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Legal Expenses Insurance – A Brief Introduction

After the Event Insurance (“ATE”) is an insurance policy available to litigants to cover their disbursements and their liability to pay adverse costs in the event that the case is lost.  This article will also discuss the latest Supreme Court decision about litigation funding agreements (“LFAs”) and how it may impact ATE insurance.

ATE insurance is not cheap, and obtaining it is not always straightforward.  Before ATE insurance can be secured, the underwriter will evaluate the merits of the case.  To do so, the insurer will generally require an opinion from counsel outlining the strengths and weaknesses of the insured’s case.  The underwriter will also likely want to be provided with (amongst other things) any costs estimates that have been filed, information about the opponent’s ability to pay, and the details of any conditional fee agreement, damages based agreement (“DBA”) or LFA (more on that later).

Premiums and their recoverability

ATE premiums can vary significantly depending on different factors.  It naturally follows that, if the risk is higher, the premium will increase, the situation will be the same if a greater level of cover is sought.  Often, premiums will be “stepped” or “staged” and increase as the case proceeds.  This reflects that the risk of paying out increases the closer the matter gets to court.

In policies issued before 1 April 2013, ATE premiums are recoverable.  However, after this date, premiums are only recoverable from the other side as costs in certain cases (mesothelioma claims; publication & privacy proceedings; and insolvency-related proceedings where the policy was issued prior to 6 April 2016).

ATE as security for costs

ATE insurance can be used as security for costs in certain circumstances.  In Premier Motorauctions Ltd (in liquidation) & Anor v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872, the Court held that an ATE policy could, in principle, be considered as sufficient security for costs.  However, the ATE policy did not offer sufficient protection in that case, because it was vulnerable to being avoided for misrepresentation or non-disclosure.  The Juge, in that case, noted that the words of the ATE policy were important, and if the insurer’s ability to avoid was restricted, it may be sufficient security.

This case was cited in Saxon Woods Investment Ltd v Francesco Costa and others [2023] EWHC 850, where the ATE insurance policy contained an endorsement that placed restrictions on the insurer’s ability to avoid.  The Judge found that the anti-avoidance endorsement (“AAE”) did not need to explicitly state that the insurer could not avoid in the event of fraud or dishonesty provided that was indeed its effect, but that the words had to be sufficiently clear, as such, to indicate “an extraordinary bargain”.  In Saxon, the policy was expressed as non-voidable and non-cancellable, and the insurer agreed to indemnify the insured for any claim under the policy “irrespective of any exclusions or any provisions of the Policy or any provisions of general law, which would otherwise have rendered the policy or the claim unenforceable…”.  The court held that the policy could be used as security for costs.

Avoidance of an ATE policy

A policy with an AAE is likely to come at a price, and for many insureds the premium will be prohibitively high. In the event that an insured’s policy does not have an AAE endorsement, insurers of an ATE policy can avoid it for all the usual reasons, e.g. non-disclosure or misrepresentation. This was confirmed in Persimmon Homes Ltd & Anor v Great Lakes Reinsurance (UK) plc [2010] EWHC 1705 (Comm).  In that case, the insurer was entitled to avoid the policy due to material misrepresentations and non-disclosures.  The alleged material non-disclosures included, amongst other things, bankruptcy and untruthful statements (which had come to light in the Judgment) and undisclosed financial difficulties.

ATE and LFAs

Litigation funding agreements are where a third-party funder agrees to fund the litigant’s costs.  In the event of success, litigation funders are typically compensated in three different ways:

  1. A percentage of the proceeds, e.g. the funder claims 30% of the proceeds
  2. A multiple of the invested amount, e.g. the funder obtains 1.5 x the invested amount
  3. A combination of the above, e.g. the funder obtains either 30% of the proceeds or 1.5x the invested amount (whatever is the greater).

Many third-party funders require the litigant to obtain ATE insurance so that in the event of losing, the costs that the litigant is responsible for are covered, protecting both the funder and the litigant (a third-party funder is generally only liable for costs up to the amount it invested, although a discussion on the ‘Arkin’ cap and the case of Chapelgate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246 is beyond the scope of this article).

LFAs, and the decision in Paccar

In Paccar Inc and Ors v Road Haulage Association Limited and UK Claims Limited [2023] UKSC 28, the Supreme Court examined s 58AA of the Courts and Legal Services Act 1990 (“CSLA”) and considered whether LFAs were DBAs for the purpose of s 58AA(3)(a), which stated that:

a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—

(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.

The Court found that third-party litigation funders were providing “claims management services”, and LFAs where the funder is remunerated on a percentage of the proceeds basis would thus be caught by s 58AA(3).

LFAs that remunerate the funder on a multiple of the invested amount basis are not caught by s 58AA.  S 58AA states that a DBA cannot be enforced unless it complies with the requirements of s 58AA(4), including regulations (the Damages-Based Agreements Regulations 2013 (“the DBA Regulations”)).  In summary, this means that an LFA will be unenforceable if the funder is remunerated on a percentage of proceeds basis (unless it complies with the DBA Regulations, which is unlikely).

Following this decision, funders and litigants will need to ensure that LFAs either are not DBAs (i.e. providing for a multiple of investment model of remuneration) or are compliant with the regulations. If the LFA is not re-negotiated and is thereby void, ATE insurers should be notified of this, as this could result in a change to the risk and could lead to the insurer avoiding the policy.

Grace Williams is an Associate at Fenchurch Law

The Good, the Bad & the Ugly: #21 (the Good). Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know.  An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders.  We celebrate those cases as The Good.

In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned.  We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided.  Those cases can trip up even the most honest policyholder with the most genuine claim.  We put the hazard lights on those cases as The Ugly.

#21 (the Good): Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1984]

The House of Lords' decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep. 437 (“Pan Atlantic”) is significant, as it established inducement as an element of non-disclosure.

In Pan Atlantic, the House of Lords examined the law on materiality as set out in the case of Container Transport International Inc. v. Oceanus Mutual Underwriting Association (Bermuda) Ltd. [1984] 1 Lloyd’s Rep. 476 (“the C.T.I. case”).  The C.T.I. case had confirmed that a material circumstance was one that would have influenced the judgment of a notional “prudent insurer” in fixing the premium or determining whether he would take on the risk as compared with one which had affected the actual underwriter’s decision-making process.

The leading speech in Pan Atlantic was given by Lord Mustill.  As he noted, critics of the C.T.I. case had thought it was too harsh.  The decision meant that, when an insured had made a material non-disclosure or misrepresentation, the insurer would be entitled to avoid the policy, even where its underwriter would still have written the risk, albeit on different terms, or even where the underwriter was entirely unaffected by the non-disclosure.  The harshness of the C.T.I. case led critics to question whether the materiality test should be altered so that only misrepresentations or non-disclosures that would have “decisively influenced” a prudent insurer would be material.

The majority in Pan Atlantic rejected the proposed “decisive influence” test.  They examined the words in s 18(2) of the Marine Insurance Act 1906, which said:

“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk”.

Lord Mustill said that the words “influence the judgment of a prudent insurer” “denotes an effect on the thought process of the insurer in weighing up the risk”.  The words in s 18(2) referred to the underwriter’s decision-making process rather than the final decision that was made.  As such, the “decisive influence” test was rejected.

The words of the 1906 Act have more or less been repeated in the Insurance Act 2015, which states that:

“a circumstance or representation is material if it would influence the judgment of a prudent insurer in determining whether he will take the risk and, if so, on what terms”.

(See our article Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC, which discusses materiality.)

While the materiality test was left largely undisturbed, the majority found that inducement should be introduced as an element of non-disclosure or misrepresentation.  Lord Mustill said:

“There is to be implied in the Act of 1906 a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using “induced” in the sense in which it is used in the general law of contract.”

The need for inducement was in line with the common law position for misrepresentation generally.  Lord Mustill noted that there was no equivalent common law for non-disclosure.  However, given that in the insurance context misrepresentation and non-disclosure are very similar concepts, the inducement test should, he said, apply also to the latter.  He then went on to say:

“A circumstance may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on the prudent underwriter’s decision whether to accept the risk and if so at what premium.  But…if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract”.


This case was plainly “good” for policyholders.  The introduction of the inducement test meant that it was more difficult for an insurer to avoid a policy if there had been a material non-disclosure.  As mentioned above, before introducing the inducement test, an insurer only needed to show that the non-disclosure was material.  Since Pan Atlantic, an insurer has also needed to establish that the non-disclosure either affected whether it would have written the policy at all or at least affected the terms it offered.

The inducement test espoused in Pan Atlantic has now been codified in s 8(1) of the Insurance Act 2015, which provided that:

“(1) The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer—

(a) would not have entered into the contract of insurance at all, or

(b) would have done so only on different terms.”

It had initially been suggested that inducement could be presumed where it has been proven that the non-disclosure or misrepresentation was material.  However, in Assicurazioni Generali v ARIG [2003] Lloyd’s Rep IR 13 it was held that there is no such presumption.  Therefore, when an insurer avoids a policy because of an alleged material non-disclosure or misrepresentation, that is not the end of the road.  To prove inducement, evidence from the underwriter is generally required.  Without such evidence, the insurer will face difficulties proving that the underwriter would not have written the risk.  The contents of underwriting guidelines and the underwriter’s track record are likely to be highly relevant.

Grace Williams is an Associate at Fenchurch Law

The Good, the Bad & the Ugly: #20 (The Good) Brian Leighton (Garages) Limited v Allianz Insurance Plc

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

#20 (the Good): Brian Leighton (Garages) Limited v Allianz Insurance Plc


The policyholder, Brian Leighton (Garages) Limited (“BLG”), operated a petrol station.  The case concerned a fuel leak caused by a sharp object perforating a fuel pipe, under pressure and movement from the heavy concrete slab forecourt.  This caused contamination of the property and the business needed to be closed, as it was at risk of fire or explosion.  The insurer, Allianz Insurance Plc (“Allianz”), declined the claim on the basis that a pollution / contamination exclusion applied.

The Policy

The Policy provided cover for “damage to Property Insured at the Premises … by any cause not excluded occurring during the Period of Insurance”.

Extension 26 provided cover for “Damage in consequence of escape of water or fuel from any tank, apparatus or pipe, or leakage of fuel from any fixed oil heating installation …”.

Exclusion 9 excluded “Damage caused by pollution or contamination, but We will pay for Damage to the Property Insured not otherwise excluded, caused by … (a) pollution or contamination which itself results from a Specified Event … (b) any Specified Event which itself results from pollution or contamination”.

Specified Events were defined as “Fire, lightning, explosion … riot, civil commotion, strikers, locked out workers … earthquake, storm, flood, escape of water from any tank apparatus or pipe …”.  It was common ground that no Specified Event had occurred.   


Allianz considered that Exclusion 9 applied as the damage had been caused by pollution and contamination.  On a summary judgment application, the High Court agreed.

On appeal, BLG maintained that the cause of the damage was the sharp object rupturing the pipe and that the pollution or contamination was the resulting damage, rather than the cause of the damage.


By a 2:1 majority, the Court of Appeal held that “caused by” meant the proximate cause, and for the exclusion to bite, the contamination or pollution needed to be the proximate cause of the loss.  While the chain of causation which led to the damage included pollution or contamination, the puncturing of the pipe, not pollution or contamination, was the proximate cause of the damage.

Other exclusions in the policy used the words “directly or indirectly caused by”, indicating that the drafter of Exclusion 9 envisaged the words “caused by” to mean the proximate cause.  Popplewell LJ said that the general rule, which requires proximate causation, could be “displaced whenever it appears on the proper interpretation of the policy to be what the parties intended”.

In reaching this decision, reference was made to the Supreme Court judgment in FCA v Arch [2021] UKSC 1, where it was said:

“In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis … It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.”

Popplewell LJ observed, however, that many policies of insurance contain technical terms which have acquired their meaning through consistent use and judicial interpretation, which it is the duty of brokers to understand and advise policyholders upon, if necessary.  He He went on to say that Exclusion 9 was to be read as a whole, and he would “not regard that strong presumptive meaning of the exclusionary words as displaced unless the wording of the write-back cannot be reconciled with it”.  Reasonable readers would expect the scope of the exclusion clause to be determined by the words used, “namely the exclusionary words, rather than by what follows”, and the presumption would only be displaced if the write-back was inconsistent with it.

Popplewell LJ found that the words of the write-back did not prevent the words “caused by” from meaning the proximate cause.  Further, he considered that a restrictive interpretation of Exclusion 9 was appropriate since: “the risk of leakage of fuel from pipes, tanks and apparatus, is amongst the most obvious risks arising from a business like that of BLG, and one against which the operator of the business would naturally desire cover”.  On this basis, it was held that Exclusion 9 did not apply.

Nugee LJ likewise allowed the appeal.  He agreed that the exclusion only applied where pollution or contamination was the proximate cause and that the words of the write-back did not require “caused by” to include non-proximate causes.

In a dissenting judgment, Males LJ concluded that Exclusion 9 was not limited to excluding damage proximately caused by pollution or contamination.  Construing the language of the exclusion clause as a whole, he considered that such a narrow interpretation cannot have been intended, noting also that this argument had not been raised until oral submissions on the appeal.


This case was plainly “good” for this particular policyholder.  It reinforces the principle that “caused by” generally will mean “proximately caused by”.  The case is useful for policyholders in confirming that non-proximate causes will be relevant to operation of exclusion clauses only where this is clear from the policy wording or to avoid inconsistencies.

Whilst finely balanced, the Court of Appeal judgment represents the latest in a series of pro-policyholder decisions, demonstrating flexibility on causation and a restrictive approach to exclusion clauses, in view of the wider commercial context (for example, see also - Manchikalapati and others v Zurich Insurance plc and others [2019] EWCA Civ 2163; Burnett or Grant v International Insurance Company of Hanover Ltd [2021] UKSC 12; Arch Insurance (UK) Ltd v FCA and others [2021] UKSC 1; Martlet Homes Ltd v Mulalley & Co. Ltd [2022] EWHC 1813).

Grace Williams is an Associate at Fenchurch Law