Legal expenses insurers face a grave threat from proposals outlined in the Jackson review of litigation costs. With the government about to consult on introducing the recommendations, we look at fears that reform could restrict access to justice
Any day now the government will publish its much-anticipated consultation on reforming the personal injury litigation system.
The battle lines have been drawn for a while: insurers hope Lord Justice Jackson’s recommendations will be implemented in full while claimant firms, which have amassed a fearsome lobbying force, want to blow them out of the water.
Personal injury claims are a multimillion-pound industry so a great deal is at stake, but few groups have as much to lose as legal expenses insurers, which could see most of their market disappear. Whether Jackson’s reforms would hinder access to justice is the subject of heated debate, but there is no doubt that they would severely restrict legal insurers’ access to income.
One of Jackson’s key recommendations centres on after-the-event (ATE) insurance, usually taken out by claimants at the start of the process to cover their own and the defendant’s legal costs should they lose. Premiums are only collected if they win, paid by the defendant’s insurer.
The end for ATE insurance
Motor and liability insurers complain that in straightforward cases where they admit liability, there is little risk to insure. They say they pay out far more for ATE premiums than they ever recover via the policies.
As a result, the insurers welcome Jackson’s proposal that successful defendants would no longer recoup their own costs from claimants, and that ATE premiums should no longer be recoverable from the defendant.
Claimants’ own costs would be paid for from their compensation, as they are in the USA, and sums should rise by around 10%.
This would effectively be the end for ATE insurance. “The impact on our business really would be disastrous,” says DAS head of legal services, Kathryn Mortimer, one of the UK’s largest providers. The company derives a quarter of its £140m gross written premium from ATE policies.
Mortimer says: “Our ATE insurance business would go into run-off, there’s no question. There would be nothing to insure in terms of cost, so ATE insurance would disappear.
“Claimants would still face the cost of disbursements, such as medical reports, but that’s a drop in the ocean. I think it would be a very, very small market, and a lot of insurers would take the view that it’s not sufficiently attractive.”
DAS has left the ABI, which backed Jackson, and is lobbying the government both on its own and as a member of the Legal Expenses Insurance Group (LEIG). The group has met civil servants at the Ministry of Justice, and supplied a 19-page document detailing the implications of changing the system.
Premiums would rise
Some claimants’ solicitors and legal expenses insurers have also established the Consumer Justice Alliance (CJA) to fight aspects of Jackson’s recommendations. So far the alliance has 16 members, including victims’ charities.
CJA chairman Nigel Muers-Raby, head of business development at Harris Fowler solicitors, will be lobbying government at national and local level.
He says: “From the outset we recognised that we needed a broad approach, because this doesn’t just affect law firms. Our members will contact their own MPs to explain how constituents could be affected.”
The key argument for the anti-Jackson campaigners is the effect of the proposals on access to justice. One-way cost-shifting will not eliminate all risk to the defendant, they argue, and many people will not be able to afford the safety net of insurance if premiums are non-recoverable.
“It’s not realistic to expect people to pay upfront for ATE premiums,” says Tony Baker, LEIG director. “An awful lot of claims are for sums below £4,000, made by people on modest incomes who can’t afford to fund their own costs.”
At the very earliest stage of a claim, an ATE premium is around £100. If liability is not accepted, this might rise to £400-£500, and to £3,000 if the case goes to court. “People just wouldn’t have that money,” says Baker.
ARAG chief executive Tony Buss points out that ATE insurance has developed as a response to the removal of legal aid.
He says if claimants have to pay their own costs from settlements, they could be left with next to nothing, particularly in complex but low-value claims.
“Disbursements can be quite significant for difficult cases such as clinical negligence or industrial diseases,” he says. “You need medical reports, expert opinions, barristers’ opinions, so the costs can be quite high, and they need to be paid for. Damages should be compensation for loss, not for the claimant’s legal costs – and 10% is far from enough.”
If fewer people buy ATE insurance, premiums for those who do need it would rise dramatically. Buss says: “ATE insurers would be left with the heaviest risks. The market would not be sustainable and it would implode. There would be severe consequences to our industry and for access to justice as well.”
The claimant lobby also argues that removing responsibility for defendants’ costs is likely to lead to far more claims that lack merit.
“Everybody would have a go. They would have absolutely nothing to lose,” says Mortimer at DAS. “I don’t think one-way cost-shifting will achieve what the government wants it to achieve, which is getting rid of the compensation culture. It will have exactly the opposite effect.
“We will see an escalation in claims and an increase in damages awarded. If a judge awards £5,000 and sees claimants losing the bulk of it, they’re going to say ‘I’m not having that’. It’s the law of unintended consequences.
“I’m afraid I don’t think [Lord Jackson and Lord Young] fully understand how litigation funding works.”
Better than average
Mortimer is struck by how little mention of the Jackson Review there was at a fringe session at the Conservative Party conference on the subject of access to justice.
She believes removing ATE insurance will also mean lawyers refusing to run all but the most clear-cut cases.
She says: “They may not take cases unless they have an 80% probability of success. “People may think ‘it’s not worth me bringing a claim, despite the fact that I’ve been injured’. There is a raft of claims that cannot be made without recoverability. We will cover cases where there is a better than average, 51%, chance of success. We’re weeding out unmeritorious cases, but allowing cases that have a reasonable prospect.”
DAS wins eight out of 10 cases, she adds, echoing the frequently expressed view that if insurers and the NHS Litigation Authority were quicker to accept liability and less inclined to fight cases all the way to court, their costs would be lower.
So what could happen to the legal expenses market? Jackson suggested that before-the-event (BTE) insurance can fill the gap.
No chance, say the insurers. “Let’s be realistic,” says the LEIG’s Baker. “More than a quarter of households have no contents cover for their possessions. On the websites that sell motor insurance, there’s a box you can tick if you want to pay extra for legal expenses, and people are not ticking that.
“They are not going to buy a policy that will cost £200 to £300 more. Nobody wants to sell insurance more than the insurance industry – and they have failed.”
ARAG’s legal insurance business is split half and half between ATE and BTE, but Buss is not optimistic about the wider application of BTE policies either.
“I’ve been in business for more than 20 years, and we haven’t been able to grow the BTE business. It has failed dismally,” he says.
Buss is prepared to consider Jackson’s less drastic proposals, such as capping ATE premiums as a percentage of damages and making policies non-cancellable in the event that claimants withhold information. “The only person to lose is a successful defendant. I can see some sense in that working. There might be some middle ground.”
DAS is considering offering a stripped-down version of BTE insurance. “We know the government is keen to look at the privatisation of legal aid, so there may be something we can do there,” says Mortimer.
She also welcomes fixing fees for all low-value claims: “That would give us certainty in terms of liability for costs, and we can underwrite accordingly.”
Despite support for Jackson from both enterprise tsar Lord Young and justice secretary Kenneth Clarke, the claimant lobby is quietly confident.
They believe that their arguments and any impact assessment of the proposals will cause the most drastic ideas to be abandoned.
“A lot of work has gone in to pointing out the problems of Jackson,” says Baker. “People are realising that it is not a good idea. Intellectually, the argument is extremely bad.
“I do not think this government will come out and say they’d like to have an American system, where they make claimants pay and reduce access to justice.”
All or nothing
While the claimant lobby may be willing to contemplate some of Jackson’s less radical ideas, that is not the message they will be giving the government.
Jackson’s own insistence that his recommendations be considered as a whole and not adopted piecemeal is in some ways a gift to the ‘no’ lobby. It means that the review may backfire – and go the way of previous attempts to reform the system.
As the CJA’s Muers-Raby says: “Whatever comes out of this, it should be an entire thing rather than tinkering at the edges. Jackson has put forward proposals in their entirety, and so we have to consider them as a whole.”
Let battle commence. IT