Following Lord Justice Jackson’s review of civil justice, the introduction of the Jackson reforms has fundamentally changed the landscape of the litigation market. No more can a claimant take out After the Event Insurance (ATE) at whatever cost the insurers might choose to charge, safe in the knowledge that, so long as the claim does not fail, the defendant will be paying that cost.
While lawyers acting for defendants will be celebrating the introduction of the changes, those on the claimant’s side of the fence will have very different feelings. But what about the insurance industry, which has made considerable returns on ATE products it has been selling to claimants over the last 10 years?
Some have suggested that the ATE market will be wiped out by the changes. That is highly unlikely. While there may be some consolidation within the industry, there will always be a market for insurance wherever there is a risk and, as all litigation lawyers know, there is always a risk in litigation.
What is likely to happen is that insurers will have to review their pricing structures and the cover they will provide, while looking for innovative ways to maximise their margins, despite the fact that their clients are likely to be considerably more discerning when considering their options for insurance.
That is evident by the fact that there has been a host of new and revised products launched in the run-up to 1st April 2013, and since. This reflects insurers’ confidence that claimants will still wish to take out insurance, to protect themselves against adverse risks. The key issue for insurers is that claimants are likely to be infinitely more price sensitive than they have been in the past, now that they will actually have to pay the premiums themselves.
Where personal injury litigation is concerned, the introduction of qualified one-way cost shifting (QOWCS), while reducing the risk for claimants, will not eliminate the need for insurance. The rules on QOWCS still allow for defendants to recover their costs from claimants, in certain circumstances, and while it is very rare for a claim to be struck out on the basis that this is an abuse of process, to trigger an adverse costs order, there is a real risk for claimants should they refuse to accept a Part 36 Offer which they then fail to beat at trial.
This is a risk which might well trigger taking out insurance, particularly if the defendant’s costs of conducting its defence may also be substantial.
The value of the claim will almost certainly become of ever increasing significance, not just for clients and their lawyers, but also for insurers. This will be particularly the case now that the courts are actively managing the costs of litigation, especially given that costs should be proportionate to the value of the claim.
Active costs management does have the benefit for those purchasing insurance of giving greater transparency of the potential downside of the litigation, which should in turn lead to a much better understanding of the costs risks involved in a claim and therefore more competitive pricing.
Gone are the days when a claimant would take out a policy with a limit of indemnity of £250,000 for a claim of the same value, because that claimant will know that, even if the claim fails, it is highly unlikely that it will face an adverse costs order for such a significant sum.
While some insurers are still prepared to offer deferred premiums, others are now offering damages based agreement style premium options, to allow the claimant to defer any premium payment until they have an award of damages. It is likely that, where insurers are prepared to agree such a deal, it will only be for claims worth a substantial sum of money, and where the percentage to be deducted is also quite substantial.
However, this model is unlikely to work for lower value claims, where the likely return is going to be too small to attract investment from the insurers.
Any rumours of the demise of ATE insurance are greatly exaggerated. While the risk profile of personal injury claims has changed quite significantly with the introduction of QOWCS, the risks of commercial litigation are the same as ever and claimants are likely to be prepared to protect themselves against those risks.
While the market may contract, there will always be a place for good products sold at competitive rates and there will always be insurers ready to innovate, finding new products that will sell to those involved in litigation.
CLIENTS STILL SEEKING TO OFFSET RISK
For the ATE insurance industry, March 2013 was a golden month. The volume of applications was unprecedented, underwriting decisions were made in hours, deals were agreed in minutes and the market was united in one big push to get as much insurance written as possible under the old regime.
This surge in ATE uptake was mirrored by the acceleration in new claim notifications to the Deft Insurance Claims world. It is hoped ATE insurers selected cases with care.
The rationale for providers and claimant firms was to seek to protect clients from adverse costs or alternatively from the compensators’ perspective, to maximise the return from cases on the stocks in the old world before the window of recoverability of additional liabilities was firmly shut. This spike in the ATE market will have an impact on claims numbers and level of costs recovery for the next few years.
The sign up campaign by ATE insurers is likely to provide an income cushion while the ATE market transforms its offerings, develops pricing and identifies where ATE can still add value to the market.
Fast-forward two months and few would say with a straight face that the volume of ATE insurance applications is even a fraction of what it was before 1 April. But to suggest, as some have, that this is indicative of the wider demise of the ATE market is short sighted. It is still expensive to litigate in the UK and the adverse costs risk will continue to be a concern for many clients that are considering litigation. The idea of managing these costs risks through insurance, especially if the insurance premium is only payable if the case is won and out of the damages recovered, remains highly relevant.
So who will want insurance under the new regime? Any individual or SME pursuing a contractual or negligence claim will, at the very least, wish to consider the option of insurance, where the alternative would be to expose the entire wage bill or the equity in the family home to an adverse costs risk. Moreover, the clear message is that corporates do not have unlimited litigation budgets and recent surveys show that corporates are cost-conscious and keen to manage risk, so insurance covering own side’s and/or adverse costs remains an efficient way of managing risk for those that have the liquidity to fund their case on a day to day basis.
Even in the personal injury and clinical negligence space – the area most affected by the recent reforms – there remain insurable risks for claimants under QOCS, such as Part 36 adverse costs risk and own side’s disbursements. This market is inevitably a shadow of its former self yet the major players are still operating and offering a range of low-premium products to cover these risks.
In the PI space ‘ATE lite’ has been suggested as the successor product and one can readily see how such a product is superficially attractive. Looking at it from a compensator’s perspective, there is some application for Part 36 but we do query whether a policy would pay out if a claimant’s action was struck out or found to be “fundamentally dishonest” so as to defeat the shield afforded by QOCS.
Many compensators trading in the old world will have seen firsthand the lengths to which some ATE insurers went to in order to avoid paying out to successful defendants for risks that turned sour. Of course, the insolvency market remains buoyant as it retains premium recoverability even if that is only a temporary exception.
The changes mean that there are now many different ways of buying and selling commercial ATE insurance. Every structure is tailored towards reducing the cost in real terms for a particular type of client, without necessarily requiring the insurer to fundamentally change its premium rating.
Some clients, like corporates, may wish to pay a much smaller premium upfront rather than a large deferred premium. Some insurers are offering premiums calculated as a percentage of damages – a useful method of ensuring that the cost of the insurance is always economic from the client’s perspective.
Simple things, such as buying less cover or a more restricted policy can have an immediate and significant effect on the cost of the premium, as can taking a voluntary excess. In short we foresee that clients will want to offset or hedge some risk from their balance sheet or investment portfolio.