Loser Pays

The loser pays rule — also known as the English rule or cost shifting — requires the losing party in litigation to pay the prevailing party's reasonable legal costs, in contrast to the American rule under which each party generally bears its own fees regardless of outcome. Loser pays jurisdictions (including England and Wales, Australia, Canada, and most of Europe) create substantially different risk profiles for claimants and funders than American rule jurisdictions: the downside on a failed claim includes not only the loss of the claim itself but potential six- and seven-figure adverse costs awards. This dynamic drives higher demand for ATE insurance and adverse costs coverage in English-rule markets and is a key structural reason why the litigation finance industry developed earlier and more robustly in the UK and Australia than in the U.S.

The loser-pays rule is the primary reason litigation finance and ATE insurance developed earlier and more robustly in English-rule jurisdictions than in the U.S., since claimants there face a categorically higher downside that third-party capital and insurance are well suited to absorb. Funders underwriting matters across both rule systems maintain separate risk frameworks for each, since a claim that would be modest-risk under the American rule can carry substantially higher tail risk under loser-pays.