As a broker representing the after-the-event (ATE) insurance market, I am inevitably facing questions about the future from both insurers and claimant litigation practices every day. At the moment, in light of the governments intended reforms, the same questions are arising with such regularity that they can be classified into what could be termed frequently asked questions about the impact of Legal Aid, Sentencing and Punishment of Offenders Bill on the ATE market. Indeed, they are perhaps better described as FAJWs – Frequently Aired Jackson Worries. I have listed these FAJWs in order of frequency.
‘ARE THE REFORMS GOING TO HAVE RETROSPECTIVE EFFECT? IS THERE A RISK THAT POLICIES COMMENCING NOW WILL NOT HAVE RECOVERABLE PREMIUMS?’
In theory, I should be able to give a straight answer to this as it is the most commonly asked question about the reforms raised by solicitors and clients.
Section 43 (3) of the bill confirms that the changes will not have retrospective effect. However, this does not stop the opponent challenging the premium at detailed assessment and using the general anti-recoverability theme as ammunition in front of a costs master.
It’s still going to be imperative that you can justify a premium in order to recover it in full, perhaps now more than ever. Nonetheless, the clarification in the bill on this point is welcome and should provide solicitors with some comfort that the courts will apply Parliament’s intention and try not to accelerate the process of change.
‘WILL THE INSURERS BE AROUND TO PAY CLAIMS IF THE MARKET COLLAPSES?’
We are confident that there will not be an entire ‘market collapse’ as the ATE industry is, in essence, made up of at least two separate segments: one which serves lower value civil disputes and the other which focuses on higher value commercial litigation, with some insurers straddling both.
However, the implementation of one-way costs-shifting (OWCS) is potentially fatal for some personal injury insurers specialising in personal injury (PI). After all, Lord Justice Jackson recommends OWCS with the intention of Circumventing ATE insurance.
Those insurers that would cease to trade entirely would put their portfolio into run-off, with experienced claims managers being responsible for collecting premiums and paying claims in accordance with their regulatory obligations.
Many ATE insurers which currently support the legal expenses class of insurance, do so as part of a much wider portfolio. If they were to pull out of the ATE market as a result of the changes, they would still exist to serve other markets (whether that be professional indemnity or aviation, for example) and so there must be less likelihood that they would risk reputational damage by neglecting existing ATE policyholders.
ATE insurers in the UK and several in Gibraltar are members of the Financial Services Compensation Scheme (FSCS), which provides eligible policyholders with protection in the event the insurers cannot meet their obligations.
If you hold policies emanating from a domicile without an equivalent regulatory regime and the policies do not offer the protection afforded by the FSCS, I would take action to ensure the clients are safe now in the event the reforms lead to the offshore insurer withdrawing from the market. Some solicitors have in the past sought to move their entire portfolio in the face of such concerns.
‘ARE INSURERS GOING TO STOP DEFERRING PREMIUMS?’
This is a worry for law firms who have to get to grips with ATE insurance and in particular those who see ATE as integral to their own business models, but I don’t think they should worry. I think the genie is out of the bottle with deferred premiums and the market cannot go back into charging clients an upfront fee.
I know plenty of insurers who would dearly love to believe that with all this reform, we can turn back the clock and bring ‘sanity back to the market’ by re-introducing upfront premiums. I am sure there are more than enough intermediaries and claims management companies that would like that too. In the past, how often were clients being asked to borrow money from disbursement funders simply to fund insurance premiums from exactly the same insurers who were already offering the same products to others on a deferred basis, simply to ensure the CMCs got handsome upfront commissions? All too often is the answer. Hopefully, this is now a thing of the past.
While I might think deferred premiums are here to stay, I have spoken to several insurers which are concerned that their ability to offer deferred premiums is predicated on the cash flow generated by their PI accounts – accounts that will be decimated by the introduction of OWCS. There is a suggestion from one or two that they will remain in the market albeit they would reserve deferred premiums for individual claimants or impecunious commercial litigants, while charging some element of premium upfront for higher value business disputes. This may sound fair but I am not sure this is as easy to implement as it may sound, particularly if the insurers in question want to attract a diverse portfolio of good-quality litigation.
The truth is that selling ATE is going to be difficult enough without the advantage of recoverability, once it is scrapped. ATE policies need to be as attractive as possible post-reform and the deferred premium is a crucial feature of this class of insurance which has fuelled its expansion over the last decade. Making clients pay upfront would dramatically reduce the number of orders placed and the market will fall into a much more rapid rate of decline post-reform.
I believe charging upfront premiums could lead to a massive increase in adverse selection in a market that already has to cope with a high ‘cosmic background’ level of selection against insurers. Will clients with strong cases accept the cash drain upfront on top of the fact that they will also have to deduct the premium from damages? Many will not and that is especially true where claimants can afford to absorb litigation risk without insurance.
‘WILL THIS MEAN ATE PREMIUMS WILL GO UP OR DOWN?’
Lord Justice Jackson believes that the ATE market lacks the competitive forces necessary for premiums to be priced properly. By removing recoverability, he thinks real competition will be imported back into the market.
Lobbyists against change say that the inevitable constriction in the ATE market, caused by the reforms, will lead to a less competitive marketplace.
I think both arguments hold merit. Lord Justice Jackson is probably right in relation to the PI market; if insurers were not doing so already, they will need to stop pricing on what they think they can recover but on what they can afford to offer the client in order to beat their rivals. However, the lobbyists are also right to highlight the huge gamble the government is taking in assuming a PI market will still exist. Of course, it all depends on the extent to which an ATE market is needed in the PI arena which, in turn, depends on the qualifications applied to OWCS. The bill does not help us there.
The position within the commercial market in unclear. The average ATE insurance premium applicable to a piece of commercial litigation is currently on the rise, as a result of the underwriting performance of the last five years. Even if stripping recoverability does improve competition, which should naturally drive prices down, it will be difficult to assess the impact of an industry where premiums are currently on the increase. In any event, there has always been a greater downward pressure on prices of commercial ATE than within the PI sector because of the increased likelihood of global deals, incorporating costs into an ‘all in’ settlement.
‘WILL INSURERS COVER THE RISK OF ADVERSE COSTS ORDERS WHERE JUDGES DECIDE THE CLAIMANT HAS ACTED UNREASONABLY (AS ENVISAGED BY QUALIFIED ONE WAY COSTS SHIFTING)?’
In a word, ‘no’. I have been told by one underwriter who has been quizzed by the Ministry of Justice that this is one of the governments own FAQs for the ATE insurance market. Surely the moral hazard is too great and the market too paltry?
Also, it would be incredibly difficult for underwriters to calculate the risks associated with this cover (and therefore rate the premium accordingly) as it will be tough to predict the application of judicial discretion in the new environment and following any subsequent costs war on when adverse costs orders should be made. I would rather invest in a fleet of ice cream vans in Greenland than be an insurer scratching a return out of the market. Famous last words from the righteous ATE broker; maybe beggars can’t be choosers.
‘IS THE ATE INSURANCE MARKET DOING ANYTHING TO LOBBY AGAINST THE PLANNED REFORMS?’
A number of stakeholders from the ATE market lend their weight to the organisation AJAG, which is an access to justice lobbying group, set up to campaign against the implementation of the Jackson recommendations and co-ordinated by former Labour MP Andrew Dismore. Indeed, the Legal Expenses Insurance Group (LEIG) has signed up to join AJAG.
Beyond these organisations, there have been direct attempts to communicate with MPs and make suggestions for alteration to the present bill. Although the details of every insurer’s efforts are not publicly available, there are some insurers who are very active and are spending tens of thousands of pounds on advice and assistance as to how to advance their arguments.
It is a source of great frustration to those insurers committing time and capital to the fight that there has not been a great deal of effort from certain ‘blue chip’ insurers in the market. Maybe they are working furiously behind the scenes but nevertheless some of the largest names in the industry are conspicuous by their absence when the roll call is read out. Maybe they think it is a hopeless cause, or maybe they are conflicted by their commitment to before-the-event or liability insurance. Whatever the reason for the silence, those active insurers on the front line are calling for back up now as they feel the battle is not lost and there is too much at stake to do nothing.