Since the Jackson reforms to civil litigation were introduced this time last year, their impact has been more severe for some than for others. Here, we provide an overview of how different areas of the litigation world have been affected.
Insolvency litigation was spared from the wrath of Jackson on 1st April 2013, with CFA success fees and ATE premiums still being recoverable from the opponent as part of a costs order. However, insolvency may receive the same fate as other areas of litigation with recoverability potentially being removed in 2015. If Insolvency Practitioners cannot obtain an ATE insurance policy due to the premium being disproportionate to the recovery, then Insolvency Practitioners are unlikely to litigate as they are personally liable for adverse costs. The difficulties of enforcement in insolvency mean most cases do not recover anything close to the full size of the claim, which will be an added concern for underwriters when deciding whether to provide a quote. If IP’s have to pay the premium from their recovery before the money goes back into the estate this may leave very little recovery for creditors, meaning some IP’s may decide it isn’t worth litigating. Directors will be unaccountable for any fraudulent or delinquent behaviour, which could be extremely dangerous for creditors, Central Government and UK plc’s as it may discourage business with UK companies and could ultimately have a detrimental effect on the economy. This is certainly the line of argument that R3 and HMRC, a major creditor in insolvency proceedings, are taking in lobbying against the inclusion of insolvency in the Jackson reforms, which is purportedly scheduled for 1st April 2015. We will have to wait with baited breath to find out whether their lobbying is successful.
If their lobbying is unsuccessful then we will see a huge surge in applications for ATE insurance in the run up to 1st April 2015. Law firms insolvency departments will need to consider how they will manage this to ensure they are not caught out by insurers closing their doors early to manage their case loads, or by insurers’ cherry picking the very best cases in the last few months before the 1st April 2015. As we have learnt from 1st April 2013, if a solicitor makes no attempt to obtain ATE insurance with a recoverable premium for the clients then they may be faced with claims of negligence by clients with unsuccessful claims.
Big Ticket Disputes
Clients involved in big ticket commercial disputes have been largely unaffected by irrecoverable premiums as ATE premiums were rarely recovered as part of costs and all settlements tended to be global. These clients are often facing a huge adverse costs risk on top of very expensive own legal fees, as such these clients are still heavily reliant on ATE insurance. ATE insurers in the commercial litigation sector are still writing very large limits of indemnity for cases with high quantum. The premiums for large limits of indemnity on a deferred and contingent basis can range from 20% – 90% rate on line (ROL) depending on the premium structure. Many insurers will now insist on a minimum and deposit premium being paid upon inception of the policy and the rest being deferred and contingent. Others may insist on a fully upfront premium (ranging from 20 – 40% ROL), which is far cheaper than the deferred and contingent premium (ranging from around 40-90% ROL). Some insurers are far more flexible than others; for example, we are currently obtaining up to 4 different premium options for our clients from one insurer. TheJudge have been obtaining quotes on a very strong case for 12 different premium options from 4 insurers for some of our clients. This requires a number of scenarios to be worked through with our clients – for example the gross and net recovery if the case settles at a number of different stages, the gross and net recovery in a win and the outcome in a loss at trial. However, once we have talked clients through each of these scenarios they are then in a strong position to choose their best premium structure for their case. This is a level of flexibility from insurers that we simply did not see prior to 1st April 2013.
Third Party Funders
Sir Rupert Jackson gave resounding endorsement to the development of the third party funding market. In the last 12 months we have seen a number of new funder entrants, an increase in the capital available from the funding markets, and more law firms engaging with third party funders. Here at TheJudge we have noticed an increase in the number of applications for Third Party Funding. More importantly, we are now seeing a higher conversion rate from funding application to formal litigation funding agreement. The increased number of funders in the market has led to increased competition and therefore the cost of litigation funding has steadily decreased over the last few years. The underpinning multiple on a funding deal used to be an average of 5 x invested capital, whereas now the average multiple is around 3 x invested capital. The growth of capital in the market has had a direct effect on the conversion rate of funding applications. This shouldn’t be interpreted as funder throwing money at any case. The Excalibur Ventures v Texas Keystone  EWHC 4278 (Comm) case, which saw funders Black Robe and Platinum losing around £50m, is the type of case that sends shudders down the spines of the funders and can result in funders making their risk assessment process even more stringent. Funders will continue to go through all of the case paper work with a fine toothcomb during months of due diligence, but the types of cases they are willing to fund has grown.
The increase of litigation funding deals has led to an increase in demand for ATE insurance. Third Party Funders can be liable for adverse costs if there is no ATE insurance policy so funders will either use their own channels to source ATE insurance or they will require the client to obtain an ATE insurance policy themselves. Funders may say that they will pay the premium for the client upfront. Clients need to be wary of this as it will be added to the capital invested and a multiple success fee is usually attached to this. It is often cheaper for client to either pay a full or partial upfront premium themselves, or obtain a fully deferred and contingent premium which would be payable from their damages.
The carve out in LASPO for experts’ reports on liability and causation in clinical negligence cases means that the premium relating to these disbursements is still recoverable as part of costs. Most firms with substantial volume of clinical negligence cases have a delegated facility for insurance and a small handful of insurers are the scheme insurers for all of these firms. Although insurers were making lots of amendments to their schemes in the first 6 months of the post-Jackson regime, the delegated facility market has been relatively stable since. However, detailed cost assessment may have an effect on the scheme premium ratings if insurers cannot recover the recoverable premium in full. Time will tell whether further amendments to the CN schemes will need to be made to reflect the outcome of challenges to premium recoverability.
Low Value Disputes
The real casualties of the Jackson reforms have been clients involved in low value civil litigation where the cost of an ATE premium and CFA uplift can often wipe out the majority of the clients damages, or even leave the client with nothing. This means that clients with no means to fund legal fees are unable to litigate and therefore prevents access to justice. Even if individual clients and SME’s with low value claims can find the cash to fund their legal fees, it is very difficult to obtain ATE insurance to protect their downside risk due to insurers’ proportionality concerns, meaning many of these clients are unwilling to proceed with their claim.
Some positive news is that some funders and insurers are doing their best to offer solutions to these clients. ATE insurance can work for these clients where the firm has a delegated facility insuring all their cases at an early stage, the spread of risk principle means that insurers can offer these firms far cheaper premiums, sometimes with a rate on line of single digits. There are also a small handful of funders that will fund disbursements, or part of the firms legal fees for a success fee multiple of as little as x 0.6 (equivalent to a 60% uplift). Generally these funders will back their investment with insurance so that they are not at risk but their money is out for a long period of time, hence the low rates of return.
Personal Injury cases have become difficult for small – medium sized firms to run due to the disproportionate costs and the lack of uplift that can be charged to clients if the case is successful. A number of small personal injury firms have been rumoured to be breaking into the clinical negligence market. The difficulty here is that many ATE insurers are reluctant to give delegated authority schemes to personal injury lawyers that have no experience in running clinical negligence cases. The only real survivors in the personal injury sector are large national law firms with ‘warehouse’ style PI teams that can run these cases at very low costs.
If Jackson’s aim was to the save money for the liability insurers in RTAs, then the reforms “may” have resulted in savings, although time will tell if more claims are now issued as a result of one-way cost shifting. If the aim of Jacksons reforms was to provide access to justice then the reforms must be considered a resounding failure as there is little positive to point to for those with limited financial means needing to pursue a legal dispute.