Adverse Costs

Adverse costs (also called cost shifting or opposing party costs) refers to the obligation of an unsuccessful litigant to pay all or part of the prevailing party's legal fees and expenses. The exposure to adverse costs is one of the primary drivers of demand for litigation finance and ATE insurance in loser-pays jurisdictions, as an unfunded claimant who loses faces not only the loss of their claim but also a potentially crippling costs order. In funding structures, adverse costs exposure is separately budgeted and must be covered either by ATE insurance, by the funder's capital commitment, or by a combination of both. The risk of a large adverse costs award — particularly in complex commercial litigation with well-resourced defendants — is a material underwriting consideration that can affect both the funding decision and the deal pricing.

In loser-pays jurisdictions, funders size the total capital commitment to cover both the claimant's own legal costs and a realistic adverse costs exposure, since a claimant who loses faces not just the loss of the claim but a potentially crippling separate costs order — a risk that has no American-rule equivalent and materially raises the stakes of underwriting error. Funders in these markets treat the decision to cover adverse costs directly, versus requiring ATE insurance, as a core structuring choice with direct pricing consequences.