To get off the ground, a class action requires a representative applicant. Unless indemnified, the representative applicant is exposed to any adverse costs order in the proceeding – potentially millions of dollars. Indemnification of representative applicants against adverse costs by third-party funders or plaintiff firms is the norm. After the Event (‘ATE’) insurance is commonly purchased by funders to defray the adverse costs risk, but ATE policies come at a substantial cost. To what extent should group members bear that cost? How should the Court assess whether ATE premiums are reasonable and proportionate? And what of the conflicts that may arise where ATE insurance is obtained by and for the benefit of funders or plaintiff firms, but potentially paid for by group members? The Federal Court considered these issues in Janssen v OnePath Custodians Pty Ltd (No 2) [2026] FCA 291 (Janssen).

In the 2023/24 edition of The Review, we observed that ‘Courts will look closely at the reasonableness of deductions from settlement sums and applicants should not assume that ATE premiums will be recoverable’. The decision in Janssen reinforces that conclusion and adds additional meat to the bone by interrogating underlying issues of principle.

Key takeaways

• The Court’s close scrutiny is warranted to guard against the risk of litigation funders seeking to ‘have it both ways’ by ‘justifying a funding commission by reference to its exposure to an adverse costs order while simultaneously seeking the reimbursement of the cost of defraying that very risk through ATE insurance’.[1] A touchstone is that the aggregate return to a funder must be reasonable having regard to the funding risk assumed.
• There is potential for conflict between the interests of funders (including solicitors acting on a ‘no win, no fee’ basis) and group members in the context of ATE insurance. The Court raised concern that ATE funding arrangements have developed and become prevalent ‘in a way that may not have involved careful consideration of the interests of group members’.[2] Going forward, courts may have a greater expectation that applicants seeking deductions from settlement funds for ATE premiums provide cogent evidence as to their reasonableness.
• In the consumer class actions context, indemnifying an applicant against the risk of an adverse costs order is ‘part and parcel’ of what a litigation funder does. It is unlikely that a plaintiff firm operating on a ‘no win, no fee’ model will be entitled to additional credit for providing such indemnity where, as a matter of reality, it is required for the matter to proceed.
• Care is required to ensure that disclosure material provided to group members as to the purpose for and details of ATE insurance is complete and accurate.

Context

In an earlier insight, we provided an overview of the developing ATE insurance landscape in Australia. As we indicated, ATE premiums were originally written almost exclusively on a wholly deferred basis, with the premium charged typically being something between 20-40% of the policy indemnity limit. As the market matured, additional premium options became commonplace. Relevant to the decision in Janssen, one option is the ‘split premium’ structure, whereby a proportion of the premium is paid upfront, with the balance to be paid at a later stage, such as when the matter concludes without an adverse costs order.

This flexibility comes at a price: the lower the upfront cost of an ATE policy, the greater the total cost is likely to be. As Button J warned in Janssen, ‘the [plaintiff] firm’s interests lie in minimising the initial outgoing, as that is the sum the firm will have to meet out of pocket’. The danger is that this conflict will be resolved by funders favouring ATE terms which lead to higher costs overall, which are then sought to be recouped from group members in the event of settlement. Significantly, in Janssen, there was ‘no indication that this conflict of interest [was] recognised or addressed in any way, beyond retaining a broker to obtain the insurance’.[3] The Court’s remarks suggest that additional scrutiny of the structure of any ATE insurance will be applied in future to ensure group members are not being disadvantaged.

Further complexity arises from the role of the ATE insurer, who ‘becomes a stakeholder in the success of the litigation: the case loses, it pays out on the policy… or the case wins and it receives a significantly higher [premium].’[4]

A ‘perhaps unusual’ constellation of circumstances

In Janssen, the Federal Court approved a $50 million settlement of a long-running consumer class action. The proceeding was commenced in 2020 in relation to alleged breaches of duty by the trustee of superannuation funds, on behalf of current and former members of the funds.

From the outset, the plaintiff firm indemnified the representative applicants against any adverse costs order. Around a year later, the plaintiff firm took out an ATE policy with a $4 million indemnity, a 10% upfront premium ($440,000 including stamp duty), and a contingent premium which would cost up to an additional 30% of the indemnified amount, depending on if and when the matter settled. Given the prior indemnity, the Court doubted the accuracy of a notification to group members ‘that the ATE insurance was taken out to “protect the Applicants”’.[5] Further, the Court did not accept that there was any clear baseline establishing that ATE premiums at 40% of the policy indemnity limit are inherently reasonable.

The plaintiff firm originally intended to apply for a ‘solicitor’s CFO’ – a mechanism allowing a plaintiff firm to obtain a contingency fee calculated as a percentage of any settlement. That approach was abandoned, however, due to the appeal which led to the High Court finding, in effect, that solicitor CFOs cannot be made in class actions other than those commenced in the Victorian Supreme Court (the subject of a previous Insight).

Instead, the matter came to be funded on a ‘no win, no fee’ basis. In part arising from this history, disclosure to group members in relation to ATE insurance was ‘ambiguous and incomplete or inaccurate’,[6] and there was ‘no disclosure of additional deductions being sought for ATE insurance’ during the opt out process.[7]

Having it both ways?

As the matter was run on a ‘no win, no fee’ basis, the plaintiff firm sought its legal costs subject to a 25% ‘uplift’ – being a premium payable in recognition of the funding risk assumed. Additionally, the plaintiff firm sought payment out of the settlement sum for the full amount of the ATE insurance premium, in the amount of $1.76 million.

The Court did not accept that the 25% uplift could be separated as compensation for risk distinct from liability for an adverse costs order. As is often the case, things were ‘not that simple’.[8] It would be ‘overly simplistic, and not reflective of reality, to suggest that, because the proceeding has ultimately been funded on a ‘no win, no fee’ basis, the uplift in fees has nothing to do with the risk of adverse costs orders assumed…’.[9] The ‘reality’ to which the Court referred included that to get off the ground, indemnification of the representative applicant(s) by a funder is necessary in the consumer class action context. Provision of such indemnity, and assumption of the corresponding risk, is an inherent part of the funder’s role. In that regard, the Court doubted that any attempt to recoup ATE costs over and above the amount of a contingency fee would have been made, had the original plan for a solicitor’s CFO proceeded.[10]

A limited allowance

A key function of the Court in determining whether and on what terms to approve a proposed class action settlement is to consider proposed deductions from the settlement sum for legal costs and disbursements (and any funding commission).

The Court expressed concern that prevalent ATE funding arrangements have developed ‘in a way that may not have involved careful consideration of the interests of group members’; and indicated an expectation that ‘future applications for deductions for ATE insurance will pay closer attention to [these issues]’.[11]

On the facts, the Court allowed as reasonable a deduction of 50% ($880,000) of the ATE premium from the settlement sum, having regard to the matters set out above and the aggregate deductions proposed.

The Court’s decision and reasoning is likely to play into the way Courts, funders and contradictors consider the reasonableness of proposed deductions for ATE insurance premiums. More broadly, depending on future developments, it may require a reassessment of prevailing ATE insurance funding structures with an emphasis on minimising total cost and consideration of group member interests, or alternatively acknowledgement of the limited potential for recoverability.

[1] Janssen at [154].

[2] Janssen at [197].

[3] At [186].

[4] Janssen at [183].

[5] Janssen at [173].

[6] Janssen at [178].

[7] Janssen at [177].

[8] Janssen at [165].

[9] Janssen at [169].

[10] Janssen at [168].

[11] [197]-[198].