More haste, less speed?

Matthew Amey questions the government’s rush to reform costs

The coalition government has announced a consultation process in the autumn on the implementation of certain key recommendations from Lord Justice Jackson’s report Review of Civil Litigation Costs. The government have indicated that they wish to prioritise a review of the recommendations in respect of conditional fee arrangements (CFAs), after the event (ATE) insurance and the viability of contingency fee arrangements.

The government’s preference to fast-track a review on these particular issues will be of concern to the ATE legal expenses insurance industry, whose very existence is threatened by two of the core recommendations in the Jackson report. Jackson LJ recommends an end to the recoverability of CFA success fees and ATE premiums in addition to the implementation of qualified one-way cost shifting, which would remove the adverse costs risks for impecunious claimants in certain types of litigation—currently bread and butter business for insurers.

Some solace?

Insurers may take solace in the fact that there is to be a consultation process. Many commentators were surprised at how radical the ultimate recommendations were and will be keen to counter some of Sir Rupert’s conclusions. For example, many ATE insurers felt that Jackson did them a disservice in failing to properly recognise the extent to which premiums are discounted to allow for early settlement. Many of the more extreme premiums referred to in the report related to cases that were bitterly fought all the way to trial, meaning that the underlying litigation costs were equally high. In the vast majority of cases, the actual premium recovered is heavily discounted for early settlement and represents a small amount of the overall costs in the case.

The ATE market has only existed for just over a decade and in that time many claimants would have been denied access to justice without the protection of ATE insurance. Given the significant cost of litigation in England & Wales and relatively modest damages awards, premium recoverability is an essential pillar supporting the ATE market and its removal presents significant danger. Moreover, there are many changes that could usefully be made to inject more competition into the market and bring costs down, without taking a sledgehammer to the current system.

For instance, the cost of ATE premiums in the personal injury market are sustained at unnecessarily high levels due to the existence of contractual guarantees to the insured claimant that they will never be liable for any premium shortfall following a successful challenge to the premium at detailed assessment. Tackling this issue by giving the insured claimant (and therefore the claimant’s legal advisers) a stake in the recoverability process would mean that the purchasers of the insurance will be far more concerned than they currently are about price. The paying party will ultimately benefit from the claimant’s greater endeavours to search the market for the best deal.

Future viability

If the recommendation to abolish recoverability is implemented, a question mark will inevitably hang over the future viability of the market. That said, litigation insurance for larger commercial cases will probably survive, albeit that the remaining insurers will have to cope with a greater degree of adverse selection than under the present system.

l Firstly, there is still an adverse costs risk to insure as Jackson makes it clear in his report that commercial litigation would fall outside the scope of any one-way cost shifting regime.
l Secondly, recoverability has never been the main driver for purchasing ATE insurance in commercial matters, especially where the amount in dispute is significant. Litigation insurance is already purchased by entities involved in litigation or arbitrations outside of England & Wales where there is no premium recoverability, provided that the proposition is commercially viable.
l Moreover, the majority of insured commercial cases settle on a global basis in any event, meaning that the global pot recovered from the opponent is carved up to discharge the client’s various liabilities, in which case removing recoverability of the premium may make little difference. 

There is also real concern that Sir Rupert’s report fails to address sufficiently the question of access to justice for small and medium enterprises (SMEs) involved in medium-scale litigation. If the premium is to be paid from damages recovered, then there is a quantum threshold over which the damages recovered must climb before it will become economically viable for the claimant to buy insurance. While litigation budgets can certainly be trimmed to suit different clients’ pockets, there is a certain base cost of running High Court litigation, regardless of whether one is pursuing a claim for £100k or £1m.

For cash-strapped SMEs pursuing claims in that difficult £100–500k bracket, it may be that without recoverability of additional liabilities, there simply is no viable funding mechanism to enable the claim to proceed. Damages-based agreements will be too expensive to be carved out of a limited recovery, while before the event insurance (enhanced or otherwise) as a solution, in the absence of a fixed cost regime, is a pipe dream. The necessary cost of a legal protection product to replace CFAs and ATE will simply prohibit market penetration.

The consultation process must include a greater focus on the SME market, as well as those areas of civil litigation which will not be covered by the one-way costs shifting regime. There must be at least some exploration of less drastic reforms that could achieve reductions to premiums and CFA success fees, without dismantling a very beneficial risk transfer mechanism for impecunious claimants with meritorious claims.

Matthew Amey, director, The Judge, Independent Litigation Insurance Broker

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