I have to issue a warning to liability insurers. Many may believe that conditional fee agreements (CFAs) and after the event (ATE) insurance are only related to trips and slips and claims that were traditionally legally aided. The announcement of Geoff Hoon, the parliamentary secretary at the Lord Chancellor's department at the time, that from April 1, 2000 the loser will pay success fees (up to 100% of the solicitor's fees) and ATE insurance premiums will affect all claims.
A commercial dispute could attract a premium of several hundred thousand pounds in addition to damages and a success fee on top of the base costs.
The potential inflationary impact of this is enormous. This is why it is essential that those solicitors and ATE insurers who take advantage of the loopholes that have arisen in the ill thought-out government policy need to be kept in check.
I have been arguing this on behalf of the insurance industry for the past year in my capacity as president of the Forum of Insurance Lawyers (Foil).
Presently, a solicitor should check with their client whether or not they have legal expenses insurance under their household/motor policies or credit card. The solicitor should not just ask the question, but should inspect the policy or telephone the insurer to see if such cover exists. If not, then they are entitled to proceed by way of a CFA.
This means no win, no fee. The solicitor charges a success fee on top of their ordinary costs. This is intended to protect the solicitor by creating a fund of excess costs to compensate them for those claims they lose, where they receive no costs. While the success fee is the protection for the solicitor, the client needs to be protected against their liability to pay the opponent's costs if they lose under an ATE policy.
Lord Woolf's reforms of civil litigation, which by and large have been very successful, provided for a three-month period from the letter of claim to the issue of proceedings to enable the defendant to settle the valid cases and if they were not prepared to settle, to say why. That was intended to save costs. If the claim settles during that three-month period, the rules allow for the recovery of a success fee for the claimant's solicitor. However, they do not need an ATE policy because they have no risk of paying the defendant's costs during that three-month period. There is no insurable risk.
It is argued by ATE insurers that by charging a premium at the beginning of the three-month period the premiums will be maintained at a modest level. If the only premiums to be re-covered were if the defendant declines to pay and proceedings are issued, the premiums would be vastly higher because, quite plainly, there was a real issue at stake. However, 90% of claims settle before proceedings. It is almost inconceivable that the premiums on the 10% of claims that go to proceedings, where a very large proportion will still succeed, can be the equivalent of the total premiums on 100% of claims made from the outset.
Many of these schemes are not there for the protection of the claimant, but as a means of supplying a flow of claims to the solicitor.
They are obliged to insure their client with that particular provider. Accordingly, the premium is not that which protects the claimant for their loss, but part of a commercial arrangement with the solicitor.
As matters stand at present I am unaware of any insurer who is paying ATE premiums prior to proceedings and indeed any premium for Claims Direct.