Starting the costs revolution

John Maynard Keynes, the famous economist, once said: "The real difficulty in changing any enterprise lies not in developing new ideas but in escaping from old ones". Quite simply, when it comes to the funding of civil litigation, a revolution is taking place and it's one that any purchaser of legal services needs to be aware of. It's essential to be aware of the changes and, critically, to be ready to adapt accordingly.

Many of those involved in the insurance industry are bulk purchasers of legal services and therefore the various changes taking place are particularly relevant to them. With the ways to pay for legal advice evolving it makes financial sense to understand which might be best for you.

Insurers are experienced, regular and sophisticated purchasers of legal services. They often have panels of law firms across the country whom they instruct on a regular basis. The traditional method of law firms quoting, or pricing, for their services is by way of an hourly rate.

However, the purchasers of legal services in the insurance industry are looking for more flexibility from their solicitors. Therefore fixed fees, blended rates, or even no fees at all, are all being considered as alternative ways of pricing for the provision of legal services.

The fixed fee simply does what it says on the tin, it is a fixed quote for the job. The fee can be fixed for the whole job or for part of the job.

It has the advantage, as far as the purchaser is concerned, of certainty, which can clearly be advantageous in terms of budgeting. The purchaser can start to forecast expenses for various jobs; their expenditure is known and to a certain extent under control. This pricing method is no different to the vast majority of non-legal services which are offered to insurers and will certainly suit some companies.

The blended rate approach is that of the law firms offering an hourly rate for all their qualified lawyers (from newly qualified solicitors to hugely experienced partners). The advantage for the purchaser is that the blended rate will be lower than a partner, or senior solicitor rate, and therefore on the surface, better value is offered. What the purchaser has to be careful of is that the work carried out by the law firm does not get driven down to the very lowest level.

In other words, the purchaser will want to ensure that there is some involvement in the case from a senior solicitor in order to feel comfortable with this mode of payment. In terms of suitable work, blended rates are probably most appropriate for repeat type instructions from a purchaser, rather than for a one off instruction.

Conditional fee agreements (CFAs) for defendants are the new kids on the block when it comes to pricing methods for the insurance industry. CFAs for claimants have been with us for some time and are a well-known and popular way for claimants to fund their civil litigation actions. How it works is that a claimant enters into a CFA with his/her solicitor. Under this agreement, the solicitor charges nothing for their time (no win, no fee) disbursements are usually funded by the client (that is, the claimant). The exposure to payment of the other side's costs (the defendant's costs) in the case of a defeat is usually covered by an after-the-event (ATE) policy.

If the claimant then wins the action and receives a costs award in his favour, then the claimant's solicitors are entitled to charge an uplift on their costs (of up to 100%). These costs will eventually be payable by the defendant, subject to reasonableness. If the claimant loses, and is ordered to pay the defendant's costs incurred in the action, then these are covered by the ATE policy.

It is the existence of the ATE policy which provides scope for a defendant CFA. This would work in practice by the defendant funder (often an insurer) not paying anything in the way of legal fees but entering into a CFA with their panel law firm. If the defence is successful then all the law firm's fees are payable by the claimants through the ATE policy.

We are still at the early stages of defendant CFAs but they do mark an important stage in the costs revolution currently taking place. It might be the case that defendant CFAs are more appropriate for various pieces of work; such as a discrete application in the action, or possibly after a Part 36 offer has been made, rather than for the whole action itself.

However, more and more, we see that the legal parties, and their solicitors, are basically being asked to put their money where their mouths are (or rather where their advice is).

If claimant solicitors think they are prepared to share the risks of litigation with their client, then why shouldn't the defendant solicitor acting for an insurer also be prepared to share the risk with the insurer?

We are not quite there yet, and there will be problems and issues to iron out but we are perhaps not too far away from the day when insurance companies can expect their panel solicitors to do their work (or at least some of it) for nothing. IT

David Turner is a partner at Bond Pearce Solicitors