A large trading company was assessing whether to pursue a claim for damages for a breached contract. The General Counsel was clear on the merits of the claim and the likelihood of success; the CFO had confirmed that cash flow enabled legal costs to be covered, however, the Board was concerned on behalf of the shareholders that in the event of an adverse outcome the company would be left not only with the legal costs that had been incurred but also the high probability of paying a large proportion of their opponent’s costs. This meant that the risk exposure was multiplied considerably beyond what was being spent on the company’s legal team.
At the Board’s direction, the CFO sought to hedge the risk of an adverse outcome just as he would foreign exchange and interest rate movements. This meant that the Board of the company could report to its shareholders that it was pursuing its claim whilst reducing its potential downside by 55% and retaining all of the upside of a win
Without any hedging strategy, in the event of a loss at trial the company stood to lose approximately 1.7x its legal costs in bringing the claim. This assessment was based upon an assumption that 100% of own-lawyer costs and disbursements to professionals and experts would be irrecoverable and a cost award would be made for the opponent’s costs that experience suggested would be approximately 70% of the amount spent on own-side costs and disbursements.
Hedging of this risk exposure was achievable by using QLCC’s insurance which, in the event of a loss at trial, would pay 100% of the limit of indemnity for an opponent’s cost award, 100% of the limit of indemnity for own-side disbursements and, after a risk-sharing deductible, 75% of the limit of indemnity for own-lawyer fees. This meant that with a risk exposure of 1.7x own-side costs and disbursements in pursuing the claim, the CFO had insurance available that would cover 1.55x of the company’s expected own-side lawyer costs and disbursements were it to lose the claim at trial:
85% of total costs for own legal team, experts and professionals (75% reimbursement of own-lawyer fees and 100% reimbursement of disbursements) = .85x own legal costs
100% of adverse costs = 0.7x own legal costs
The premium for the QLCC insurance was paid in stages with a premium based on the total limit of indemnity of
12% for the first phase of litigation
6% for the second phase
17% for the trial phase.
Converting this premium into a ratio against total potential own legal costs in the event of a loss, it amounted to approx. 0.6x should the claim go all the way to trial.
By having the insurance in place and paying the premium, the money at risk should there be a loss at trial reduced from 1.7x to 0.75x the expenditure incurred on own-side legal costs and disbursements i.e. 1.70x-1.55x+0.6x (the premium cost).
“QLCC” and “Quantum Legal Costs Cover” are trading names of Harbour Underwriting Limited.
Harbour Underwriting Limited is an appointed representative of Bennett Gould & Partners (Dorset) Limited which is authorised and regulated by the Financial Conduct Authority.
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