The long awaited decision in Callery v Gray is now with us. Perhaps not unexpectedly, the House of Lords has rejected the insurance industry's arguments as to the manner in which personal injury claims are currently being funded.
There is no doubt that the court had a great deal of sympathy for liability insurers over the way that after-the-event (ATE) insurers have developed the market since the introduction of liability upon the paying party for both success fees and ATE policy premiums.
Lord Hope said: "Unless the new regime is controlled very carefully, its effect may be to benefit ATE providers unreasonably and to place a burden on liability insurers which is disproportionate.
"It may lead to a culture of incurring additional costs which lacks any incentive on claimants to keep costs down."
The Lords accepted that the way in which cases are currently funded does in essence result in a form of taxation upon policyholders.
Lord Hope added: "The burden of meeting the cost of access to justice now falls on liability insurers. It thus falls indirectly on their policyholders, who are likely to have to face increased premiums."
There can be no doubt that, as a result of this judgment, conditional fee agreements (CFAs) and ATE policy premiums are now here to stay. The Lords have indicated in the strongest terms that the inequality in the system is an issue that should be considered again by the Lord Chancellor and, ultimately, what is fair should be determined by the Court of Appeal.
For those of us familiar with the workings of the judiciary, leaving matters to find their own level will be both time consuming and costly for liability insurers.
How should insurers react to this decision? The recent decision in Sarwar v Alam gives some guidance as to how the Court of Appeal will in future approach the funding issue. Essentially the courts are saying that cases should be funded by before-the-event (BTE) or legal expenses insurance in the first instance, leaving only those claimants without such cover to look to CFAs and ATE cover. After all was this not the basis upon which claims were dealt with under the previous legal aid scheme?
The problem for the industry is the low take up of BTE cover, estimated at around 25% of the motor market. The issue is not necessarily one question of cost, as traditionally the premium is tens rather than the hundreds of pounds currently being demanded for ATE cover, ignoring the additional success fee uplift.
Conservative estimates suggest that each ATE-supported case costs the paying liability insurer an extra sum of around £750 per case. On the basis of such figures, it does not require a degree in mathematics to appreciate that motor insurers could well give away BTE cover with each motor policy and still achieve considerable savings, particularly where such cover only triggers in the event of an adverse costs award.
Some insurers are already experimenting with schemes to capture claimants and send them along a pre-determined track. These schemes do not currently extend to their own insureds unless BTE or legal expenses cover is in place.
It is my belief that liability insurers should now come together, either through the Association of British Insurers (ABI) or independently, to pool information and investigate the possibility of some market agreement addressing reciprocal arrangements for the pursuing of personal injury claims between them.
Provided the transparency of any arrangement is maintained, as required by the Court of Appeal in Sarwar, this would seem to be
a logical way forward until the Lord Chancellor or the Court of Appeal ultimately gets around to regulating through fixed or benchmarked costs or further guidance on the use of conditional fee agreements.
My real fear is that this could take years and never truly achieve the certainty that liability insurers are seeking.
David Faithful is insurance partner at Amery-Parkes
