Despite rule changes, after-the-event insurance is still core to funding litigation cases, while damages-based agreements are largely ignored
Q: To what extent is after-the-event (ATE) legal expenses insurance relevant to the modern commercial litigation market?
Malcolm Henké, senior partner, Greenwoods: In personal injury (PI) cases the claimant is still concerned with meeting the cost of disbursements, which may be extremely high if the claim is not successful. However, even where the claim succeeds, the ATE premium must be paid by the claimant, as he is no longer able to recover it from the defendant.
The defendant is no longer concerned about what funding arrangement the claimant may have entered into or what his liability may be for meeting any ATE premium. It is important the claimant has a close interest in what costs are being incurred on his behalf and what impact that may have on the net damages he recovers.
Lee Norman, associate partner, DWF: Non-recoverability of premiums has not altered the fact that ATE remains a core part of the funding package.
Our clients continue to choose to invest a proportion of their future settlement to buy the certainty and assurance that ATE provides. Further, while its previous force has diminished through non-recoverability, ATE remains a potent litigation weapon, placing significant settlement pressure on defendants.
The challenge for ATE providers is to make the numbers work for clients. Our experience post-Jackson is that the good ATE providers are addressing that issue. Products are more innovative and regularly carry cheaper deferred premiums, and insurers are prepared to back more cases.
Non-recoverability and reduced premiums mean the cherry-picking of cases that occurred pre-Jackson has been replaced by a requirement for volume to make the ATE model work. Increased access at reduced premiums is good news for clients.
Steve Beahan, partner, Irwin Mitchell: Although the recent changes preventing the recovery of ATE premiums from opponents has had an impact on its attractiveness to commercial clients, ATE legal expenses insurance is still highly relevant to commercial litigation, given that parties still need to protect against adverse costs and their own disbursements, unlike in the PI arena. Clients have engaged with it and are willing to look at innovative funding routes to access justice. This was certainly the case in the recession, when businesses were more reluctant to litigate, and it has remained popular.
ATE is used tactically to provide parity of arms even if one side has far deeper pockets than the other. And, importantly, it allows commercial clients to manage risk.
This ‘balance sheet protection’ is important as it can enable a fin-ance director, for example, to approach his board and recommend that a case is pursued on the basis that the organisation will be able to quantify in financial terms what the worst-case scenario will be if the case is lost. This has gained a lot of traction in the marketplace recently.
ATE insurance forms a considerable part of our case funding plan with clients. Not only does it work well with conditional fee arrangements, it sits well with third-party funding. Indeed, if a third party is looking to fund the case they will generally insist on an element of ATE insurance.
Q: What is the market’s attitude to damages-based agreements (DBAs)?
Henké: These are widely known as ‘don’t bother agreements’, as they appear to be universally unpopular.
The greatest concern is how to set the success fee (as a percentage of damages) and then deciding on the optimum time to settle. There is the potential from the outset for conflict between solicitor and client. Some see a future in bringing claims against solicitors who have under-settled claims and/or have not reached fair agreements with clients about how to fund cases. DBAs in their present form could see abuse.
Norman: For firms with an innovative approach to litigation funding, there is undoubtedly a desire to
offer and use them, but unfortunately the reality is that in their present state, DBAs are practically useless.
The uncertainty surrounding the regulations means they don’t work for law firms or clients. Until the problems with the regulations are resolved, including whether ‘hybrid DBAs’ are permissible, law firms and their clients will continue to prefer to make use of alternative contingent funding solutions that have a record of working.
If and when uncertainty with the regulations is resolved, law firms and their clients will want to use DBAs. That is the message we are getting from our clients, who like the fact we already back our judgment and share risk by offering contingent funding packages. The appetite for risk-sharing and working contingently is growing and our clients want to see that extended to DBAs.
Beahan: The attitude among solicitors in commercial litigation cases is cautious. For example, many sol-icitors are concerned about the effectiveness of DBAs generally, particularly the lack of enforceability within the regulations where clients withdraw from litigation.
Some firms believe solicitors are taking a risk with such agreements. It is, for example, different from the PI space as not all defendants are insured. If a law firm is due to receive a percentage of what is recovered but the defendant is not insured and cannot afford the damages, the law firm is at risk of not having its fees paid. On DBAs, the case has to be of a certain value to be worth taking on. For smaller cases, they are not relevant.
In practical terms, there have not been many DBAs, but the potential is there.
Q: What impact has qualified one-way cost shifting (QOCS) had on the ATE market?
Henké: Although QOCS has been with us in theory for over a year, in reality the vast majority of cases we are handling at present are under old-style conditional fee arrangements (CFAs). It must be borne in mind that accidents occurring since the rules came in still have almost two years to run on primary limitation.
The impact of the new rules on the ATE market will depend on whether claimant lawyers become more risk-averse (which seems likely) rather than take on cases where, although there is little risk of adverse costs orders, there is a risk of not recovering disbursements.
Norman: I understand from PI colleagues that ATE remains relevant to PI claims, although the dynamic has changed. Pre-Jackson, ATE premiums were ordinarily paid by defendant insurers in successful claims, but not even by claimants in unsuccessful claims because the risk of having to pay the premium was also insured.
That resulted in widespread use of ATE policies with little control over premiums, given that the insured had no significant personal interest.
Post-Jackson, and with the costs protection available to PI claimants, the picture has changed. ATE is still available and used, but only to cover limited adverse costs risks and own disbursements. The insured party is now paying the cost, and so has a significant interest in the premium. The effect of QOCS is that fewer policies are being taken out and premiums are down.
Q: Have the courts succeeded in upholding the principles of cost proportionality?
Henké: Despite the fact that in the past 12 months we have been required to prepare numerous costs budgets, we have experienced remarkably few cases where the judge has been prepared to hold a full costs budgeting hearing.
Some lawyers see this as a sign of the limited time judges are able to allocate to each case, but others see it as a reflection of the average judge’s lack of knowledge of costs.
However, proportionality has provided some judges with the best of both worlds. They have used it as a tool for reducing costs budgets at a stroke without providing detailed reasoning, leaving the parties to go back and redistribute the reduced costs across their costs budget.
Norman: Our recent experience suggests that the intended impact of the costs reforms has not yet been matched by the reality of the litigation process. The intended controls and efficiencies associated with cost budgets, disclosure reports and more proactive case management by the courts has not materialised.
Parties have to do significantly more work at the beginning of cases, which has been exacerbated by the explosion in interim applications. That has made the task of limiting and controlling costs difficult, particularly where some parties are already seeking to stretch the rules and principles, for example by front-loading pre-issue costs for budgeting purposes.
In 2014 it will be interesting to see how the Court of Appeal considers proportionality and whether the stricter test will be robustly applied.
Beahan: Yes. In commercial litigation cases, there have been some stern judgments from courts in terms of cost budgeting, cost estimation and cost assessment. It is vital, however, that there is consistency up and down the country in this area.
Courts are providing guidance but this does not always match clients’ expectations. However, it has ensured that solicitors have full and frank conversations with their clients from the outset and throughout on the issue of irrecoverable costs.
Also, the fact that courts are assessing the principles of cost proportionality at hearings is adding another layer of cost to the system. As ever, in theory it is very interesting, but in reality it is being applied in a variable way.