Given the significant impact the implementation of LASPO has had on the After the Event (ATE) insurance market, we felt it important to share our experience with the Ministry of Justice in response to their Post-Implementation Review of Part 2 of LASPO. We have briefly summarised our key points below specifically with regard to commercial and other non-personal injury litigation.
LASPO has had a negative impact upon access to justice for claimants bringing modest non-injury cases
Since the enactment of LASPO, the market has seen a material decline in applications for ATE insurance for smaller commercial cases (up to £500k) whether brought by individuals or SMEs. There is no reason to believe that the volume of meritorious cases has reduced. It is more likely that, as was foreseen by most people operating in the sector prior to its enactment, a substantial number of modest value cases are not proceeding or are under-settling due to lack of access to affordable funding.
We believe that this decrease is attributable to the abolishment of the recoverability of CFA success fees and ATE insurance premiums for these claims
The minimum level of costs required to bring a modest value claim results in insufficient room for a CFA or DBA success fee to adequately compensate the law firm for their cost-risk as well as discharge an ATE insurance premium.
Post-LASPO, the underlying costs of litigation do not appear to have diminished, so the premiums remain the same. As a result, the availability of ATE post LASPO is not merely based on the merits of the case, but rather whether there is sufficient economic headroom to pay the premium from the damages.
The LASPO reforms have had a disproportionately negative effect on SME claimants
The recoverability of CFA success fees and ATE premiums is critical to claimants who have modest non-PI claims. Often, a modest value case involves a “bet the company” approach, thus the very survival of the business is dependent on seeking compensation at a viable cost. SMEs (and officeholders representing SMEs in liquidation) find themselves with the heightened risk of having to comply with a Security for Costs Order, for which they may necessitate ATE.
The notion that a claimant is able to recover the cost of obtaining a mechanism to meet a Security for Costs Order (such as a Deed of Indemnity or Anti-Avoidance Endorsement) would provide some assistance, because the cost of such an instrument often needs to be funded upfront. The true cost would not only be the price of the instrument but any ancillary fees, reasonably incurred, to fund that cost.
Lawyers and clients are interested in DBAs but the uncertainties surrounding the regulations are causing lawyers to abstain
We regard DBAs as a useful option in cases where it is clear that a CFA success fee would not adequately compensate the law firm. A success fee capped at 100% of base fees is frankly insufficient in highly complex litigation where the prospect of payment is far from certain, and the deferred payment may only be made after many years. The returns need only to be benchmarked against the returns charged by the majority of non-recourse litigation funders who would not entertain an investment in meritorious cases for a capped 100% return and would probably require at least double that amount.
The DBA regulations must be amended so that law firms feel more comfortable that they can comply when drafting a DBA. There is certainly confusion between professionals over what is permissible and what is not – specifically surrounding whether counsel can be funded by the client simultaneously and what the client owes a law firm if they terminate just prior to making a recovery. These issues, as well as the others addressed in the CJC Working Group Report, must be clarified.
We are of the view that the implementation of LASPO has had a detrimental effect on access to justice, particularly for SME claimants with modest, albeit bet the company, claims. Potential solutions could include:
- reinstating the recoverability of CFA success fees and ATE insurance premiums for cases below a certain value;
- enabling claimants to recover the cost of obtaining a mechanism to meet a security for costs order (such as a Deed of Indemnity or Anti-Avoidance Endorsement) including any additional costs reasonably incurred to fund that price;
- amending the DBA regulations to clarify the issues currently limiting their use.
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