A recent article in this publication by Dr Can Eken and Peilin Chen examined whether the costs of third party funding should be recoverable in investment arbitration. Their analysis highlighted a tension that can no longer be ignored: as third party funding becomes embedded in dispute resolution, the question of who bears its cost demands a clear answer. The authors argued that recovery may be justified in investment arbitration where, in essence, a respondent’s conduct forces a claimant to seek external financing.
A similar debate is now taking place in connection with litigation in England and Wales. The Civil Justice Council (CJC), a public body that advises the Lord Chancellor on civil justice and civil procedure in England and Wales, in its report on litigation funding in June 2025, recommended that third party funding costs should be recoverable in civil proceedings in exceptional circumstances.
The CJC report said it found it difficult to identify “an obvious, or principled, reason” for the divergence between English-seated arbitration, where tribunals have used the broad costs discretion under section 59(1)(c) of the Arbitration Act 1996 to award funding costs in appropriate cases, and litigation, where funding costs cannot be recovered. As the report put it, this “creates an uneven playing field where claimants with arbitration agreements may be better positioned than those who have no choice but to litigate in court. Such an approach runs counter to principles of fairness and access to justice.”
The CJC’s reasoning is compelling. But if it holds for third party funding, it must also hold for adverse costs insurance premiums. The arguments are functionally identical, and the case for recovering adverse costs insurance premiums in exceptional circumstances is equally strong.
Applying the CJC’s test
The CJC’s draft rule defining what constitutes “exceptional circumstances” sets out a range of factors the court must consider before ordering recovery. These include the conduct of the parties, whether the funding costs were reasonably incurred, whether the proceedings could have been pursued without them and the financial consequences of any order for both sides.
Each of these factors applies with equal force to adverse costs insurance. Consider a commercial claimant facing a well-resourced opponent whose strategy is to “financially out-muscle” and deplete the claimant’s resources by, say, running up costs through extensive disclosure applications and aggressive security for costs demands.
The litigation brought by sub-postmasters in Bates v Post Office provides a striking example. Claimants of modest means were forced to secure external funding and insurance to pursue meritorious claims against an opponent with vastly greater resources and every incentive to exhaust them. In a case like that, adverse costs insurance is not a luxury but a practical necessity.
The CJC framed its recommendations with the overarching aim of promoting effective access to justice. The exceptional recovery of adverse costs insurance premiums sits squarely within that aim.
A question of consistency
The CJC’s own report acknowledged the role of adverse costs insurance in the funding ecosystem, recommending that security for costs should not be ordered against a funded party where the funder has met capital adequacy requirements and a suitable adverse costs policy is in place. The CJC recognised that adverse costs insurance serves a legitimate protective function within litigation. It would be inconsistent to acknowledge that function while denying any possibility of recovering its cost.
If the exceptional circumstances test is met, there is no clear reason why a funded claimant should be able to recover third party funding costs while a claimant who instead brought the same claim with adverse costs insurance should be unable to recover that cost. For many commercial parties, particularly SMEs, the expense of adverse costs insurance represents a genuine barrier to pursuing meritorious claims. If a defendant’s unreasonable conduct forces a claimant to incur that cost, there is no principled reason why the successful claimant should be unable to recover it.
This is not a call for a return to the pre-Jackson regime of routine recoverability of adverse costs insurance premiums. But the CJC accepts that a more nuanced approach is required that balances access to justice against proportionality by confining recovery to exceptional cases. If that framework is adopted for funding costs, the logic of the CJC’s own framework requires that it be extended to adverse costs insurance premiums. The cost of insuring against the financial risks of litigation is just as much a cost of the dispute as the fee paid to a funder. The law should treat them consistently.
Rocco Pirozzolo is Managing Director and Underwriting Director at Harbour Underwriting Limited, a specialist provider of commercial dispute insurance.
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