Hugh Price asks if after-the-event legal expense insurance can continue in its present form.
Over the past few years after-the-event (ATE) insurance has settled down, but with the Ministry of Justice (MoJ) proposals for the future of personal injury claims the landscape has changed from one of some certainty to one of potential turbulence.
A number of years ago Lord Woolf looked at the procedures for bringing claims through the civil courts. He went to huge lengths to consult and canvass the views of all stakeholders, including the judiciary, lawyers, insurers and banks – essentially, all those who use the civil court system on a regular basis.
Lord Woolf concluded that the judicial system was too slow, too expensive, too complex, too uncertain and too adversarial. In other words it was a mess.
The Civil Procedure Rules that resulted from the Woolf report included (among others) four fundamental changes, namely: the need for proportionality; pre-action protocols; Part 36 offers; and case management by the courts.
While some certainty began to settle on legal procedures in another area, a major conflagration was starting that would have a damaging effect on Lord Woolf’s aim to reduce cost and the adversarial nature of civil law.
The fire was lit by the withdrawal of legal aid from personal injury and its replacement with conditional fee (no win, no fee) agreements, enabling lawyers to claim success fees of up to 100%. Furthermore the ‘loser pays all costs’ principle was retained generating the need for ATE insurance.
I suspect the legislators did not realise the consequences as, soon afterwards, claims farmers arrived, such as Claims Direct and TAG , confirming that poorly thought out changes can generate unforeseen problems.
The initial Law Society-backed ATE scheme (flat rate premium of around £100) was not financially sustainable, as many lawyers failed to take out cover on straightforward claims because of uncertainty as to whether the premiums would be recoverable. On the other hand, lawyers wanted high success fees to cover lost cases and the cost of referral fees.
Two major cases have helped to settle the ATE market (it is a salutary thought that the market was fighting its own internal battle), namely R&SA /First Assist ‘pursuit’ cases and (DAS) Rogers v Merthyr Tydfil BC. I will refer to them as Pursuit and Rogers.
Pursuit involved five claims: two personal injury, one clinical negligence, one stress claim and one RSI. The ATE premiums claimed from the defendant insurer were respectively: £54,000 (damages, £400,000); £9,000 (damages, £1,250); £32,000 (damages, £20,000); £17,000 (damages, £44,000); and £115,000 (damages, £250,000). These are not inconsiderable sums. Arguments included disproportionality, champertous (illegal), and in breach of the Law Society’s indemnity costs.
Senior Costs Judge Hurst described the cases as a battle between liability insurers and ATE providers, and “an honest attempt by an honourable insurer to fill a gap”. He concluded that the ATE premiums had to be paid but not at the levels claimed.
The ATE premiums would have to be calculated by reference to three criteria: the prospect of success; own costs estimate; and adverse costs estimate.
The premiums were significantly reduced with both sides claiming victory. In truth the outcome was an honourable draw. The Pursuit cases gave ATE insurers direction for the future by establishing the principle of premium recovery and the methodology of premium calculation.
“The fire was lit by the withdrawal of legal aid from personal injury and its replacement with conditional fee (no win, no fee) agreements.
Rogers looked at a different model, that is, staged premiums. The financial model was closely scrutinised and the ATE insurance market fully analysed. The claim involved an 11-year-old boy who suffered an injury when he fell in a council-provided play area and cut his hand on glass shards embedded in the wooden boundary posts. Damages were agreed at £3,105.
The local council contested liability because the hospital records gave a different version of events. At trial the hospital accepted it had taken details from the boy’s mother, who had got the facts wrong. The point was not made in the defence or in the witness statements. Had it been, it is doubtful that the claim would have progressed to trial.
The ATE premium was allowed at £5,103. On appeal it was reduced to £900. On review, Costs Judge Hurst heard representations from various parties including ATE providers, brokers and the Law Society.
The case involved premiums at three different stages: before proceedings, £450; part way through, an additional £900; and trial, calculated by actual risk and anticipated defence costs to the end of the trial.
A very small number of cases progress to stage three as most are resolved at stages one and two. It is at stage three that the calculation becomes increasingly difficult, and is where ATE premium calculations and prospects for recoverability become uncertain.
Lady Justice Smith’s comments in the Court of Appeal summed up the position as follows: “The picture that emerges is, to my mind, rather worrying. I do not think it was the intention of Parliament that would-be claimants should be able to litigate cases without any risk whatsoever to themselves. The figures we have seen suggest that the ATE insurance market is not managing at all well, at least on the cases that go to trial. This lack of rigour is resulting in the system being more expensive (eventually to the premium paying public) than it should be.”
Plainly, under the stepped premium model, ATE insurers need to identify sooner which cases should be abandoned before reaching stage three.
The ATE market is now settling down. Fixed standard premiums of £350 abound, so that the many pay for the few. However, market research suggests that many of the easier claims are not insured – with motor claims only 15% are ATE insured. This may be a combination of no insurance and the increasing availability of low cost before-the-event (BTE) cover, many funded by referral fees.
The MoJ has made proposals which could have dramatic consequences for ATE – some suggest they sound the death-knell. They are that the premium will not be recoverable: from the paying party where £2,500 or less is claimed; or where the paying party /insurer has admitted liability. Consequently many soft premium policies will be lost to the market, as ATE cover is no longer required, causing a hardening of the market with higher premiums. Attempting to put numbers on this is difficult as published statistics do not deal specifically with ATE insurance.
However Datamonitor’s report, Personal Injury Litigation 2007, reveals:
• Number of personal injury claims 2006/07, 682,498.
• Annual growth projected, 2.6%.
• Projected number of claims 2011/12, 775,958.
“Plainly ATE insurers will have to look more closely at the prospects of success in each case. The quality (of claims) will be the key.
• Personal injury claims cost 2007/08, £7.5bn.
• Projected 2007 market legal expense premium, £470m.
From the evidence in Rogers there was a general acceptance that an acceptable loss ratio is between 50% and 55%. As the overall claims cost of failed cases is unlikely to change, the premium cost will be spread over a smaller base with the risk factor increasing due to the higher chance of a significant claim. Cost will increase and will be borne by the overall market.
In my view there is likely to be a return to the level of premiums sought in the Pursuit claims as the pool of recoverable premium cases reduces while the outlay (exposure to costs) remains much the same.
Will this become another battle ground? I am not convinced that the market will change as much as predicted. For some time ATE insurers have complained that solicitors are taking up straightforward cases without ATE cover. At best, they are taking cover out when cases are progressing towards trial.
Plainly ATE insurers will have to look more closely at the prospects of success in each case. The quality (of claims) will be the key. They will apply stricter selection criteria and higher premiums to the pool of business that remains available to the market.
Only specialist ATE insurers can assess the one-off cases that will be prevalent under the MoJ proposals. Those insurers already in this market will grow their market share. Pre-action disclosure applications may proliferate, increasing the opportunities for claimant lawyers to churn costs, and yet giving ATE insurers better insight of the claim prospects at an early stage.
If ATE claims are higher value and the claimant/solicitor is exposed to higher adverse costs orders, then the ATE market could grow by removing all non-insured cases. The ATE market will be more specialised – a niche provider. The relationship between the client solicitor seeking ATE cover and the insurer will be closer as service level agreements and key performance indicators become the norm, generating a more open and focused relationship between the law firm and the underwriter.
This is a niche area. Its complexity, lack of maturity and uncertainty will not encourage new insurers to rush into it. All legal expense insurers (both ATE and BTE) will analyse the performance of lawyers they work with to establish best practice in terms of case management , risk assessment and management information. This partnership of understanding is crucial for this market to succeed. More effective risk assessment (and by definition fewer claims) equates to lower premiums and, therefore, less overall cost.
ATE has come a long way in a relatively short period of time. It remains fragile. The MoJ proposals change the shape and dynamics of the market place by forcing ATE insurers into premiums calculated by the actual risk and cost. A bespoke market beckons? IT
Hugh Price is head of business litigation at Hugh James Solicitors.