The claims culture is being fuelled by the practice of no win, no fee cases - it seems the claimant has nothing to lose. But do insurers know what they have let themselves in for? Alison Boyle and Yvette Essen report.

It seems that nowadays you can sue for anything - for a fall down a friend's garden path to the late delivery of that new refrigerator. And with a whole range of companies willing to take up your case on a "no win, no fee" basis, surely the consumer has nothing to lose?

The Access to Justice Act came into force last April, enabling people to take their troubles to the courtroom without having to worry about costly legal fees. It allows after the event (ATE) insurance premiums where the losing party not only pays out damages and full legal fees incurred but also the bill for the insurance policy.

Should your case be unsuccessful, all litigation costs will be paid by the insurance policy. This will push up the price of the premium, but the potential for this market is huge. Out of two million personal injury accidents, there are only 350,000 actual claims per year. Last year Claims Direct handled 40,000 claims compared to Accident Line's 20,000.

Tony Buss, assistant general manager for DAS Legal Expenses Insurance, which covers five million people, believes ATE policies offer individuals more choice.

"There's no doubt about it, it's worth having," he says. "It is much cheaper to get before the event (BTE) insurance but millions of people are not willing to spend £10 to £15 a year on something that might not happen."

The government is now looking to replace legal aid with this new scheme. Although some insurers are refusing to pay the premium for the 90% of cases which do not get to issue of proceeding stage and are leaving it up to the courts to decide, last month David Lock, parliamentary secretary to the Lord Chancellor, spoke in favour of ATE policies.

In the House of Commons he stated: "The government's policy is that the premium paid for cover against the risk of having to pay legal costs should be recoverable from the losing opponent. Recoverability includes premiums on policies taken out before proceedings are issued."

Tim Hoy, partner in the claimant division of Silverbeck Rymer, which acts for a number of major legal expense insurers, also believes ATE is the way forward.

"The solicitor has a duty to protect the client's interests," he says. "If a client hasn't got a legal expense policy, then a conditional fee arrangement and advice on an ATE policy from day one in order to avoid hidden costs is the only other option.

"Many policies on the market are specifically geared for early inception. So to ensure a client gets the full benefit of the most appropriate policy, an early decision on funding is needed. The ruling from the Lord Chancellor's Department confirms that ATE policies are recoverable prior to the issue of proceedings."

But Paul Mitchell, a legal costs specialist at Paul Mitchell Consulting, believes consumers should tread with caution. "ATE policies prevent the premium being assessed at a point where the extent of the risk could be uncertain and over-estimated," he says. "But limiting the ability of a client to recover premiums only on insurance policies entered into at such a late stage in the proceedings would mean that in the vast majority of cases that settle early, no premium would be recoverable."

The issue of reclaiming fees is not the only problem surrounding ATE policies. The cost of taking out a policy has also provoked controversy.

Abbey Legal Protection is taking the moral high ground against Claims Direct, the UK's biggest "no win, no fee" personal injury claims company. It is now relaunching its rival company Accident Line and says that Claims Direct and other claims farmers are charging "unreasonable" premiums.

Managing director Chris Ward says Claims Direct's basic £1,350 premium could be challenged in the courts on the grounds of being unreasonable under the Access to Justice provisions. And in a thinly-veiled attack, David McIntosh, the Law Society representative, made several swipes at Claims Direct, which he accused of viewing solicitors as a "necessary evil".

In comparison, Accident Line offers policies starting from £315 for personal injury fast-track cases, rising up to more than £2,000 for more complex occupational disease claims. Cases will be handled through a panel of 450 solicitors' firms.

With more packages becoming widely available, the consumer can now shop around for the best ATE policy to suit their individual circumstances. But Hoy believes policyholders are still confused by the different types of insurance available and clients should opt for the most simple policy with the lowest cost.

"Mass advertising has exacerbated the problem," he says. "And until the market settles down, clients will have a bewildering choice of policies. The difficulty arises with hidden extras. These in turn bring the legal and the insurance industries into disrepute."

Kieran Tierney, business development manager of Lawclub Legal Protection, believes society has helped more people become aware of their rights, especially when it comes to their irritable neighbours. "The traditional way was to get two people in court to fight it out and then they have to go back to living side by side to each other," she says.

"The Lord Chancellor has said that he wants more cases to be handled by mediation and the courts will take a dim view of anyone that has turned down this route and might award stupid money like £2.

"Joe Public has so many more rights these days and they know it. They have those programmes like Neighbours from Hell thrust on them by TV. In the early 1990s it was mostly only retired police and teachers who would be litigants. Watchdog has added to the complain mentality."

But what does the future hold for both insurers and those seeking compensation? Mitchell believes firms must pay out recovery costs or this "would seriously undermine the government's policy and in their view that would impede access to justice unnecessarily". Yet if they do open their purses for ATEs, Hoy thinks this will shake-up the whole of the market. He says: "The cost to the insurance industry is likely to be colossal and we fear inadequate provision has been made by insurers to cover the additional costs involved.

"We are talking here, potentially of a number of cases attracting either a premium or a success fee. The question is, have insurers reserved properly for this outcome?"

What are the funding options?
After-the-event (ATE) insurance policies combined with a conditional fee arrangement (CFA) with success fee are now widely available to enable claimants to enter into virtually risk-free litigation after a claim has arisen. This is a new and rapidly developing market. The options fall into three categories:

  • CFA (no win, no fee arrangement) with ATE cover against costs payable to the opponent (including disbursements - medical reports, court fees, travel etc) and/or claimant's own disbursements and the insurance premium itself if the claim fails. Many insurance providers also expect counsel to act under a CFA and require the policy and CFA to be entered into before sending the first letter of claim
  • ATE cover against both sides' costs and disbursements. Insurers generally refuse to accept cases until prospects of success have been assessed. Initial costs may not be covered. The cost of both sides' cover is higher because greater cover is needed and because success rates where a solicitor is not acting under a CFA are believed to be lower. Where a party has both sides' cover, no success fee should be paid
  • CFA policies with own costs covered. A hybrid CFA with AEI cover against between 30 - 90% of own costs. The success fee should not be recoverable in full, if at all, because own costs are partially insured.

    Source: Weightmans

    Case Studies

    Kitchen sink drama
    A Lawclub client purchased a fitted kitchen from a well established company. But when it arrived, certain items were damaged and the new washing machine would not work.

    The customer was told that a replacement would not be ready for three months, which he reluctantly accepted. But five months later he was still waiting.

    When he tried calling the retailer he was cut off the telephone and given fake contact names. Eventually he sought help from Lawclub, which in turn contacted the supplier, saying under the Sale and Supply of Goods and Services Act 1982 the supplier had to provide the goods and services in question within a reasonable time.

    It asked for its client's kitchen and washing machine to be completely installed within seven days and for £300 compensation for stress and inconvenience. This was initially refused but the kitchen was repaired.

    Lawclub contacted the company again, stating it was in breach of contract. Eventually, £100 and a free set of cooking pans or a canteen of cutlery was offered to the customer in the form of a goodwill gesture.

    Poor storage
    An elderly couple had paid for all their furniture to be stored in sealed boxes for a few months. But when they got their possessions back, many of them were severely damaged, smelt badly of mould and some of the boxes contained mouse droppings.

    The couple contacted the owner of the storage company, Mr Jenkins, to complain and asked for money to replace some of the broken furniture. Three months later, after receiving no reply, the couple turned to Lawclub.

    It wrote to Mr Jenkins asking him to contact his insurers to reimburse the customers' losses. He offered to pay part of the costs, but still demanded a further payment of £144 for storage costs. Following further correspondence he eventually offered a cheque for £240 and waived the £144 fee.

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