Fixing the cost of litigation

The cost of litigation is rising, despite the Woolf Reforms' aim of making litigation cheaper and quicker. Research by the Law Society and the Civil Justice Council (CJC), the body set up to review the civil justice reforms, has found the reforms to be unsuccessful in terms of controlling costs. And the preliminary results of a study by economists Paul Fenn and Neil Rickman, commissioned by the CJC's cost forum, found that base costs - solicitors' hourly rates - have risen over the past five years. The Woolf Reforms, introduced in April 1997, sought to increase access to justice and reduce costs. Mechanisms were introduced to encourage early settlement and the claims procedure was streamlined. Now that claims are rising, and underwriting losses are no longer acceptable, controlling claims' costs is imperative for insurers. And policyholders suffer from the inevitable knock-on effect on premiums.Zurich estimates that 40% of claims costs are attributable to the legal system. Focusing on employers' liability (EL) alone, this amounts to a staggering £400m of the £1bn that insurers pay out each year. Small claims fare even worse. For claims under £5,000, the legal costs amount to 95% of the total court award, according to AXA chief executive Peter Hubbard. But help is at hand. In April 2003, a fixed cost system will be unveiled that will stem the rising tide of legal costs. This has been developed by the CJC and will provide a predictable cost structure determined by the level of awarded damages. The scheme will consist of two elements: a basic fee; and a percentage of the awarded damages. The basic fee is likely to be £800 and the percentage of damages will be 20% per £1,000 up to either £5,000 or £6,500, plus 15% on any surplus up to £10,000. Although the figures appear generous, Weightman Vizards best practice partner and CJC member Laura Wilkin says the new cost structure is a significant climbdown from claimants' solicitors' original hopes.

Insurer benefitsThe scheme will apply to all personal injury claims arising out of motor accidents valued between £1,000 and £10,000, which settle prior to the issue of proceedings. This will cover most motor claims: statistics suggest that 85% of cases settle for under £10,000 and 85%-90% settle without recourse to litigation.Although the scheme will exclude after-the-event (ATE) premiums and success fees, legal precedents in these areas are being set and cases currently before the court will complement the fixed fee structure, says Wilkin.Fixed costs will provide a number of benefits for insurers. "It will give insurers more control and reduce their cost and incentivise people to deal with claims quickly and efficiently," says Wilkin. "It will also provide greater certainty, simplicity and predictability. This will help insurers with reserving."A further benefit of a fixed cost scheme is that it could improve the industry's image. "A fixed cost scheme may re-ignite the co-operative spirit that has been undermined by the recent costs litigation. It will help the free flow of information and encourage early settlement of claims, with less disaffection between the sides; the industry would be seen as providing a solution."The success of the scheme will be reviewed in two years' time, when consideration will be given to extending it to cases that settle after the issue of proceedings and also to non-motor claims.Wilkin admits that one disadvantage of a fixed costs system is that it may encourage claims, as greater certainty over costs will mean that potential claimants know what the costs risks are. But she argues that this is good, from the civil justice perspective, if it flushes out genuine claims. "In any event claims are always going to increase given the existence of claims management companies and ambulance chasers," she says.How can insurers take full advantage of the benefits offered by a fixed cost system?Wilkin says that, in the short term, it is essential that insurers comply with the protocols to avoid litigation - as only pre-action settlements will enjoy fixed costs. This means ensuring the early reporting of incidents, early investigation, early concessions and early exchange of information. Claims processing systems may also need to be upgraded and more claims staff employed. Insurers should also do everything to avoid claimants' solicitors doing extra work that may justify their requesting non-fixed fees.

Collect dataIt is essential that insurers make the system work, says Wilkin. "If the claimants' solicitors see insurers are not trying to exploit them by forcing them to under-settle - by sending them on inquiries they cannot afford to make - it will work. There must be co-operation."Insurers also need to collect data about the effectiveness of the fixed cost system, and the impact of ATE premiums and success fees. Wilkin says that one of the problems that the Court of Appeal faced in Callery v Gray was the lack of hard data available. The CJC will be considering how costs information can be collated for reviewing the scheme.Finally, Wilkin warns that insurers need to ensure that they keep a keen eye on future events. "Early on in the costs debate insurers felt marginalised," she says. "They need to make sure that they identify future problems and the best ways of facing them. "Litigation is high cost, high risk, uncertain and lengthy. There are other way to tackle problems, such as mediation. The CJC can help to mediate around potential pitfalls before legislation is introduced."