After-the-event insurance has been a popular way of protecting claimants against a loss in litigation but its future is now in question
Reform of civil litigation costs has been a long time coming. Years after Lord Justice Jackson began his investigation into the cost of civil litigation, and just three months after the reforms came into force, there is a sense that we are merely in a lull between storms.
Prior to April there was frantic scrabbling not only to gain full understanding of the reforms, the various exclusions and the longer-term timelines for change, but also to push claims through while after-the-event (ATE) insurance premiums and success fees were still recoverable from the defendant.
Now, however, the Jackson reforms are in place. Following a profession-wide overhaul of the way costs are handled, a waiting game is under way to see exactly how the responses of claimants, lawyers and underwriters to the changes will pan out in the long term.
The overriding objective of Jackson was to make costs proportionate. Under the Woolf regime, put in place in 1999 to bring about -conditional fee agreements (CFA), lawyers became used to front-loading fees so they could capture the maximum uplift should they win the case.
To bring costs down and prevent them spiralling out of control it was decided that recoverability of ATE premiums should be done away with, as should the uplift offered to lawyers on successful cases. Instead, more use was to be made of third-party funding models and contingency fees, or damages-based agreements (DBA) as they are now more widely known.
Since the new rules came into force on 1 April, underwriters have reported a notable slowdown in the number of claims coming across their desks, not just because claims before that date had been accelerated to get them in before the cut-off point but because firms have had to update paperwork, embed new systems and take a far greater interest in the individual merit of each case, how costs should be handled and whether the case is worth pursuing at all.
No win, no fee
Before April, cases could be brought at no financial risk to the claimant. Civil litigation and the majority of personal injury claims were pursued on a ‘no win, no fee’ basis under a CFA, and ATE insurance covered the claimant’s side against having to pay the defendant’s legal costs if the case was lost. Where the claimant would previously buy as much insurance as they needed to cover their case, now underwriters are under pressure to keep the premium down, so that claimants can still afford to pursue claims.
Some are offering new structures under which the claimant can pay some of the premium upfront to make it easier to keep the headline cost down, because deferred premiums cost more, or buy less cover, which reduces the premium. So for example, a claimant may take the first £10,000 of risk themselves and insure for the rest.
Matthew Amey, a director at litigation funder and ATE provider TheJudge, says people are already more willing to search the market for cost-effective cover. “Now that you can’t recover the premium, lawyers need to be more aware of the cost-to-damages ratio and advise their clients accordingly,” he says.
Amey says insurers are offering damages-based premiums, covering a percentage of damages, much as a contingency fee would. These can be staged on how soon the case settles or on the extent of the damages, but the buzzword, he says, is “proportionality”.
There are a few areas of civil litigation where the old rules still apply to varying degrees. Clinical negligence escaped having all recoverability removed because of the high cost of expert reports, which are unavoidable in this kind of litigation. And insolvency is exempt since once a client is insolvent they are by definition unable to afford the cost of litigation.
Experts’ reports are not generally recoverable from the defendant under the new regime, but because they are required to establish liability in the early stages of clinical negligence cases, the cost of those initial reports is still recoverable.
Shoosmiths’ clinical negligence partner Richard Follis says this ties into wider changes that have been made as part of the Legal, Aid, Sentencing and Punishment of Offenders Act (LASPO).
“In clinical negligence, because the risk has changed since qualified one-way cost-shifting came in, the most significant cost under the
new regulations is the initial unsupported expert reports, but there is now a small market of providers that will cover everything that was being insured before 1 April,” he explains.
The introduction of qualified one-way costs shifting (QOCS) in personal injury cases means that a successful claimant will be able to recover costs but a successful defendant will generally only be able to recover costs to the extent that the claimant is awarded damages or interest. A defendant can apply to the court to recover their costs in full if a claim is found to be ‘fundamentally dishonest’, but test cases will probably be needed before there is a precise definition for that phrase.
In theory QOCS, which the government has said will eventually be rolled out across all civil litigation, eradicates the need for claimant ATE. But the existence of a clause in the Civil Procedure Rules, known as part 36, makes the system fundamentally unworkable. Under part 36, the sanctions for defendants who refuse a claimant’s settlement offer are less severe than for claimants who fail to beat a defendant’s offer.
Because claimants are encouraged to settle early, they will be forced either to accept a part 36 offer for a fraction of what the claim is worth or buy ATE insurance and cover the cost of the premium out of their damages.
Honest claimants therefore run the risk of being liable for the defendant’s costs if they win a case but fail to settle early via the part 36 system. In practice ATE remains critical to safeguarding a claimant’s chance of gaining a fair result.
Lawyers like Follis are cautiously optimistic about insurers operating in the clinical negligence market. Obtaining ATE insurance as early as possible in claims is still regarded as critical despite the changes, and underwriters have risen to the challenge of offering affordable cover for disbursements that are no longer recoverable. There are, however, very few underwriters doing this and it remains to be seen whether the new products offered are affordable and viable in the long term.
There are a range of pricing structures on offer. Some charge the premiums upfront or are relatively predictable, others are more complicated and yet others are charged at the end of the case and so cannot be predicted until the outcome is known.
As Follis says: “It’s still unclear whether the new insurance products that are coming to market will remain until the close of these lengthy trials, and long enough for significant data on their efficiency to be collected.”
With so much uncertainty over how the new regime is going to pan out in practice, it is more important than ever that underwriters know they are working with lawyers with sound judgment and for lawyers to know the underwriters are honourable. Any marked reduction in the cost of premiums should ring alarm bells, particularly in clinical negligence where claimants require a long-term commitment from their insurer.
Before LASPO, firms could afford to include ATE insurance as part of the package to clients, giving them automatic cover as a result of working with the firm. Under the new regime that is not possible. Now that firms are having to take cases on individually, premiums are too high to absorb as an overhead.
A system will eventually emerge under which firms with well-established relationships with underwriters will be able to take on block insurance policies, but it will be a while before enough data has been gathered for the risks involved to be calculated. The system is so different post-Jackson that barely any of the old data is usable and it will be years before any reliable new benchmarking statistics are available.
Although the details of the new regime are still a little murky, overall the sector is positive about the way in which the insurance market has responded. Lawyers are not quibbling with the concept of proportionality where cost is concerned but the lack of clarity around how all the new rules operate is causing nervousness. For now, it is very much a case of waiting to see how the first few cases under the new regime play out, at which point the current calm may well give way to a second storm.
Sections 44 and 46 of LASPO concerning success fees and ATE premiums are two of the key aspects of the Jackson reforms. They prevent successful claimants from recovering success fees and ATE premiums from defendants. However, while these changes were introduced in April 2013, they will not be introduced for insolvency litigation until April 2015 at least.
So why the exemption? Lord Justice Jackson certainly did not appear to believe that insolvency should be treated as a special case in his reports. However, a period of intense lobbying by HMRC among others followed contending that insolvency was a truly special case. It was claimed that the introductions of sections 44 and 46 would have a drastic impact on the ability of insolvency practitioners to pursue genuine claims. This seems to have prompted a change of heart at the Ministry of Justice. A written ministerial statement in May 2012 indicated that there would be a delayed implementation of sections 44 and 46 for insolvency proceedings. “Insolvency proceedings bring substantial revenue to the tax payer… and encourage good business practice,” the statement declared.
The introduction of two orders earlier this year, including the LASPO 2012 (Commencement Order Number 5 and Saving Provision) Order 2013, finally provided a definition as to what type of litigation would be included in the exemption. The exemption is wide and includes “proceedings brought by a person acting in the capacity of… a liquidator” and notes accompanying one of the orders suggest it will include proceedings “which are or are related to insolvency proceedings”.
Intriguingly there is no reference to a long stop but rather sections 44 and 46 (among other provisions) simply have not been brought into force in respect of this type of claim.
Those involved in other types of commercial litigation may well argue that other areas were equally deserving of special treatment. The suggestion by some that no lawyers would take on the work if sections 44 and 46 were introduced did sound far-fetched. Many of the claims of impending calamity imply there would be no innovation by either lawyers or ATE insurers. Further to the implementation of s44 and s46 for other litigation, that innovation is already taking place. This includes new ATE schemes by which the premium is paid only if the claimant wins and then set at a percentage of the recovery. Damages-based agreements and hybrid agreements combining CFA with a success bonus will also be offered by some lawyers. It appears that by 2015 the argument of ‘special case’ will have been weakened.
Matthew Hirst, legal director in the financial services dispute resolution group, Eversheds
A little over two months since the LASPO changes took effect we still have significant uncertainties from an ATE underwriting perspective, beyond the question of what the competition is doing.
We don’t know how many cases we are going to see or how many of these will work for ATE. Most of the lawyers I talk to are still trying to figure out how many cases, of what type and size, they will have. April was very quiet, May has been better, but we still don’t know what the new normal looks like.
If the changes do lead to cases being settled more quickly, this could mean lower premiums but quicker settlements and fewer going to (or close to) trial. It will take us months to get a full picture.
Are damages-based agreements going to take off or will the current uncertainty persist? We see a definite opportunity here for lawyers, with ATE removing any doubt over adverse costs issues, but so far the profession seems to be holding fire.
Finally, how will the courts interpret their new powers? The ending of premium recovery should remove many arguments that ATE providers face, but will the certainty on lost cases promised by budgeting be achieved in practice?
Ross Clark, chief investment officer and chief strategy officer, Burford Capital (UK)
QOCS changes the game
An important concession was won for clinical negligence cases through a new s58C inserted into the Courts & Legal Services Act 1990: that part of an ATE premium referrable to insuring against the cost of own-side expert liability reports is still recoverable from a losing defendant.
This has encouraged a handful of underwriters to stay in this niche market. They have adopted different pricing strategies, but all face the same problem: that post-QOCS risks are very different from the book of work they insured before 1 April.
With these cases having a long gestation, it may be a considerable time before we know who has their premium pricing right. In the meantime, having a good working relationship with – and trust in – an underwriter’s commitment to stay in this market is as important as shopping around for terms.
That said, insurers are really backing the solicitors’ judgment, and firms’ success rates will be under scrutiny as never before.
Claimants really must be advised to insure and to do so early in clinical negligence cases, particularly with the part 36 coach and horses gap in QOCS. Without access to specialist insurance law, firms should think twice before signing a retainer with a victim of a medical accident.
Richard Follis, head of clinical negligence, Shoosmiths