Insolvency Practitioners (IPs) represent a sector of the litigation community that has been largely overlooked by Lord Justice Jackson and the Ministry of Justice through its endorsement to the proposed changes to eradicate recoverability of success fees and after the event (‘ATE’) insurance premiums.
Critics argue the blindsided attention to personal injury and libel litigation has jaded the opportunity to recognise areas where recoverability provides a lifeline to many businesses.
IPs face a constant dilemma over balancing the economic risks of pursuing litigation to recoup creditors’ losses.
The eradication of recoverability will make this economic analysis even greater, with lawyers and IPs having to don mathematician hats as they work out maximum claim value; possible settlement value; likely recoverable costs; scaling effect of success fees/ATE premiums, all of which will impact on the net recovery in a non-recoverable system.
The problem can manifest itself in cases which progress to Trial.
A defendant will know that, irrespective of the merit of their case, if the opponent is likely to have some form of risk hedging in place, the longer the case runs the smaller the net recovery as lawyers’ success fee/ATE premium scales up.
Accordingly, a win at Trial could result in the smallest recovery of all for an IP who would recovery (typically circa) 66% of their costs and thereafter have to settle any success fees/premiums from the damages recovery.
This will inevitably result in a greater proportion of cases not being pursued on economic grounds.
So, what solace can insolvency practitioners take? In reality, there is a mixture of good news and bad news.
The bad news is that, whilst there would be pressure on insurers and lawyers’ success fees in a non-recoverable system, this can only go so far.
Notwithstanding criticisms levied at the pricing of premiums by paying parties, they omit to recognise that a certain proportion of cases lose.
We’ve seen insurers having to make payments in excess of £4m in certain cases.
It is simple maths to see how many successful cases and recovered premiums are required not only to break even but also to make a profit.
The conundrum for insurers and risk-taking lawyers is that cases will traditionally lose late (i.e. with heavy losses) whereas stronger (winning) cases will settle earlier with smaller recoveries – both success fees/premiums are smaller the earlier the settlement.
Accordingly, whilst there might be some flexibility in pricing, it is unlikely to resolve the more significant economic effects of eradicating recoverability.
Fortunately, there are some positives.
The litigation funding and insurance sector is in a constant state of innovation.
Some of the weaknesses in the present insolvency funding market are being addressed. The launch of INSOLV3NCY, which is supported by multiple litigation insurers, providers a positive step forward.
The credit risk of defendants is a key risk factor in many insolvency cases.
The risk of split-outcome decisions as a result of pursuing more than one opponent is another factor.
The problem posed by security for costs applications is another hurdle.
And what of the insolvency practitioners’ own fees, i.e. non lawyer’s fees?
The supporters of INSOLV3NCY are endeavouring to meet these challenges by extending the cover beyond traditional ATE insurance offerings.
Innovation isn’t limited to the insurance sector.
Where interim financing is required, those in the know will be aware that the market is evolving and historic unpalatably high-cost options will not be the benchmark going forward.
So, in summary, the “good” is that with product launches such as INSOLV3NCY and other inventive steps, the litigation insurance and funding sector is not being complacent in its bid to provide insolvency practitioners (and other commercial litigants) with a wider range of options.
The “bad” is that there will always be a floor below which pricing for hedging risks cannot pass.
The “ugly” is that whilst IPs and other commercial litigants can hope for the best, i.e. some fort of government U-turn, if recoverability is stripped certain cases simply won’t be economic to pursue.
To discuss the INSOLV3NCY product or any of our other services, please contact us.