, today you also need to know how to manage the financial needs of both you and your client or you will never be able to try your case, no matter how talented you are as a litigator. For many of our clients, the motor vehicle accident that injures them will be the single largest traumatic incident in their lives from both a physical and a financial perspective. Many of our clients will find themselves about to lose everything while they wait for the Court process to plod along. Rather than face the risk of losing their family home and their life savings, many clients will instruct you to accept outrageously low settlement offers to attempt to salvage something out of the accident and to protect their family. The odds that your client will instruct you to under-settle the case are likely to grow dramatically when you tell him that he runs the risk of having to pay legal costs to the insurance company in the event that this lawsuit is unsuccessful.

At the same time, law firms today are facing increasing financial pressure. Lawsuits are becoming prohibitively expensive, and in the world of Ontario personal injury law today, those lawsuits are entirely funded by plaintiff personal injury lawyers. In my view, newer lawyers attempting to establish themselves today are in a Catch-22 situation: on the one hand, they need to take cases to trial to establish their bona fides as legitimate trial lawyers. On the other hand, given the current climate towards plaintiffs in Ontario, [2] taking a case to trial has never been more fraught with risk. Excellent trial skills and good intentions will not protect a young lawyer who is driven to bankruptcy by a string of unsuccessful trial decisions.

It is this environment that has spawned the proliferation of litigation financing and cost protection companies. The ability to take the case to trial is an access to justice issue in its purest sense. At their best, litigation financing and cost protection companies are vehicles that facilitate this goal. If misapplied or misused, however, these companies can profoundly negatively impact the very clients that we have a fiduciary obligation to protect.

This paper will examine three important aspects of litigation financing and cost protection that every lawyer should be aware of when attempting to ensure that their firm is in a position to take meritorious cases to trial. Firstly, how does the law firm fund the disbursements necessary to carry a significant case to trial? Secondly, what tools exist to provide financial support for clients desperately looking for funds to support themselves and their families for the duration of their lawsuits? Finally, what products are available that might protect both accident victims and law firms from the consequences of adverse decisions? [3]

Disbursement funding has become an increasingly difficult challenge for law firms. In the early days of my practice, most personal injury lawyers actually asked the plaintiff to make some form of modest contribution towards disbursements. My firm used to ask for a small contribution, but I am aware of many lawyers that asked clients to fully fund the disbursement costs of their cases. In the current environment, asking claimants to fund their own disbursements simply will not work. Even if they could afford it, the fact is that there is simply too much competition. If you will not pay for your client’s disbursements, she will simply go down the road to the competitor who will.

Many long-established firms today have opted to leave significant funds within the law firm to fund their client’s disbursements. [4] Assuming this option is not viable for newer firms, the cheapest financing option remains banks and trust companies. Of course, the challenge with banks is that they are generally unwilling to treat work-in-progress (WIP) or disbursements as collateral. In my experience, banks will only expend money based on cash flow and historic monthly billings, and will generally cap an operating line at three-months’ billings. For most law firms, this level of funding is utterly insufficient.

As a result, law firms have been forced to turn to alternative sources of funding. At the risk of stating the obvious, one thing a lawyer should ask is whether a disbursement is truly necessary. The easiest disbursement to fund is the one that you don’t get. Assessment and rehab companies may be in a conflict situation when they press law firms to obtain yet another rebutting medical report or assessment. The Courts have made it clear that legal costs should be proportional. Does it make sense to spend $100,000 in disbursements on a $100,000 case? One runs the risk that even if you win your case, the defendant may not be ordered to pay all of your disbursements.

Another source of disbursement funding is the deferred account. Experts and assessment companies are aware of the financing challenges facing lawyers and some are prepared to defer payment of their fees until the conclusion of litigation. This deferral is sometimes without interest, but sometimes involves the expert either charging a higher fee or interest. There is at least some authority supporting the idea that the interest charged by experts ought to be a recoverable disbursement. In Herbert v. City of Brantford, [5] the issue was whether interest charged by an expert on his account was a recoverable disbursement as against the defendant. In considering this issue, Mr. Justice Whitten relied upon the following statement given by Chief Justice McLaughlin in an address to the Faculty of Law of the Université de Moncton in 2007 where she said,

The history of the Bar Association and of the judiciary in Canada is that of the struggle to provide Canadians with an efficient and affordable justice system. However, the cost of legal services today is unfortunately a factor which limits access to justice for many Canadians. For the wealthy, and for large companies, access to justice is not a problem. The same applies to the very poor; despite the shortcomings which exist in some regions, they have access to legal aid, at least in cases of serious criminal charges which could lead to jail time. Rather it is the most numerous group, that of middle-class Canadians, which is most affected. This is because these people have a certain income. They have a few assets, maybe a small house, and this disqualifies them for legal aid. The choices they have are none too encouraging; they can exhaust the family assets in a trial, represent themselves, or simply give up. The cost of justice, which could represent taking out a second mortgage on the house or using money saved for retirement or for the children’s education should not be so high. [6]

Justice Whitten noted that this above noted passage has been cited with approval in Justice Cyr’s decision in Bourgoin v. Ouellette. [7] He ultimately found that the interest charged on expert accounts was recoverable, concluding:

It is permissible pursuant to Section 33(1) of the Solicitor’s Act R.S.O. 1990 CS. 15, for interest to be charged on a solicitor’s account. Is it not comparable that interest be charged on expert accounts? The understanding that interest will be charged on unpaid expert accounts is in a way, an additional means of financing the litigation. Without that financing, there would be difficulty in citizens accessing justice as the Chief Justice observed. Litigants may very well not be able to afford otherwise pertinent expert opinions and testimony. [8]

This case suggests that deferred payments to experts (with interest) may be a valid financing tool. However, the approach does have some risks. In the first place, insurers are now asking both lawyers and experts if their accounts have been paid. If the account remains outstanding, more than one insurer is prepared to suggest at mediation and during trial that the expert has a vested interest in the outcome of the case and is not impartial. I am also advised that upon learning that expert bills are unpaid as of the time of mediation, insurers have attempted to negotiate reduced disbursement payments on the assumption that plaintiff’s counsel will be able to get the experts to take a haircut.

If all else fails, a final method of disbursement financing is the litigation loan from a third-party lender. There are several companies prepared to loan funds to lawyers to enable them to go out and obtain necessary reports and evidence for trial. It is critical that counsel understand the terms of this agreement. Is the loan conditional upon success? Do you have to repay the funds regardless of whether you are successful or is the obligation extinguished if the trial is unsuccessful?[9] What are the conditions of the loan? Does the lawyer have to attest that the chances of success are better than 51%? What happens if key facts related to the file change?

It is also worth noting that the approach taken by the Courts with respect to interest on litigation financing loans has been different than the approach taken in Herbert (supra). Consider the case of Guiliani v. Region of Halton, [10] in which the plaintiff was successful in litigation against a municipality. Notwithstanding the win at trial, Justice Murray refused to order the defendant to cover the interest charges related to the litigation loan. The Judge expressed outrage at the whopping interest charge of $92,734.26 charged by a third-party lender of a $150,000 loan (after roughly 12 months). The Judge observed,

[56] The interest rate on the loan obtained by the plaintiff for disbursements is unconscionable. It is turning the world on its head to assert, as does [the plaintiff’s lawyer] Ms. Chittley-Young, that this is an access-to-justice issue and that ordering interest payments on the Lexfund is reasonable. This loan agreement does not facilitate access to justice. This loan agreement does nothing to advance the cause of justice. It is difficult to believe that any lawyer would refer a vulnerable client to such a lender.

[57] The concept of reasonableness governs the Court’s treatment of disbursements. The interest payments owed by Ms. Guiliani to Lexfund are unreasonable. This Court will not require the defendants to reimburse interest charges on the Lexfund loan whether such interest charges are calculated as of November 15, 2010 or thereafter. To do otherwise would bring the administration of justice into disrepute and encourage predatory lenders whose business it is to extract unconscionable amounts of interest from vulnerable individuals.

The New Brunswick Court of Appeal came to a different answer when asked to consider a similar question in LeBlanc v. Doucet. [11] In this decision, Chief Justice Drapeau overturned the earlier decisions to lower Courts and allowed the plaintiff to recover interest on litigation loans she used to finance disbursements. The Chief Justice agreed with counsel’s submissions that the $14,158 and interest incurred, at an effective annual interest rate of 32% per annum, was a reasonable expense “necessarily incurred” in advancing the plaintiff’s claim through to resolution at trial. The Court found that,

[4] The record shows and, in fact, the clerk found Mr. LeBlanc lacked the means to finance the litigation and his impecuniosity resulted in the loans that generated the interest in issue.

[38] The loans taken out… were necessary to prevent a most unjust outcome for [the plaintiff’s] legal dispute with the respondents: the settlement of his claim for a pittance or perhaps even its abandonment… It follows the interest due on those loans constitutes [an expense] necessarily incurred within the meaning of sub-para. 2(14).

In his assessment of the issue of “reasonableness”, the Chief Justice noted:

[39] The interest rate [the Lender] set reflected an assessment of the risk assumed… a risk that two financial institutions had previously deemed prohibitive… I reject the respondents’ submission that the Law Society Act, 1996, S.N.B. 1996, c. 89, and the rules that govern contingency fee agreements foisted upon [plaintiff’s counsel] the obligation to assume that risk….There is nothing in the record to suggest…that Mr. LeBlanc could have borrowed the money he needed at a lower interest rate.

In fact, it was actually noted in this case that the plaintiff was able to mitigate cost by refinancing the litigation loan subsequently through BridgePoint Financial at a lower rate of interest in the original third-party lending company. The Court specifically dismissed the argument that the litigation loans encouraged maintenance and champerty as there was no evidence, in the view of the Court, that there was any inappropriate motive in providing the litigation loans. The Court ordered payment of interest expense by the defendant to the plaintiff, noting that its decision was consistent with earlier decisions of Bourgoin 12 and Guiliani [13] where the criteria of “necessity” and “reasonableness” were determined to have been met and failed, respectively.

The British Columbia Court of Appeal has also seen fit to consider the question of whether a plaintiff ought to be entitled to recover interest for disbursement loans in MacKenzie v. Rogalasky. [14] In this case, the B.C. Court declined to follow the LeBlanc decision and declined to order the defendant to pay interest costs incurred to borrow money to fund disbursements in a law suit. In this case, counsel chose to claim interest as part of a cost award as opposed to a head of special damages; however, in argument counsel advanced the basic tort principle that the plaintiff ought to be returned to her pre-litigation position. The original assessment offer held she was limited by the nature of how the relief was being sought, noting,

[6] The assessment of a successful party’s disbursements following an action is done by a registrar pursuant to the provisions of Rule 14-1(5) of the Supreme Court Civil Rules [Rules]. That provision of the Rules says:

(5) When assessing costs under subrule (2) or (3) of this rule, [and this assessment before me is under subrule (2) since it is an assessment of party and party costs] a registrar must

(a) determine which disbursements have been necessarily or properly incurred in the conduct of the proceeding, and

(b) allow a reasonable amount for those disbursements.

[7] Therefore the issue before me is whether under that Rule interest on a loan taken to fund disbursements is, in and of itself, a disbursement that was “necessarily or properly incurred in the conduct of the proceeding.” [15]

Later in her decision Registrar Sainty crystallized the difference between seeking recovery of financing costs in tort versus as an assessable cost in the following statement:

[37] Nor can it be said that the object of costs (as compared to damages for a tortious act) is to return a party to his pre-litigation status and thus interest ought not to be recoverable. Costs are not intended to provide full indemnity to a successful party and the successful party is only entitled to recover necessary or proper disbursements at a reasonable amount. In my view it cannot be said that interest on disbursements is a necessary and proper adjunct of litigation. It is simply one of those unfortunate matters that arose in the circumstances of this particular plaintiff and I find it is not reasonable that the plaintiff recover it.” [16]

With respect to the Registrar, the assumption that having to incur costs to fund disbursements is not a necessary and proper adjunct of litigation, appears to ignore the business reality of modern litigation. While the B.C. Court of Appeal did not address this question directly, but rather focused on the reasonable and necessary test, it too appears to have opted for a narrow interpretation when it rejected the appeal. The Court found,

It appears to me that the purpose of permitting the recovery of disbursements in the context of a costs regime is to permit the recovery of those expenses that arise inherently and directly from the issues in the case which relate, as the appellants suggest, to the direction, management, or control of litigation and which pay for materials and services used to prove a claim or defence. These expenses arise directly from the nature and conduct of the allegations in a proceeding. By contrast, interest expenses do not arise from the nature of the allegations or the conduct of proceedings, they arise from unrelated causes including the financial circumstances of a party. In my view, as such, they do not fall within the meaning of the word “disbursements” in the context of a costs rule. [17]

It remains to be seen whether the MacKenzie case will be applied in Ontario. Close reading of that case suggests that counsel may wish to protect themselves and their clients by specifically pleading entitlement in tort to elevated interest costs found to be reasonable and necessary in order to obtain resources necessary to fund disbursements. The case law also suggests the concepts of reasonableness, proportionality and need are applicable. The fact is, however, that there remains a significant risk that interest incurred to fund the disbursements may not be found to be a proper assessable disbursement or head of damage.

If indeed interest incurred to fund disbursements is found not to be a proper assessable disbursement, prudent counsel would be well advised to have clear and transparent written arrangements with the client setting out whose responsibility it is to fund those interest charges in the event that they are not recovered from the defendant. Given the fact that many Ontario law firms seem prepared to fund those costs themselves, it may simply not be competitively possible to attempt to pass those additional costs onto the client. Further, the negative comments associated with charging interest on disbursements in Hodge v. Neinstein [18] led to the strong inference that in the context of contingency billing arrangements, charging interest for disbursements may be problematic at best, and more likely simply not allowed.

Assuming that you solve the challenge of determining how to sufficiently fund disbursements in order to prepare the case for trial, plaintiff lawyers also need to consider the fact that if the litigation process is too slow, your client may be forced into bankruptcy or capitulation long before her case gets into the courtroom. Your case will fail if your client instructs you to accept a nuisance value offer because he is desperate to keep the bank from foreclosing on his family’s home.

The most important practical piece of advice that I can give about preventing your client’s financial hardship from derailing her case is to stress the importance of moving the case along quickly. A plaintiff may be able to survive three or four years of waiting for his case to get to trial, but will seldom be able to endure having to wait seven, eight or even 10 years before he sees the inside of a courtroom. Make the decision as to whether you believe in the case early in the process. If you decide that you’re going to move forward, expedite booking examinations for discovery and obtaining your expert reports and then set the case down for trial. In my office, we have post examination for discovery meetings once per month. The lawyers take a look at every single file that has gone through the discovery process and our goal is to attempt to ensure that every file is set down for trial within 60 days of the completion of examinations for discovery. The process puts pressure on the entire office, but it ensures that our clients’ cases are being prosecuted as quickly as possible.

We are all familiar with the fact that there are some law firms in the province of Ontario that have made it a practice to extend loans or financial advances to clients. [19] While some law firms have advanced money for humanitarian and other altruistic purposes, it is clear that in at least some cases individuals have advanced loans and financial advances for marketing purposes. The propriety of this practice was considered during the process of creating the Ontario Trial Lawyers Association’s (OTLA) Code of Conduct. OTLA’s position is set out in its formal opinion on “Loans or Financial Advances to Clients,” dated December 4, 2014, [20] which states,

As a general principle, advancing money or making a loan to a client directly or indirectly should be avoided. In exceptional circumstances, it may be acceptable for a trial lawyer to gift or provide an interest-free loan to a destitute client on humanitarian or compassionate grounds provided suitable safeguards are put in place, and even then a lawyer should carefully consider whether advancing or loaning money to a client in these circumstances is permissible under the law and the Rules of Professional Conduct.

It is never appropriate to give a promise of payment, gift or other such consideration for the purpose of inducing or to maintain a lawyer-client relationship.

Beyond the fact that it is improper to use client loans as a marketing tool, the more practical issue is that if widely used this practice would likely bankrupt most law firms. Only the largest and most established law firms would have the financial resources to make use of this device on a widespread basis.

If your client requires additional financial resources to get to trial, before considering litigation loan companies, a prudent lawyer should work with the client to ensure that have explored all other possible options. Have they attempted to obtain a line of credit from the bank? Have they applied for a second mortgage? Have they attempted to refinance the first mortgage? Do they have some family member who might be happy to loan them some money?

Clients should consider litigation loan companies to cover living expenses only after all of these other options have been explored. In our firm, it is our invariable practice never to recommend litigation loans to clients. Given the extremely high interest rates that all litigation loan companies charge, it is our experience that these loans can end up being a significant impediment to settlement. If the principal and interest of a loan is sufficiently high so that the client is facing a limited recovery at a mediation, the chances are significantly increased the client will reject a reasonable settlement offer and instruct you to take the case to trial.

However, in some cases your client will be in desperate need of a loan and a litigation financing company will be the only option available. These companies are highly controversial. It is worth noting that the British Columbia Trial Lawyers Association has determined that litigation loan companies charge interest rates that are unconscionable for vulnerable individuals and they refuse to allow these companies to be affiliated with them in any way.

In Ontario, there has been healthy debate about whether litigation loan companies (who provide funding directly to plaintiffs) should continue to be permitted to advertise in OTLA publications and at OTLA conferences. After considerable debate, the consensus that emerged is that there are compelling access to justice issues that support allowing litigation loan companies to continue to advertise with OTLA given proper safeguards. It is critical to understand that there are massive differences between different litigation loan companies. There are significant differences in terms of interest rates charged, compounding formulas for interest, administration charges, minimum loan periods, transparency, promotion of periodic payments instead of lump sums, independent evaluation of claimants and the general use of ethical business practices. [21] After conducting widespread consultation and debate on this topic, in 2015, the OTLA Board of Directors developed and implemented a Policy and Procedure related to Litigation Loan Companies. [22] Rather than adopt the BC position which refuses to do business with these companies, OTLA recognized that not only are these services legal in Ontario, but properly used, they may enhance the fundamental rights of clients to access justice. Pursuant to current OTLA requirements, in order to be recognized, a litigation loan company must:

a.) Agree to operate in compliance with all Canadian laws;

b.) Agree to provide information to clients and lawyers to ensure complete transparency of the cost and risk including details concerning all fees and administration charges, minimum loan periods, and rates of interest (including sample charts);

c.) Agree that the company’s website, promotion materials and legal documentation shall be clear and transparent;

d.) Agree to act in the best interest of the client, by taking steps such as recommending periodic advances rather than lump-sum payments to minimize interest payments;

e.) Agreed to be responsible for taking appropriate steps, which would be in addition to merely speaking to the claimant’s lawyer, to obtain sufficient information about the claimant as to ensure that the requested loan is appropriate, in the circumstances, for that claimant;

f.) Agree to be responsible for compliance with applicable financial industry protocols;

g.) Avoid any conflicts of interest or potential conflicts of interest;

h.) Refrain from paying any referral fee or transfer funds to any party;

i.) Refrain from requiring legal counsel representing a client to provide any written analysis or opinion as a requirement of entering into a business relationship with the client, and to limit any other inquiry to a brief overview of the parameters of the case together with an assurance that the claim is (on a balance of probabilities) likely to succeed;

j.) Refrain from requiring the client or legal counsel to provide privileged information as a requirement of entering into a business relationship with the client;

k.) Agree to protect confidentiality and client privilege;

l.) Agree to require all claimants to discuss, with their lawyers, their intention to borrow before proceeding with the loan process.

Why did OTLA put these requirements into place? Because we heard stories about litigation loan companies charging extremely high rates of interest and burying the details concerning same in the fine print. We heard stories about companies that did not disclose upfront that they charged significant administration fees or that they had a minimum loan resulting in the client paying interest long after she had repaid her loan. We received complaints that third-party litigation loan companies, in some cases, had business relationships with specific law firms that may have included cross-ownership. We heard lawyers express concern that their clients had made arrangements with third-party companies for loans without consultation with their lawyers. As a result, in some cases, clients may have borrowed more money than was appropriate and this turned into an impediment to settlement. We also heard lawyers complain that in some cases they were pressured to provide confidential information and analysis concerning the case as a final condition of providing a loan. Lawyers who expressed reservations about providing this information were advised by their clients that some lending companies advised the client that they would be better off to change lawyers.

There will be times when the only viable option is for your client to consider a third-party litigation loan. It is my strongly held view, however, that you should not be the one to recommend this product. In the current environment, the real interest rate being charged by these companies ranges from 28% to well over 40% per annum. If too much money is loaned too early in the litigation, it might well consume the settlement. I have personal experience where I assumed carriage of a file in which the previous lawyer had helped broker a loan and the client refused to repay same upon settlement, resulting in litigation that bankrupted the plaintiff. In another recent high-profile case, the fact that the plaintiff’s counsel helped broker a third-party litigation loan is one of the contributing factors that led to litigation against her former lawyers. [23]

If your client determines that she intends to examine the possibility of obtaining a third-party litigation loan, make sure that she has first explored all other financing options. Also ensure that she does research and compares the relative financing costs of the different companies and ascertains whether the loan company that she settles on is operating in compliance with the OTLA Policy Regarding Litigation Loan Companies. As of the time this paper was drafted, there are two companies – BridgePoint Financial Services Inc. and Seahold Investments Inc. – that have successfully applied for and been approved as approved litigation loan companies pursuant to the OTLA Policy. We anticipate that, in the future, there will be further applications.

One tool that might control interest rates is the use of periodic loans rather than lump-sum payments. A $20,000 lump sum payment intended to allow your client to survive for one year will generate significantly higher repayment obligations than would be incurred on a loan of $1,500 per month for one year. Periodic payments would also prevent against the temptation to over-spend.

The final topic that I would like to discuss is the use of adverse cost insurance and indemnities. This product has its roots in England where adverse cost insurance has become the norm. In fact, insurance companies in England are currently providing two different types of products to a significant percentage of the public.

The first product, which is actually the most common, is called Before the Event (BTE) insurance. This is a type of insurance that you might purchase as part of a larger policy, such as a homeowner policy. BTE insurance purports to cover individuals for potential legal costs related to personal injury lawsuits. This raises the significant question as to whether an injured individual in the United Kingdom is free to retain the lawyer of his own choosing or whether he will be directed to the appropriate counsel by his insurance company. The coverage purportedly not only provides some level of indemnity for incurred legal expenses, but also provides protection to the client in the event of an adverse outcome. There are suggestions that it is only a matter of time until this product is offered in Canada, but as of this point in time, BTE insurance does not appear to be a product offered to the Canadian public.

The second type of adverse cost insurance is the one that most litigation lawyers in Ontario are familiar with; that is, After the Event (ATE) insurance. This is a product that an accident victim (or perhaps a law firm) would purchase after the individual was injured in a motor vehicle accident or slip and fall. Generally, the product would provide some level of protection in the event that the matter proceeds to trial and the plaintiff is not successful. This protection would cover some combination of both incurred disbursements and the legal costs ordered payable to the successful defendant. The product does not provide insurance for the legal costs of the unsuccessful plaintiff’s counsel.

At the present time in Ontario there are two significant companies offering adverse cost protection. The first company to establish itself in the field was BridgePoint Indemnity Company (BICO) which offers what it calls indemnity protection as opposed to traditional insurance. BICO was originally more focused on providing indemnity coverage in specific individual cases, but its current focus is providing some sort of blanket level protection for the entire cabinet of a law firm. The other significant player in the field is a European insurance company called DAS Canada, which is a division of Munich Re, based out of Germany. DAS is a traditional insurance company which provides insurance pursuant to a policy in the traditional sense. While there are some other companies that purport to offer ATE insurance/indemnity, it is my understanding that most of those companies are acting as brokerages for DAS rather than being standalone products. We are advised, however, that many other additional insurance companies are taking steps to enter the Ontario market.

There is a raging debate as to the relative merits between the BICO indemnity product and the DAS insurance product. Both companies have taken very aggressive stances in terms of their allegations and representations about the relative merits of their own product as opposed to their competitor’s. DAS is strongly critical of the fact that BICO offers an indemnity rather than an insurance product. BICO argues that insurance products such as DAS place restrictions on coverage which may mean, that when you need it, coverage will not be in place. DAS fiercely disputes these allegations. OTLA has struck a task force to look into all aspects concerning adverse cost coverage and is currently seeking feedback from a number of stakeholders including the Law Society, Law Pro, the companies that sell these products, the Canadian Bar Association, and the BC Trial Lawyers Association. We know, for instance, that DAS has been able to forge marketing and endorsement relationships with the Ontario Bar Association and others. Until recently, DAS was the only adverse cost company recognized by the BC Trial lawyers Association. However, I am advised that the Association has recently reconsidered its position and has now decided to accept advertising dollars from BICO. BICO and DAS are not on equal footing in BC.

Lawyers considering using one or the other of these products should do their homework. It is clear that there are fundamental differences between the indemnity product and the insurance product offered by the leading providers in the field. There is a significant possibility that at some point in the near future, lawyers will be considered to be acting negligently if they fail to advise their clients about the potential availability of adverse cost protection. Lawyers who are considering the utilization of one of these products should meet with all providers and obtain as much information as possible about the sort of protection each company is prepared to offer.

Questions that you may want to consider include the following:

a) What is the basic amount of coverage that the policy provides?

In many cases, the base amount of coverage may be limited to $100,000 inclusive of costs and the disbursements. Query whether that level of coverage is sufficient in today’s litigation climate. Some companies will provide significantly more coverage for a nominal cost early in the process while others will sell the product to you closer to the trial but at significantly elevated fees.

b) Who pays for the insurance/indemnity?

While there is little authority on point, lawyers should be aware of the decision of Markovic v. Richards [24] in which Madam Justice Milanetti held that the fee charged for obtaining legal cost protection was not a compensable disbursement. In this decision the judge unfortunately mistakenly referred to the product as ATE insurance purchased from DAS, when it was in fact legal cost indemnity provided from BICO. During argument, plaintiff’s counsel provided the Court with a number of decisions from the United Kingdom to support the argument that the fee for obtaining adverse cost protection should be considered a compensable disbursement. Justice Milanetti noted, however, that in England there are statutory provisions that allow for the disbursement to be charged and, in the absence of similar provisions in Ontario, she declined to order that the cost be reimbursed for the following reasons:

1. There was no legislative reform in Canada or policy reason that the indemnity fee should be compensated as a taxable disbursement;
2. Obtaining legal cost protection was entirely discretionary;
3. Legal cost protection did nothing to advance litigation; and
4. Legal cost protection could act as a disincentive to resolve an action.

While the analysis of Justice Milanetti is perhaps unfortunate in that she does not appear to give weight to the idea that adverse cost protection is an access to justice tool, the fact is that if this case is followed this incurred expense will not be assessable. Lawyers should therefore carefully consider and discuss with their clients as to whether they are prepared to forgo part of their settlements in order to purchase this insurance.

c) Do you have to offer the Cost Protection product to all of your clients?

Some companies are still prepared to sell the cost protection product to clients on an individual file basis. Other companies, however, require you do undertake to offer the product to all clients as a condition of coverage. My office maintains a position that there are many cases in which it is not appropriate or necessary to offer the product to clients and we are resistant to any arrangement which requires us to provide blanket coverage for our entire cabinet. Many other law firms, however, view the matter very differently.

d) If the defendant beats its offer to settle, how does the product pay out?

This is an area of fundamental difference between the products. It is our understanding that the indemnity product offered by BICO specifies that the damages awarded to a client need to be exhausted to pay an adverse cost award before the insurance kicks in. However DAS purportedly allows the client to keep her damage award and pays the total amount of the adverse cost award from dollar one of the proceeds of insurance without forcing the plaintiff to use up her recovery first. This may not be, however, as advantageous to the client as it sounds because in the majority of cases the base coverage is limited to $100,000 and the insurance payout may not be sufficient to cover the adverse cost award in any event. Further, one could argue allowing the client to keep her base award in the face of a reasonable offer to settle may promote litigation that is not in the best interest the Court system, the client, or the lawyer representing the injured party.

e) Does the product indemnify/insure the client on unsuccessful summary judgment motions?

Individual products vary as to whether they protect the accident victim against summary judgement motions relating to issues such as the threshold, limitation defences, and coverage matters.

f) How much information do you need to disclose to the adverse cost company about your case?

All companies that provide adverse cost protection currently require that the lawyer affirm that she believes that the case for which she is seeking coverage is meritorious. My understanding is that this means that the lawyer needs to attest that there is, in our opinion, at least 51% chance of success. As a result, this insurance will not protect litigants or lawyers in cases that are being taken to Court on a “flier basis”. Further, it is an open question as to whether coverage would continue to be in place in the event that there was some late-delivered evidence such as profoundly negative medical reports or surveillance which would cause a reasonable lawyer to change her opinion as to the merits of the case.

g) What other events might avoid coverage?

There are a number of eventualities in all forms of cost protection coverage that might result in the accident victim finding out that he no longer has access to adverse cost indemnity/insurance. In addition to a determination that there is less than a 51% chance success, most policies also contain provisions that if the client does not follow his lawyer’s advice, fails to accept a reasonable offer to settle, fails to sufficiently cooperate, or takes any other action in contravention of the policy, then the insurance will be voided. The last thing the plaintiff’s counsel wants to do is to be on the eve of proceeding to trial with the comfort of thinking that she is protected by cost protection coverage only to find out at the 11th hour or worse, after the fact, that the coverage will not respond due to some sort of policy violation.

h) Does the agreement which provides for adverse cost protection contain any mechanism that would allow for interference with, or control over, the litigation?

This question is currently being contested in some quarters. Read the adverse cost agreement that you and your client are being asked to sign carefully. Does it contain provisions that allow the company to review the claim at any point? Does it contain provisions that specify that at a certain financial level or a certain point in the litigation, expenses need to be pre-approved by the company providing protection? Does it allow the company to assign independent counsel to work with plaintiff’s counsel in any capacity with respect to the case?

It would be inappropriate for this paper to make recommendations as to which company that provides adverse cost protection coverage is preferable. The fact is that there are widely different products available in the current market place. Some provide limited disbursement protection while others provide complete disbursement protection. Some products provide limited cost coverage while others are willing to provide blanket cost coverage for hundreds of thousands of dollars per file for a lawyer’s entire cabinet of work. The question as to which system of coverage is best for you and your client is an individual one based upon your type of practice, the level of financial resources, who is prepared to pay for adverse cost protection, your likelihood of going to trial, and your aversion to risk. I cannot emphasize enough that lawyers that are considering this product should meet with all players and ask as many questions as possible. They should then obtain contracts and read every line carefully and meet with the providers again to ask additional questions.

In the case of my law firm, while we continue to carefully consider all options, we have heretofore resisted entering into any blanket relationship with any company. We do regularly make use of adverse cost protection on individual cases where warranted. It is our view that it is an effective tool to protect the client and advance settlement in certain specific cases.

It is worth noting, however, that I have been advised by a number of lawyers that defence counsel have indicated to them that the existence of adverse cost protection is a factor that mitigates against settlement. In cases where historically an adjuster would have made a nuisance value offer to settle, they have, in at least some cases, advised their lawyers to proceed to trial because they know that there is adverse cost protection available and they are seeking to access the benefits of that policy if they are successful at trial.

If you are considering purchasing adverse cost insurance, there is one final consideration worth noting. There is an ongoing debate on whether there should be a legal requirement to produce a copy of the indemnity insurance policy in the context of larger litigation. Insurance defence companies have been asking for copies of these policies at discovery. Plaintiffs’ counsel are encouraged to refuse to provide same. There are a number of strategic reasons that counsel should want to refuse to disclose an indemnity agreement or even the amount of protection that is being offered. In the first place, if the amount of protection is known for the defendant, the plaintiff will be at a disadvantage when it comes time to negotiate cost as the defendant may not settle for less than or equal to the amount of the protection obtained. In addition, the defendant may try to escalate the costs of the litigation beyond the coverage offered. If the plaintiff is unable to obtain supplementary coverage to cover the extra cost, the litigation may have to be abandoned. Further, the defendant may attempt to exploit the exclusions in the terms of the indemnity/insurance if they are aware of the terms of the policy.

A number of cases have considered this question and have generally held that the existence and terms of an agreement should not be disclosed to the other side and should be protected by common interest privilege. Recent cases in Ontario have followed established Alberta and English precedent. [25]

In conclusion, used properly, cost protection and litigation financing are access to justice tools. You cannot get justice for your clients if you cannot get her case into the courtroom. Litigation financing seeks to provide sufficient financial resources to accident victims and their law firms to properly fund the disbursements necessary to bring the cases to trial. Litigation loans to clients can allow your clients to keep their homes and not have to capitulate to unreasonable settlement offers due to desperation. Adverse cost protection can, to some degree, level the playing field in what is otherwise a classic David versus Goliath confrontation.

These tools, however, must be used properly. Disbursements need to be proportional. Disbursement financing at high interest rates should be a tool of last resort. The interest may well not be compensable, and so advance arrangements with the client need to be made if you are going to finance litigation using that tool. Litigation loans to clients can be an impediment to settlements. Information may be improperly disclosed to a third-party company and come into the hands of an insurance company, and that may adversely impact the litigation. Clients may not be able to settle, not because the offer is unfair, but because they owe too much money to the third-party financing company. Adverse cost protection may, in some cases, cause both insurers and clients to reject fair and reasonable offers to settle.

In the current environment in Ontario, it is more important than ever that lawyers be ethical and thoughtful advocates on behalf of their clients. It is critical that counsel carefully consider these issues and arrive at a course of conduct that is compliant with their ethical obligations, the Rules of Professional Conduct, the OTLA Code of Conduct, their fiduciary obligation to their clients, and their own obligation to their law firm and their partners. Lawyers who are mindful of all these considerations will be able to use these tools in a manner that is beneficial to their clients, their practices, and access to justice issues generally.

Notes 

[1] The author would like to acknowledge the able assistance of associate lawyer, Kristy Fleming, of Rastin & Associates in the research of this paper.

[2] There is widespread belief that the current advertising environment is poisoning the jury pool against accident victims. Lawyers are losing respect in the broader community, again a large part due to current advertising practices. At the same time, the insurance industry has been able to successfully convince the current Liberal government to pass law after law limiting the scope of fair compensation available to accident victims.

[3] Note that this paper does not consider anything to do with the question of fees and law firm profitability. Those complex questions are properly the subject matter of an entirely separate discussion.

[4] It could be argued, however, that leaving your own money in your business is an unwise investment in the current low-interest environment.

[5] 2011 ONSC 4066

[6] Ibid at para 20

[7] 2009 CanLII 27242 (NBQB)

[8] Supra note 6, at para 23

[9] This product is different than adverse cost insurance (which will be discussed below) in that disbursement loans are paid up front to fund the costs of expert reports, etc. ATE insurance/indemnity products, however, are about repaying the lawyer who has funded her own disbursements in the event that she is unsuccessful at trial.

[10] 2011 ONSC 5119

[11] 2012 NBCA 88

[12] Supra note 7

[13] Supra note 10

[14] 2014 BCCA 446

[15] 2012 BCSC 156

[16] Ibid

[17] Supra note 14

[18] 2012 ONSC 7181

[19] In some cases, two law firms have apparently decided to loan money to the other law firms’ respective clients for interest. In my view, this practice amounts to substantially the same thing as loaning money to your clients.

[20] A copy of that opinion is appended to this paper.

[21] For instance, it is important to know who owns the company as well as whether they employ individuals with expertise in personal injury law.

[22] Appended to this paper are copies of the OTLA Policy regarding Litigation Loan Companies and the OTLA Procedure related to Litigation Loan Companies.

[23] Supra note 18

[24] 2015 ONSC 6983

[25] See Cobb v. Long Estate, 2015 ONSC 6799. Also Hobshawn v. ATCO Gas and Pipelines, Action No. 0101-04999, Alta. Q.B. dated May 14, 2009; MacQueen v. Sydney Steel Corp, 2011 NSSC 484; Stanway v. Wyeth Canada, 2013 BCSC 369; Arroyo & Ors v. BP Exploration Company, [2010] EWHC 1643 (QB).