Costly events

A recent House of Lords ruling has brought some much-needed sanity to after-the-event (ATE) motor legal expenses insurance. The Callery v Gray ruling set down some parameters for the recoverability of premiums in motor claims involving personal injuries.

The Lords (with LJ Scott dissenting) endorsed the Court of Appeal's findings, deeming a premium of £350 reasonable for cover against third party costs and disbursements in a straightforward claim. This, coupled with the findings in the first tranche of Claims Direct test cases on recoverability of premiums for insurance for both sides' costs, ought to place a brake on the more excessive ATE insurance premiums. These can sometimes reach more than £1,000 for routine claims.

Wider access
The Lords' judgment is the latest in a long line of dramatic events over the last three years involving uninsured loss recovery (ULR), the recovery of costs and expenses from negligent third parties. The changes are the product of the Access to Justice Act [1999], itself a consequence of Lord Woolf's reforms aimed at widening access to legal services to pursue claims. The Act introduced the concepts of ATE and conditional fee arrangements (CFAs) with solicitors, also known as no-win no-fee.

As a result of government reforms, ATE has been a growing market over the last two to three years, although premiums have been a major bone of contention from the outset. The question the industry is now asking itself is whether ATE is set to take over from before-the-event (BTE) insurance. Or is it all a short-term opportunity for a small number of new insurers to take business away from traditional firms?

Tim Gorman, senior partner in Newcastle-based Gorman & Hamilton Solicitors, a ULR practice that specialises in personal injury claims, explains the legal setting: "The Access to Justice Act provided no guidelines for acceptable levels of ATE premiums. As a result, a war is being waged through the courts between the ATE insurers and the liability insurers, resulting in a number of rulings of which Sarwar v Alam, Callery v Gray and the Claims Direct test cases are the most important to date. These court cases are likely to lead to a more mature and competitive market."

Dominant insurance
He continues: "It remains to be seen whether the findings upon recoverability and acceptability of levels of premiums will encourage the ATE market to grow even further. This must be set against the clear signs that ATE underwriting costs are increasing, causing margins to be squeezed from both ends.

"On balance, I believe the motor claims market will settle down with BTE insurance very much the dominant form of legal expenses insurance.

"After all, around two-thirds of motorists, whether they realise it or not, already have BTE insurance."

Many insurers are against ATE insurance and CFAs on principle; they consider that they inflate the number and cost of claims. But the solution is in their own hands. If insurers included BTE legal expenses with their motor policies, they could drastically reduce the demand for ATE insurance or possibly even kill the market stone dead. They would also achieve one of the aims of the Woolf reforms by keeping premiums to a minimum by spreading the risk.

Claims frequency on a motor policy is currently 20%. But only a quarter of these create a claim that can realistically be pursued against a third party, and only around a fifth of these involve a personal injury claim - the ATE insurance market's staple diet. Insurers could cover the cost of these ULR claims, particularly those involving personal injury, by adding around 50p to every vehicle's premium. Everything they charged above this on a BTE premium would be profit.

Lucrative market
Such a policy would involve co-operation with legal expense insurers, who have often been frowned upon by motor insurers. This is because of a number of cowboys who linked legal expenses to inflated credit hire tariffs. This issue has largely been dealt with, leaving many reputable legal expenses insurers in the market. There would be no conflict of interest between insurers and policy-holders as an EU Directive on insurance requires that a separate claims handling resource deals with all ULR claims.

Insurers may believe that ATEs and CFAs are here to stay and that they cannot afford to stay out of such a lucrative market.

My contention is that the government's reforms are fuelling an American-style claims climate. Careful consideration by the claimant before pursuing a claim is no longer a necessity as the personal risks are now removed. Inevitably, the number of claims will continue to rise. And this cannot be in the interest of insurers.

Theodore Agnew is chief executive of Town & Country Assistance