2 July 2012 | By Katy Dowell
Lawyers and underwriters are getting battle-ready for the new ATE arena as Jackson LJ’s litigation reforms approach
From April 2013 litigants bringing their cases on no-win, no-fee deals will no longer be able to recover the cost of after-the-event (ATE) insurance premiums from the losing side. The aim is to bring about great financial disciplines, speed up cases and bring down costs. Here, The Lawyer examines the impact of the reform on the ATE market.
Lord Justice Jackson sent shivers through the legal expenses market when he unveiled sweeping reforms to the litigation funding sector at the beginning of 2010. In future, he said, the recoverability rule should be abandoned and successful litigants will no longer be able to claim costs from the loser. Fees had spiralled out of control. The front-loading of costs had escalated beyond control. Change is needed.
Fundamental reform is coming down the road rapidly. By April 2013 the Ministry of Justice (MoJ) wants the after-the-event (ATE) insurance market to be changed forever. The Civil Justice Council (CJC) is expected to be made responsible for developing the new rules, although many in the market believe it is yet to begin examining the sector.
“There’s the question of the absence of the timetable,” says FirstAssist managing director of legal expenses Peter Smith. “It’s very difficult to see how the changes will be ready for April.”
Rather than scaring players out of the market, the uncertainty has led many to consider how they will prepare for the change and balance their books. Broadly speaking, ATE falls into two categories, personal and commercial.
The personal injury (PI) market is expected to be the worst hit by the reforms – after all, this is the sector in which fees have escalated considerably. Consequently many market players are considering a move into the commercial sector, where their product could be viable for the litigators doing battle in the High Court.
“Very broadly speaking, the traditional big market has been personal injury,” explains Just Costs client services manager Mark Beaumont. “What we’ve seen over the past 12 months is a lot more activity in the commercial market. Temple Legal Protection and Abbey Legal Protection are looking to do more in that arena.”
“On the personal injury side,” adds Just Costs associate Kevan Neil, “there’s a big fear that part of the market’s gone.”
That fear, however, may be unfounded, according to Matthew Amey, a director at litigation funding broker TheJudge.
“It may end up being a very watered-down market, but it’s by no means a dead market,” he insists.
With less than a year until the reforms are implemented, there are no signs of demand slowing. Smith says volumes are holding up in the PI market, while Amey believes there has actually been a surge in demand.
“There’ll be a huge demand in the rush up to the deadline,” Amey predicts, although he warns that “it will be worrying if lawyers leave it until the last minute”.
While demand may slow in the PI sector post-April 2013, many expect there to be a rise in demand from lawyers working in the commercial sector. What is currently attractive about ATE is that it comes at minimal cost. Deferred premium deals mean that insureds can delay payment until after the hearing.
Nevertheless, Amey asserts that the recoverability rule – loser pays – is not the main driver for commercial insureds.
“Some people will want the product to hedge their risk,” he says. “The problem with recoverability is a constant issue for the market. The concern is that you have to pick the winners, so you’re always battling to have the right selection of the cases.”
The fundamental change post-Jackson will mean that premiums will have to be paid upfront. Experts suggest that this change could have a positive impact, as it will force underwriters to examine more closely the merits of a case and it implements a disciplined underwriting culture.
This is expected to have a direct impact on litigators using the products, as they in turn will be asked for more information about the financial viability of a case, bringing in some much-needed focus on costs.
“ATE underwriters are often worried about costs certainty in the profession at the beginning of a case,” Amey points out. “Insurers like to have a decent pool of risks so that if they lose one case it won’t write off the entire book of business.”
Lawyers are often criticised for their lack of awareness when it comes to the financial planning of cases.
“Costs budgeting is an occupational weakness for lawyers, and is something that firms should become more proficient at,” states Smith.
The determination of judges to crack down on spiralling fees, as well as an increased availability of third-party funding, is forcing a fundamental change – the kind of change that will put lawyers rather than underwriters in the driving seat of the costs budget.
“The commercial costs management pilot’s coming into play,” points out Neil, referring to the recent pilot at the Technology and Construction Court (TCC), where lawyers are being asked to explain their budgets at the outset of the trial. “[Judges] are looking at costs on both sides. It’s expected to sharpen lawyers’ minds on funding and make them think about how they structure the case.”
This is expected to have a knock-on effect on premium levels, with underwriters able to price risk at the outset rather than making a prediction about costs variations as cases develop. Smith believes it takes on average 18 months for legal expenses premiums to be paid, although this could be as long as three years in some instances.
“We had a case that was heard two years ago – we got the costs award in June 2010,” Smith says by way of example. “It’s taken this long to reach a detailed assessment – it took nine months to get a court date.”
Additional time means costs piling up for the client, and this is what Jackson LJ wants to combat. Smith predicts that premiums across some classes of business will have to be paid upfront for the market to thrive.
The financial incentive for lawyers comes by way of contingency fees – in other words, litigators taking a slice of their clients’ winnings. This means the legal risk is taken on by the firm, with the lawyer getting a juicy payday should the case be won.
For some cash-rich firms this may be attractive; but for many others, waiting up to three years or more to get paid is a hindrance. Amey suggests that they may want to lay off the risk by taking out a commercial premium, possibly rolling in a third-party funding package.
Whispers are starting to emerge about firms that are looking to fund collections of cases.
Funding multiple cases is already common practice in the US, where contingency fees are the norm. A firm has 10 cases of varying values, between £2m and £10m, for example; it wants to underwrite them as a book and therefore manage a joined-up cash pot, allocating the money where it is needed most. This enables the firm to run cases and still enjoy a payday without holding the risk on the books.
“There’s a lot of interest in portfolio covers for a group of actions,” Smith says. “It’s widely accepted in the US. For firms where cash remains an issue – not those in the top 10, but still a very broad range of firms – this provides an alternative means of funding the business.”
The initial chill that Jackson LJ sent through the legal expenses market when he recommended the end of the recoverability rule is starting to wane. This is not the first time the MoJ has attempted to bring the ATE market into line and many underwriters have been aware of changes on the horizon for some time.
For the lawyers, greater financial knowledge about cases is essential for future case-planning. A renewed emphasis on costs by underwriters will pressurise lawyers to respond in a positive manner. Those who do will win in the post-Jackson environment, with ATE insurance evolving to become a much more considered product.
The Jackson reforms
In March 2011 the Ministry of Justice (MoJ) endorsed a series
of reforms proposed by Lord Justice Jackson aimed at speeding up the court experience in favour of reducing costs. This included lifting the ban on contingency
fees in a bid to tackle escalating legal fees.
Claimant lawyers will no longer be able to recover success fees from the losing side if they win the case. Neither will they be able to recover the cost of an after-the-event (ATE) premium as they would under a conditional fee arrangement (CFA).
Instead, the MoJ said that “claimants will have to pay their lawyer’s success fee and will therefore take an interest in controlling the costs being incurred on their behalf”.
There will be a 10 per cent increase in general damages to compensate for the loss and qualified one-way costs shifting introduced.
Claimants who represent themselves will be able to recover higher costs than those represented by lawyers, it added.
Abbey Legal Expenses
QBE Insurance Group
Temple Legal Protection
Innovator One (May 2012)
The Innovator claim was one of the largest independently funded cases to be brought
before the High Court. The £5m worth of litigation funding was provided by Allianz ProzessFinanz and the after-the-event (ATE) insurance was covered by QBE Insurance Group and Brit Insurance.
The 555 claimants, represented by Enyo Law partner Michael Green and 4 New Square’s John Powell QC, made allegations of conspiracy, dishonest assistance and negligence against the firm during a 16-week trial in the High Court.
Mr Justice Hamblen dismissed the claim in May and Collyer Bristow has launched a claim for indemnified costs.
Stone & Rolls (July 2009)
The eagerly awaited judgment in Stone & Rolls (in liquidation) v Moore Stephens (auditors) was handed down by Lord Phillips in July 2009, striking out the claim.
Stone & Rolls launched its £90m claim against auditors Moore Stephens in January 2007, using a combined package of third-party funding – by IM Litigation Funding (IMLF) – and ATE insurance.
The net effect of the arrangement was that IMLF was left liable for the costs of Moore Stephens up to the sum that it had invested in bringing the case to the House of Lords. That sum, say sources close to the case, was a risk covered by the ATE insurance.