The recent Jackson report has sparked considerable debate in the legal press, with varying views from both the defendant and claimant camps. However, whilst much is being debated on the potential longer term ramifications, little has been discussed of the immediate effects with regards to some of the proposed changes. It is perfectly possible, for instance, that the mere existence of the report’s recommendations will produce choppy waters for those successful litigants currently in the process of trying to recover their premiums, regardless of whether those recommendations affecting ATE insurance are ever implemented.
For a moment, let’s assume that the Jackson proposal of eradicating premium recoverability has been enacted (ambitious timescale granted). Now few would expect such a change to be retrospective, indeed the injustice would be colossal. However, in some respects the changes will have an indirect effect on cases being insured in today’s market.
Let’s assume two clients with broadly similar cases purchase insurance; one purchases cover in today’s market and the other in a post-Jackson world. It could well be 2.5yrs before the first client’s case concludes and costs are determined at assessment. Without recoverability, the argument for many is that premiums will become more competitive as the market becomes more price sensitive. Assuming this to be true, the second client will benefit from downward price adjustment in premiums brought to being by Jackson’s reforms.
This situation could look very unsatisfactory to a costs judge. One can well see scenarios where defendants will seek to educe evidence to demonstrate the premium issued to the first client, during the recoverable regime, was unreasonably high, as demonstrated by the fact the very same insurer has issued policies in the new regime at a significantly cheaper amount for a similar risk.
Of course, many insurers would no doubt query such adverse conclusion being drawn against them. The immediate response in defence will be that ratings changed based on the performance of their underwriting accounts which is connected to the prevailing circumstances within the market at the time the policy was issued. However, one can see cost judges harbouring a greater willingness to apply their discretion; particularly where such evidence may have been brought to their attention by the opponent.
Similarly the decisions being made to older cases incepted during the recoverable system will have limited long term application in terms of precedent. If cost judges are aware that recoverability is to be abolished for cases from a certain point going forward the cost judges may not be so cautious to apply their discretion in the paying parties favour through fear of damaging the ATE industry; particularly where the insured has little evidence to demonstrate the reasonableness of the product selected.
At TheJudge we’ve certainly seen an increase in challenges to premiums over the past 6 months and therefore subsequent calls on our services to assist our clients by providing independent evidence to support the insured litigant’s recovery. It could of course be coincidental but similarly it could be the beginning of a shift away from the opponents accepting there is little they can do to challenge premiums to a more aggressive approach to premium challenges.
So whilst Jackson’s recommendations may or not happen, fee earners would be wise to starting thinking forward as to how the world might look once their new cases finally reaches detailed assessment. As a bare minimum fee earners should ensure they have ample evidence to demonstrate the premium size was well within market norms at the point the policy was purchased. Over reliance on comfort letters or Premium Indemnity Guarantees could be dangerous as their existence assume a status quo. That is to say that the issuing insurer might say “we are pragmatic and would take a commercial view” but what if that insurer has ceased writing ATE business in the post Jackson world because they can’t make the economics work. Their approach to any premium shortfall might be markedly different than at present.
IMPACT ON SMES
Another impact of the Jackson recommendations that does not appear to have received a great deal of air time is the impact on the SME. The Financial Times recently reported on a case we brokered for an SME and actually quoted the client on how important ATE was to getting his victory in court. This was an example of a claimant who simply may not have brought the case to court had it not been for the existence of ATE insurance. Based on the economics of the case, recoverability was an important factor to the client’s decision to litigate.
Let’s consider a fictitious case example in a world where the litigant cannot recover a premium or success fee but does not have sufficient means to comfortably afford to litigate their small business dispute.
Our SME litigant has been advised that at best his case is worth £350,000 and the prospects of success are believed to be circa 60%. Accordingly, the case clearly carries some real litigation risk. The opponent in the case (a liability insurer) has already said they will fight the case strenuously and has engaged a city heavyweight firm to manage their defence. Indeed, our SME client’s lawyer was told by the defendant’s lawyer when leaving a pre-action roundtable that he has a mandate to tie up our client in interlocutory battles wherever possible because his client is confident our litigant doesn’t have the financial resources to see the case through. Effectively, they mean to strangle the case before trial.
Our SME litigant’s solicitor puts together an estimated budget for the litigant, doing his best to mitigate the cost the client faces. However, at best this is a forecast and the lawyer cannot be certain that costs will not spiral, particularly given the advance warning from the opponent of a tough fight ahead. Our own side’s cost exposure is calculated to be £160,000, including Counsel’s and expert fees. The opponent’s fees are estimated to be £150,000. The lawyer believes their fees will actually be considerably higher but is hopeful that on Detailed Assessment it can be brought down to a sum within this ballpark.
Accordingly, the client is facing a total exposure of £310,000 if the case is lost. In the current climate, the economics work. The solicitor can enter a CFA to assist the client and the litigant need not worry about the success fee. The adverse costs and disbursement risk is dealt with by the ATE policy with a recoverable premium (subject to reasonableness).
Now consider the position in a non-recoverable system. Our client’s lawyer is requesting a success fee of £40,000 (40% on the basis of a £100,000 bill) and an ATE premium of £73,500, on the basis of a £210,000 ATE exposure (i.e. a 35% premium rate). As in today’s system, both the success fee and premium may include discounts for early settlement but the client must work on the assumption that the case could proceed to trial given the defendant’s stance to date.
The total success fee/premium if the client wins equates to £113,500. In addition the client is only likely to recover circa 67% of his fees on a standard basis leaving a shortfall of £52,800. Accordingly, the client has a total deduction of £166,300 from his maximum £350,000 claim leaving the client with a maximum recovery of £183,700. One might say that this is not a bad return but the damages claimed are the cost of purchasing a critical piece of machinery for the client’s small manufacturing plant, which the defendant insurer is refusing to indemnify. In this context a recovery close to half the replacement value really isn’t sufficient.
This also assumes a full recovery and indeed that costs do not spiral. The defendant will know the client needs to buy insurance to cover his risk. The higher the fees incurred means the more insurance the client needs to buy, which in turn means the lower the net result for the client in damages. In this regime, once again the defendant has been empowered to such an extent that they are sitting in far too comfortable a bargaining position.
So what will litigants in our SME client’s shoes do in such a world? Obviously a great number might opt not to litigate at all. Those that do are going to need to be extremely calculating when it comes to searching for a competitive retainer with lawyers and premiums with insurers. In a non-recoverable system, insurers won’t have the luxury of offering “premium indemnity guarantees”. Price is going to be a massive driver for the client both in terms of lawyers and insurers. It goes without saying that where price is the only driver there is always a risk of clients engaging an inappropriate firm or perhaps an insurer with questionable security that uses price as the sole means to gain market share.
There could be no access, low access or poor quality access for SMEs in this new world. I hope this is a problem that isn’t masked by the assertion that BTE insurance can cure all ills.
Helen Smith is senior broker at TheJudge Limited (http://www.thejudge.co.uk)