Proposed changes to the conditional fee structure could mean that insurers pay more claims. But lawyers may lose out too.Caroline Jordan reports

Could there be more bad news for insurers trying to keep a lid on spiralling claims costs? A new government consultation paper on conditional fee agreements (CFAs) is calling for an end to many of the technical challenges often put forward by defending solicitors.

If changes to the current CFA structure are made, insurers could be forced to pay out quicker and put up less of a fight.

It is claimed these challenges - known as satellite litigation - are often based on spurious technicalities and act as a stalling mechanism that often delay payments to claimants and create a backlog in the courts.

A lawyer, who did not wish to be named, says Norwich Union (NU) and Churchill both tend to make unnecessary challenges, but that others take a more flexible view.

"Royal & SunAlliance and Direct Line are insurers that are more forward thinking and will want to come to a workable agreement," he says.

The overall theme of the consultation paper, Simplifying CFAs, is a call for a more transparent CFA regime and it is inviting responses from insurers, lawyers and consumer groups.

The paper has been produced by the Department for Constitutional Affairs and the project is being spearheaded by David Lammy, the MP for Tottenham and the department's parliamentary under secretary. Lammy has a legal background, having practised in the UK and the US, where he specialised in negligence and commercial litigation.

"I would like the CFA regime to be easier for the consumer to understand, for the legal representative to use and harder for any mischievous challenges against the solicitors' costs. We will be consulting widely to identify the views and options from both legal and non-legal parties," he says.

He says the aim is to promote discussion and to create an effective regulatory system for CFAs. It will focus on what secondary legislation is needed, how prescriptive this should be and the information and protection needed for clients.

The CFA regime was introduced in April 2000 and changed the way personal injury cases were funded, meaning a shift away from legal aid. Recoverable success fees were introduced and after-the-event (ATE)insurance premiums replaced state funding.

This June, further changes were introduced to the regime. Lammy's predecessor, Baroness Scotland, announced that the indemnity principle would be overruled. This means losing parties were not required to pay more costs than stipulated in the original agreement between claimants and their solicitors.

She said this would improve transparency and that this later consultation paper would look at ending the current practice of delaying payment of legal costs to claimants awarded by courts due to technical errors

Satellite litigation and how this can be reduced is one of the main areas addressed. According to the consultation paper, these challenges, which are aimed at exploiting minor omissions and mistakes in individual CFAs, are highly frustrating.

Personal injury specialist Andrew Twambley, a partner at Manchester law firm Amelans is well used to spats with lawyers. He was the solicitor involved in the House of Lords case, Callery v Gray, which involved NU. This case was understood to have caused a backlog of around 150,000 claims.

Although Callery had already been awarded damages, NU fought the case based on the premise that excessive charges were being made. Amelans argued that its success fees were well earned.

"For lawyers, it means there is an incentive to take on no-win, no-fee cases that are not watertight, as they can offset success fees against the claims they lose. Without this, many people would have been denied access to justice," says Twambley.

He adds that if an insurer is unhappy with the success fees being charged, it still has recourse to the courts, where the fee can be overturned and the greedy solicitor reprimanded.

"Some firms of solicitors have gone to the wall waiting for their costs to come through, while insurers are bleating," says Twambley.

An ABI spokesman says members support the consultation paper and would use it to get across concerns about the high costs being levied by lawyers.

"We are very concerned about success fees and what is being charged. Around 95% of cases are successful, but lawyers continue to charge high fees on top.

"We are in the situation where around 40% of claims costs are going to lawyers and this is not right. We can see now the strain this has placed on the employers' liability (EL) market for example," the spokesman says.

Tony Buss, assistant general manager for legal expenses insurer DAS, says the current CFA regime is far from satisfactory.

"It is clear that many consumers don't understand the documentation and that cases are far too long-winded. Cracking down on technical challenges will be beneficial, as when acting for claimants, it takes too long to find out if you've won or lost."

DAS offers both before-the-event (BTE) and after the event (ATE) insurance but Buss says the latter is far more problematic. "While we would prefer people to buy BTE cover as it is much better value, some will always require an ATE policy.

"The government is committed to making the CFA regime work and it will be looking to implement greater clarity. In particular, if a defending solicitor does make a challenge, it will need to bring in a material aspect."

David Pipkin, associate partner with lawyers Davies Arnold Cooper, which acts for lawyers, says: "To some extent, the legal profession is being blamed for the CFA regime being too complicated. But, we did not produce the rules. If there are irregularities, then an insurer's lawyer will want to point these out."

He says it is vital that insurers put their views across and respond to the consultation paper. "The issue of success fees needs to be calmed down. Some form of capping would be welcomed.

"It is clear that on both sides, this has been rushed law that could be improved."

An analysis of responses will be published by the end of the year and changes to legislation should be introduced in 2004.