Adverse cost insurance does not eliminate risk of costs award against plaintiffs, says lawyer

While many plaintiff’s-side personal injury law firms provide adverse cost insurance to their clients, plaintiffs covered under those policies should not feel totally insulated from the defendant’s costs claim if the litigation goes south, says Toronto lawyer Darcy Merkur.

“Many personal injury plaintiffs may not appreciate that even though they were smart enough to purchase adverse costs insurance, where appropriate, that their adverse cost insurance may prove highly inadequate to address the real risk,” says Merkur, a trauma lawyer and partner at Thomson Rogers.

In personal injury matters, lawyers typically work on contingency fees or other arrangements to ensure plaintiffs who cannot pay can access the justice system when they are seriously injured. Adverse cost insurance provides further peace of mind, by covering the bill if the plaintiff is unsuccessful and the judge orders them to pay the costs incurred by the other party. But the maximum payout on an adverse costs insurance policy is typically $100,000, and occasionally reaching $200,000-$250,000, says Merkur.

“That is a good chunk of the exposure but not all of the exposure. So plaintiffs who are injured, who think that they are safe and they get a free run at trial because they have adverse costs insurance and don’t have to pay their lawyer if they lose, aren't necessarily without risk,” he says.

“What happens is a lot of plaintiffs firms have developed a practice or have set their offices up such that they offer or encourage or insist that all of their potential clients take adverse cost insurance,” Merkur says. “The problem is $100,000 in insurance may not be enough and it doesn't therefore resolve the concern that a lot of clients have about the possibility of adverse costs being levied against them if the case proves unsuccessful.”

An April decision out of the Superior Court, demonstrates that, even with adverse costs insurance, a plaintiff can be on the hook when the court’s costs award exceeds their coverage.

In Mundinger v. Ashton, Kasey Mundinger, the plaintiff, sought damages for a car accident which occurred July 9, 2010, in Uxbridge, Ont. L&A Mutual Insurance Company admitted liability for the accident, but disputed the nature and seriousness of her injuries and the duration of her recovery. At trial, the jury awarded Mundinger damages totalling $53,000, which were offset by the deductible provided in the regulations and $41,600 worth of income replacement benefits she had received from her own insurer.

With a net award of $0, Justice Robert Charney dismissed the plaintiff’s action. But the parties were unable to settle costs. The defendant sought $160,000. The law firm representing the plaintiff owned an adverse costs insurance policy which covered her for up to $100,000. The plaintiff argued any costs order should be limited to that amount, as she has no assets that could satisfy an order above it. Justice Charney wrote in the decision that the plaintiff “provided no authority to support that position.” The plaintiff also did not dispute the defendants’ hours billed, hourly rate or disbursements and did not provide her own legal bills to argue the defendant’s were disproportionate.

As the defendant demonstrated before the court, costs awards exceeding $100,000 are common. The defendant provided the court several recent examples where the court awarded costs to a successful defendant of between $130,000 and $175,000: Nguyen v. Szot, Jamieson v. Kapashesit, Robichaud v. Constantinidis and Loye v. Bower.

Adverse costs insurance is “an irrelevant factor in the fixing of costs,” said Charney. The plaintiff cannot limit the cost amount to which a successful defendant is entitled by limiting their insurance coverage and it did not appear the plaintiff’s law firm would limit its own costs claim had they been on the winning side, he said. Limiting the costs amount would undermine its function in promoting settlement, by incentivising plaintiffs to ignore reasonable settlement offers, said Charney.

Charney awarded the defendant $160,000 in costs.