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The recoverability of indemnity fees – the debate is just beginning

By John Rossos

Since BridgePoint Indemnity Company (Canada) Inc. (BICO) introduced BICO Legal Cost ProtectionTM to the Canadian legal market, a fundamental question posed by the personal injury bar is whether the indemnity fee charged is recoverable from the defendant. Until recently, there has been no Canadian decision addressing this issue.

The Superior Court of Justice has now addressed the issue in Markovic v. Richards et al., 2015 ONSC 6983 (CanLII) (“Markovic”) on Nov. 12, where Justice Jane Milanetti held that the fee charged for obtaining legal cost protection is not a compensable disbursement.

The plaintiff in Markovic had obtained legal cost protection against adverse costs and disbursements in an action arising from a motor vehicle accident. The judge has mistakenly referred to the product as ATE insurance purchased from DAS, a foreign insurer, when, in fact, it was a legal cost indemnity provided by BICO. Following trial, the plaintiff sought payment of the indemnity fee from the defendant as a disbursement.

The United Kingdom has a mature ATE insurance market, and the Superior Court was provided with decisions from there to aid in making its decision. After reviewing its case law, Justice Milanetti noted that the United Kingdom had introduced legislative reform over the years that allowed the claimant to recover the ATE insurance premium in its costs from the defendant if the claim was successful and noted that no such provisions apply in Canada.

Although the court recognized that it was the plaintiff’s prerogative to obtain legal cost protection, the court did not accept that such a fee should be reimbursed by the defendants as a compensable disbursement 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 the litigation; and
  4. Legal cost protection could act as a disincentive to resolve an action.

Accordingly, the court did not think it was fair and reasonable that an insurer should be expected to pay this premium.

We believe there are compelling reasons for a claimant to recover the cost of the indemnity fee, or ATE insurance premium, and that counsel should take a fresh approach litigating this issue. There are compelling reasons to challenge Justice Milanetti’s decision:

  1. Legislative Reform: The absence of legislation requiring a defendant to pay for legal cost protection is not a valid reason for denying the recovery of this cost either as an assessable cost or a special damage. Legal cost protection is a novel product that requires the law to adjust and adapt to innovation in the market. Where a claimant has been harmed by the actions of another and, as a direct consequence, they are forced to bear a cost to manage risk conventional legal principles ought to apply to ensure the claimant is made whole.
  2. Discretionary Expenditure: Most expenses incurred to advance litigation are discretionary, including the costs of expert reports, preparing for discovery, mediation, and trial. Acquiring legal cost protection provides the claimant with a critical form of litigation risk management and, given their unique financial circumstances, may be a key aspect of their litigation strategy.
  3. Advancing the Litigation: Legal cost protection not only advances the litigation, it facilitates access to justice. The claimant is often of limited means. An adverse cost award could have a significant financial impact on the claimant even if the claimant is impecunious. However, the financial consequences for an insurer are de minimis since they are able to spread the cost across a large population of policy holders.The imbalance in economic resources between the claimant and the insurer puts pressure on the claimant to settle their claim and obtain less-than-fair compensation. This undermines the principal objectives of our civil justice system and denies the claimant proper access to justice. Accordingly, by acquiring legal cost protection a claimant is able to fearlessly advance the litigation and obtain fair compensation for their losses.
  4. Disincentive to Resolve the Action: There is an inherent contradiction between Justice Milanetti’s concern that legal cost protection does not advance the litigation while simultaneously claiming that it acts as a disincentive to resolve the action. The terms and conditions of indemnity agreements exclude protection where a claimant behaves unreasonably by rejecting reasonable offers to settle or otherwise does not prosecute their claim in a timely manner causing the claim to fail for want of prosecution.

For these reasons, we do not believe that Markovic is the last word on whether legal cost indemnity protection can be recovered by the claimant either as an assessable cost or as a special damage. Tactically, counsel may consider either approach depending on the specific facts or circumstances of the claim. However, it is important to create an evidentiary foundation that properly supports the claim for recovery. Plaintiff’s counsel in Markovic elected to seek recovery of the cost as an assessable disbursement. It is noted that plaintiff’s counsel did not amend its pleadings to seek recovery of the fee as a special damage. While Markovic may have been too advanced by the time the plaintiff obtained legal cost protection, it is an open question whether an amendment to the pleading would have changed the result:

  1. Were there specific facts or circumstances surrounding the claimant that compelled them to seek protection?
  2. Was there a shift in the risk exposure that the claimant faced during the litigation process that required them to seek greater protection in order to advance their claim?
  3. Was the defendant’s behaviour a factor?
  4. Are there compelling strategic reasons to seek recovery of the cost as an assessable cost rather than a special damage?

As this area develops in Canada, we will continue to monitor and report on any new developments. Please contact us if you have any questions.

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