The Callery judgment means the ATE industry will have to get its act together, says Lord Hunt

After waiting with bated breath for the House of Lords to rule on Callery v Gray, the judgment last week was something of an anti-climax. Insurers have convinced the courts of the potential for abuse in the new costs regime and the House of Lords has recognised that there is cause for serious concern.

In dismissing the appeal, the Lords, with the exception of Lord Scott, effectively held that the House of Lords was not the right forum to monitor and control the developing field of conditional fee agreements (CFAs) and after the event (ATE) insurance.

As well as expressing disquiet at the potential for abuse in the new system the Law Lords were uneasy about the lack of market force control. So whose task is it to regulate the regime? Lord Hoffman thought the judiciary were not equipped to do it. He felt, in common with many areas of the insurance industry that the solution was a legislative change to introduce fixed costs. Lord Bingham thought the courts could do it at local level, but this surely is unwarranted optimism - after all, if that was right, Callery would not have ended up in the House of Lords.

One thing is clear: the front-line responsibility for making the regime work fairly lies both with the claimant's solicitors offering CFAs and with the ATE insurance market.

However, there is no mechanism to control the ratchet effect of insurance premiums and success fees being set at the level of the highest cases allowed by the courts, and a constant upward pressure being exerted on those levels by the solicitors and the ATE market that had a direct financial interest.

If the ATE market (and claimants' solicitors) cannot regulate themselves and if Lord Hoffman is right in saying that the courts will not be able to provide the checks and balances, then legislative change or outside regulation of the ATE industry (and perhaps claimants' solicitors) is the inevitable long-term consequence. Liability insurers will need to find a way to curb excesses on costs claimed in personal injury cases. As the court recognised, the ultimate cost is to motor.

As Lord Hoffman observed, outside regulation is normally considered necessary in those parts of the economy in which market forces are insufficient to produce an effective use of resources.

Unless the ATE industry can sort out its act, that is what could happen.

  • Lord Hunt is senior partner of law firm Beachcroft Wansbroughs

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