Insurers entangled in big battle over small print
29 March 1999
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Last week Royal & SunAlliance Insurance announced the launch of its new "pursuit" policy, together with the claim that it was unique within the market.
It is an after-the-event insurance policy for commercial matters linked to conditional fee agreements. The joint holders of the policy, the solicitor and his client pay a premium only if they win the case.
For the client and solicitor it sounds like the ideal product. Both can start legal action knowing that there is a safety net underneath but, as ever, there are catches involved.
After the launch publicity, the smaller players in the insurance market were up in arms claiming that such policies were nothing new.
Bob Gordon of Greystoke Legal in particular takes issue, saying that his company paid out its 200th claim for commercial work just before Christmas.
"We have been offering after-the-event insurance for commercial matters for about three-and-a-half years and it makes up about 30 per cent of our business."
He believes that commercial law is an area in which other major insurers will start to look and can only grow.
However, in contrast to the Royal's scheme which is attached exclusively to conditional fee agreements, 90 per cent of Greystoke's policies are attached to standalone agreements, although there is the chance to link it to CFAs.
Standalone agreements - cases where there is no conditional fee agreement and the insurance pays what the client would have been liable to pay if the case is lost - offer the best deal for the client, according to Gordon.
"If we attached the policies to CFAs then the client would have to pay twice if he won. Once for the premium and once for the success fee.
"With the CFA the solicitor must tell the client about the standalone option which we believe is a better deal from the client's point of view."
However, Peter Smith, technical underwriter for the Royal's policy, insists that his company is unique in demanding payment of the premium only if the holder wins his case - another claim which Greystoke disputes.
The Royal policy is the brainchild of Linklaters & Alliance's head of advocacy, Mark Humphries who says: "I came up with the idea quite a long time ago when thinking about the reforms of legal aid.
"At the time there was a lot of debate about the number of people in middle England who were ineligible for legal aid but unable to fund legal actions themselves. But then it became clear that no win, no fee arrangements were part of the Government's plan to enhance legal aid.
"Putting myself in the position of the solicitor I wondered whether I would take on many CFA cases because of the risk. So then I came up with the idea of insuring the solicitor rather than the client.
"With insurance CFAs become a bit of a misnomer because there is no risk involved anymore."
However, Humphries admits he was surprised that the Royal has been able to offer a no premium deal.
"I know the lengths to which they have gone for their due diligence to check what they have to do economically and they obviously believe that they can offer this product with no premium and still make money.
"They will sell this product by making it attractive but will not be overly ambitious with the types of cases they take on."
Smith adds: "Our required success rate will not be higher than the solicitor is looking at in deciding a CFA. It may be lower but not higher."
Perhaps the secret to Royal success is in the premiums charged in a successful case. Under the policy, the Royal will cover the costs of the other side and most of the solicitor's own costs and disbursements if the holder loses his case. But if the case is won the Royal will take a pre-arranged slice of the plaintiff's legal fees.
As to how much this would be, the company is taciturn.
However Shoosmiths & Harrison's head of commercial litigation in Reading, Claire Rowe, says the size of the premiums have deterred her clients from taking cover.
She deals with several medium-sized businesses which are the prime candidates for taking out the cover.
"I have had some interest and have been to get quotes but the premiums have been about 20 per cent of the potential liability.
"So if a client is expecting to get damages of about £100,000, they would have to pay about £20,000 in premium.
"It also only pays out if you lose lock, stock and barrel. So if the client settles there is still the premium to be paid."
After discussions with the handful of clients who have seriously considered the cover, they have all decided against it. The clients' rationale is that if the cautious insurance companies are willing to take on their case then they must have a good chance of winning and so do not need the insurance.
As it is easy to spend an insurance company's money, could there be a possibility of clients upgrading their lawyer when they do not have to pay the increased hourly rates themselves?
"I think that the customer is more likely to look at the hourly rate of their own lawyer, compare it with that of the likes of Linklaters and realise that Joe Bloggs on the high street can work three times as hard for three times as long for the same price," believes Humphries.
Greystoke believes that the way the policies are sold will also help protect the smaller solicitor's caseload.
"We sell through the solicitors, so where the firm has been proactive and told the client about the policy it breeds client loyalty," says Gordon.
Part of the reason why the big shots in the insurance world have held back until now to enter the ring is the complexity of the area.
The personal injury market, which has provided rich pickings for many insurers, is relatively easy to predict. But, in commercial cases, Gordon believes there is a much greater element of the unknown involved - which is why other insurers have been slower to dive into the market.
For both Greystoke's and the Royal's policies, the premium payable depends on the individual case, which means increased overhead costs for the insurers to pass on to the clients. Also, the variety of cases for which it would make economic sense for a plaintiff and solicitor to purchase a policy would be necessarily limited to high volume areas.
However, for the defendant in a CFA action the presence of insurance is good news, according to Martin Staples, senior partner at London insurance and litigation firm Vizards.
"We are trying to ensure that a plaintiff pursuing a case under a CFA has to declare the arrangement. Otherwise even if the defendant wins the case there is a good chance that he will not recover his own costs. If that is the case, the defendant may choose to settle rather than follow the case through.
"But if the plaintiff has insurance that is not a problem, although we would want to know how closely the insurer is instructing the lawyer taking the case."
While the insurance companies claim that their products will open up a new market for small and medium sized companies that are at present unable to take action, Staples disputes that the volume of litigation will change significantly.
"At the moment many of these companies are covered for legal expenses in their general before-the-event insurance, but we see few cases funded by this insurance brought to the courts."