The campaign over the civil justice reforms is often characterised, or caricatured depending on which side of the divide you sit on, as a battle for the hearts of ministers between claimant lawyers fighting for the rights of defenceless accident victims on the one side and the monolithic might of an indifferent insurance industry on the other.
But there are divisions within the insurer group and they came to a dramatic head recently when all but one of the small band of legal expenses insurers left the Association of British Insurers. The after-the-event (ATE) insurers claim that the industry group had “under-represented their views and failed to consult properly” over Lord Justice Jackson’s review of civil litigation costs, which proposes to scrap recoverability of ATE premiums and success fees, and impose qualified one-way costs-shifting.
In July the major legal expenses insurers including DAS and Elite Insurance were reported in the Insurance Times to have split from the ABI. Elite’s chief executive Jason Smart, who is an ILEX Fellow, told the magazine that they were leaving “on the basis that we weren’t even consulted (over Jackson). We were very disappointed, and in many respects pretty disgusted, that we weren’t even asked for our opinions”.
So where next for ATE insurance?
In particular, where will the legal Aid, Sentencing and Punishment of Offenders Bill, which incorporates the Jackson proposals, leave the business model of an insurer like Elite? “If concessions aren’t forthcoming and the bill goes through as planned, we will have to make a choice and at the moment that would be to withdraw from the market,” says Mr Smart.
Elite wrote about 75,000 ATE policies last financial year and “around 70,000” were under solicitors’ delegated authority schemes, comprising mainly of volume personal injury cases.
The remainder was commercial litigation. Mr Smart reckons that Elite, with its team of seven in-house lawyers “underwriting cases day in, day out”, has about one-third of the total ATE market and its withdrawal would leave “quite a gap”.
Solicitor Michael Lent is underwriting director of Temple Legal Protection, which writes about 25,000 cases a year. He argues that a “fundamental schism” has grown between ATE insurers and the ABI. “There is a fair bit of disgust at the hypocrisy of mainstream members of the ABI who want to get rid of conditional fee agreements and ATE and who, on the other hand, have been trousering referral fees as fast as they can,” he claims. What will be the future if the government sticks to the Jackson blueprint? “Pretty bleak is the short answer,” he replies. Will Temple leave the market? “We will have to find an alternative model but it is difficult to see the one that works.”
As “a niche player in the market”, Elite has to ensure a spread of business – high volume low risk to compensate the low volume high risk work on the commercial and insolvency type cases”, says Jason Smart. “The net effect is that without both the model isn’t workable.”
Peter Smith, managing director of another market leading legal expenses insurer, First Assist, describes himself as “hostile to Jackson from the very first moment”. He argues some of the views represented in Lord Justice Jackson’s preliminary report in 2009 were “unfounded”, adding:
“There were some very unhelpful remarks about ATE not being competitive and being very expensive…. compared to what? Other arguments were very antithetical towards ATE an general and, we thought misguided.”
He continues: “If the bill does not come in, we’ll see a reduction in the number of players out there, as there will be fewer cases to insure and the cost of doing business will rise per policy,” says Mr Smith. But he believes his business is “very well positioned” to ride the storm because of more than a decade’s experience of delegated authority schemes and the individual underwriting of cases. “We have done more non-PI cases than anybody else”, he says.
What does Jackson mean for the ATE business model? Qualified one-way costs-shifting – meaning claimants will usually not be liable for defendant costs if they lose and therefore do not need the protection of ATE policies – will remove the bulk of cover, responds Mr Smith. However, he points out there will still be a need for each case to have disbursement protection, which is specifically preserved in the recent bill.
“So there will be as many requests for cover but the cover will be reduced in scope,” he says. “It will mean the market will become bizarrely less efficient – not more – because the cost is the same to assess risk whether you want cover of £25,000 or £100,000. It is going to cause a number of players to decide whether they wish to be in the market or not and some of those players might well exit the market.”
But could ATE insurers move from the PI model to other areas of work such as providing policies for commercial claims? Views are divided. Mr Lent is not optimistic. As he points out, ATE insurance was available prior to the Access to Justice Act 1999 but clients did not buy it because the premiums were so high and then the problem of adverse selection raised its head: “The trouble is generally people only want to pay premiums if they think they are going to lose, in which case the insurer doesn’t want to underwrite the action”.
Mr Smith reports that First Assist has been funding commercial cases since 1999. “We think the commercial market is still undeveloped and will continue to grow despite any changes coming in,” he says.
Commercial litigators have never really embraced ATE. Why is that? “For commercial cases, it is much more difficult to predict liability,” comments Gavin Foggo, litigation partner at Fox Williams LLP and honorary secretary of the London Solicitors Litigation Authority.
Commercial disputes are often about much more than money, as opposed to straight forward personal injury claims. “The danger in commercial litigation is that the ATE insurance brings more complexity to those proceedings,” he says , adding: “It is another person you need to bring into settlement discussions, another mouth to feed around the table.”
Mr Foggo points out that in many cases where commercial solicitors might want to deal with ATE insurers, the insurers “wouldn’t be interested because of their funding criteria, for example, requiring 70% chances of success”.
For all that, there is evidence of ATE being used more in commercial cases – sometimes in combination with third-party funding – and several large firms now have delegated authority schemes in place.
Matthew Amey, a director of the risk transfer broker TheJudge, believes commercial ATE is increasingly becoming a funding option. It is on an “upward curve” with “year-on-year growth for the last six years which, he argues, will continue, Jackson or not. “Recoverability has never been the main driver for why clients buy commercial ATE cover,” he comments.
“The main driver is that companies are risk averse and want to cover those risks and protect their balance sheet for uncertain exposure.” Also, says Mr Amey, that premium is already usually recovered and paid for out of the global settlement. He adds: “If you look at international jurisdictions, they are still buying ATE insurance and they haven’t got recoverability.”
What about the Jackson report’s plan to encourage the take up of before-the-event insurance (BTE)? Rocco Pirozzolo, solicitor and senior underwriter at the legal expenses insurer QBE, says that personal injury “is not a massive part of our book, I’m glad to say. Most of what we write is commercial”. He continues that the government and Jackson “have assumed that the legal expenses market will just move to BTE and whilst ATE usage falls, BTE would increase so there will almost be a neutral position.
“There has been an assumption that BTE would step up to the plate and provide the products which will fill the funding gap left by the reforms. It is not based on any analysis and the views expressed by Lord Justice Jackson and the government amount to no more than exhortations that the legal expenses market respond”.
Mr Amey predicts ATE insurers will not simply swap business models. He reckons that there are about 15 insurers in the ATE market and they divide into two segments: the low-value civil disputes and larger value company to company litigation and international arbitration. He observes: “There have been a few who have tried to straddle both but generally speaking it is hard to do so.”
It is a bleak scenario, says Mr Amey. The whole purpose of one-way costs-shifting is to “circumvent the use of ATE insurance” and he points out that cover for adverse costs (to be scrapped) tends to be “three or four times greater” than disbursements (to be retained).
Of those insurers that operate in personal injury, most have no presence in the commercial market and “they will find it very difficult to adapt”, he says, concluding the prediction: “My expectation is that at least one third, if not half, will fall away.”