False economy

Failing to invest in after-the-event insurance – as still happens in one in four cases – is leaving personal injury firms at risk of being sued by losing clients. Here, three experts give their views on best practice

By failing to take out after-the-event (ATE) cover when working on a conditional fee arrangement (CFA), personal injury firms are leaving themselves wide open to claims from their own clients.

It is widely agreed that ATE premium rates are sky high, yet solicitors are under an obligation to at least inform clients of their funding options when it comes to CFAs.

An ATE premium will cover the client for financial losses were they to lose the case. But failing to take out the cover could leave the aggrieved party looking to recoup losses from another source – the advising firm.

Richard Langton, head of funding with Russell Jones & Walker, says insurers have put solicitors in a difficult position – unable to get reasonably priced ATE cover and leaving firms open to professional negligence claims.

Jane Jarman, senior lecturer in law at Nottingham Law School, says clients are being left financially exposed and looking for financial redress when things go wrong.

And Paul Hurley, business development and marketing manager for legal expenses insurer ARAG Legal Services, says solicitors must get their act together and look for cover earlier on in the proceedings to secure a decent rate.

One thing is for sure, there is a storm brewing in the ATE market and firms could end up paying a very high price.

Richard Langton, head of funding, Russell Jones & Walker

The Solicitors Regulation Authority will soon report on ‘speccing’- the practice whereby firms fund claims using a CFA, but without purchasing ATE cover against the defendant’s costs. Why do they do it?This practice is absolute folly. Almost all ATE providers insist that the solicitor does not cherry pick. Failure to insure one case could invalidate all policies that the solicitor does buy for other clients’ riskier cases. Such firms must be timid in negotiations, invariably accepting the highest offer the insurer is prepared to make, forever fearful that failing to beat a Part 36 offer will expose their vulnerable position.

With the sophisticated management information insurance companies now gather, they will have already pinpointed those firms that routinely claim success fees but no ATE premium for low ball settlement offers. Liability insurers always offer lower damages to firms they know never litigate.

Maybe they could take out ATE at the point of issue when negotiations break down? While there is a certain attraction to such an insurance scheme, in practice I am not aware of any mainstream ATE provider offering this cover routinely. In any event, the premium for such a policy would likely be extremely high and meet with vigorous objections from the paying party in due course. There are plenty of ATE providers that run 100 per cent deferred premium schemes and it seems unlikely that speccing is down to the particular firm of solicitors having a poor track record. A firm with a track record so poor that it cannot get ATE cover should not be practising personal injury law.

Much more likely they are sick and tired of the relentless continuation of the costs war carried out by the liability insurers and their tame solicitors and cost negotiators. Claimant law firms – my own included – receive on a daily basis challenges to ATE premium levels, almost invariably linked with a spurious challenge to the recovery of any costs at all. Claimant solicitors must be robust in response to these ATE challenges. We often make more money out of recovering costs than we do out of the original proceedings, so it can be turned to an advantage.

Jane Jarman, senior lecturer in law, Nottingham Law School

Speccing is like speeding. Everyone knows the danger and that an accident is sure to happen one day, yet people still do it. Taking on a case either without a CFA at all, or with a CFA but without ATE cover, is a risky but increasingly commonplace practice. In some cases there is really no alternative: either the case is so cut and dried that an ATE policy is not required or so risky that the premium is prohibitive, even if the premium payment is suspended or stepped.

While cases such as Rogers v Merthyr Tydfil (2006) assume that the ATE market will grow, the situation on the ground is rather different.

First, the ATE insurance market itself is volatile. While ATE premiums have increased, the number of providers has actually reduced – the result, perhaps, of an increasingly ‘hard’ market. The recent downturn in the financial sector can only exacerbate the situation.

Second, the risk assessment of some cases for the purpose of ATE seems conservative in the extreme, with the result that good cases are deemed too hot to handle at a competitive premium. The risk, therefore, shifts to the client but also to the solicitor in an environment in which clients only hear “no-win, no-fee”.

The result is increased financial vulnerability for clients and means they must be advised of the full extent of their potential liability. In a different context, Mastercigars v Withers (2007) is indicative of the need to be a pedant when it comes to financial issues. The loss of fee income, disbursements paid out of office accounts and a potential professional negligence claim all point to the fact that there is little margin for error for the firm or the client.

Where does all this leave the concept of access to justice – daggers drawn against the indemnity principle?

Paul Hurley, business development and marketing director, ARAG Legal Services

There is not only no benefit for the consumer in a solicitor taking on their case without insurance, it can also be detrimental. A client’s case should be settled on the best possible terms, but without insurance their solicitor is taking a risk.

Fortunately, more solicitors are seeking insurance as they become aware of the ease and types of cover available – although around one in four cases still do not have insurance.

One of the main reasons for this is that some solicitors only look for insurance when cases become complicated – only to find insurers unreceptive. This is because insurers seek a spread of risk, meaning solicitors can receive a negative response when insurers are presented with cases that are disputed over matters such as quantum, causation, or those near to trial or limitation.

In such cases, if a quote is provided, then depending upon the prospects of success, a premium can equate to 75 per cent of damages – so in complex, high-value cases this can be considerable. In normal circumstances the insurance premium, if not fully recovered from the third party, is taken from damages. So in the majority of cases the client is almost forced into accepting an offer far less then they are entitled to had the case been allowed to run its course.

Where insurance is not provided, the solicitor is basically self-insuring. Some believe that this is acceptable for simpler, straightforward cases. However, cases often become complex. Legislation provides for solicitors to fully protect their client and themselves, so self-insuring should never be an option.

A client can only be fully protected if they will never receive a bill for third-party costs or their own side’s costs. A CFA in isolation provides partial protection, but no client is fully protected without insurance from the outset.