Firm endurance

A raft of changes are hitting the insurance market, but what do they all mean for law firms? Dan Cutts explains.

The Legal Services Act, The Ministry of Justice Claims Reforms and Lord Justice Jackson’s review of civil litigation costs all started life at different times but, like buses, they will all arrive roughly together as far as their impact on insurance law firms are concerned.

They will all drive the same changes in the pro-active insurance law firm. The MOJ reforms and any output from the Jackson review will be of direct applicability whereas the changes brought about through the Legal Services Act will be driven by hard economics and the need to survive in a more competitive environment.

It is easier to begin with the Legal Services Act. The biggest threat here is the involvement of non-lawyers in the ownership of law firms. External investment will be able to fund expansion and “cherry picking” from existing law firms.

New business start-ups will be better able to compete, being free from legacy issues that impede rapid change in more traditional law firms.

When Lord Hunt recently addressed Forum of Insurance Lawyers (FOIL) members he anticipated that external investors would begin by tackling the back office function of law firms they invested in.

Frankly it comes as no surprise that an investor in a law firm would seek to strip out cost and drive efficiencies in production. The only way that traditional law firms can insulate themselves from this competition (or alternatively make themselves more attractive to investors) is to tackle those inefficiencies now.

Banks will not be so free with legal capital and only the healthiest and leanest law firms will attract substantial future investment.

However it is far from being all bad news. The opportunities to sit other businesses side by side with a law firm will be increased. The customer proposition could thereby be improved.

There has been much talk as to whether Insurers will use this as an opportunity to set up their own law firms. Several insurers have tried this in the past. There are very few examples of it working effectively.

However the MOJ reforms have fudged the previous boundaries between ‘claims’ and ‘litigation’ and much more legal work is capable of being improved by process. Insurers may wish to invest in law firms to guarantee capacity and price going forward.

I think the better view is that they will conclude that the open market and competition between insurance law firms delivers an efficient pricing model with less management input at their end.

There is very little for a traditional insurance law firm in the new MOJ claims environment. However there are some opportunities for those who can partner with insurers to meet the new challenges. Insurers may choose to outsource the run-off of old style cases so as to be able to hit the ground running in April next year.

They will need guidance from those who fully understand the new regime.  The streamlined process will almost certainly produce some form of satellite litigation as the new regime beds in and the boundaries are inevitably tested.

The MOJ reforms will lead to a loss of some low-end work for insurance law firms. There will be further consolidation in our market. FOIL is already seeing the number of member firms reducing as firms merge or pull out of the sector.

The impact of the Jackson Review is much harder to predict. Lord Justice Jackson is still in the consultation phase of his report. He is giving very little away.

Based solely on the level of discussion at meetings, the likely change would appear to be the application of a fixed fee costs regime to all fast track personal injury work as envisaged by Lord Woolf over a decade ago.

The prospect of one-way costs shifting also needs to be considered.

Fixed costs would offer no challenges for insurance law firms. The model is well established on the defendant side of the fence. It will present far greater challenges to the claimant community who still proceed on hourly rates and a different business model.

It is much harder to predict the impact of one-way costs shifting. It is said that this will encourage a ‘have a go’ culture in which case claimants will be issuing more proceedings and there will be more work for insurance Law firms. However there is very little history to go on.

There was a ‘have a go’ culture when legal aid was available (in effect one-way costs shifting) but at the same time there was the £2,500 CRU amnesty.

The will be no such get-out this time. It may well be that there is more litigation but it does not get as far with claimants discontinuing once the insurer’s resolve has been tested.

However what is clear is that Lord Justice Jackson is keen to reduce the cost of personal injury litigation.

So whether the dog that bites insurance law firms is the Legal Services Act, MOJ reforms or Jackson’s review doesn’t matter. Greater operational efficiency is the only effective defence to competition and the springboard to any opportunities.

Dan Cutts is vice-President of the Forum of Insurance Lawyers (FOIL) and director of insurance at Weightmans