Time to bust the ghosts

' For some time it has been well recognised that a chain of 'suppliers' exists to feed the insurance market. The principle of brokers being paid commission by insurers is long established.

In the past few years the industry has battled through the courts with credit hire companies and, more recently, with claims management firms on the recoverability of 'premiums' being charged for their involvement.

However, a new battle could be about to develop which has a more insidious character, namely over the legality of 'ghost' after-the-event (ATE) policies.

This new controversy could not have arrived at a more sensitive time, bearing in mind the proposals for the regulation of solicitors set out in the Clementi report and FSA regulation of the intermediary market.

Peter Dobie, of Allianz Cornhill Legal Protection, defined a ghost policy as an arrangement between a solicitor and broker or underwriter, whereby either no premium will be paid or a nominal sum paid on the clear understanding that no claim will ever be made on the policy, even if an adverse costs order is made (Legal Report, January 2005).

On the successful conclusion of the liability claim the solicitor will recover his 'outlay' for the policy premium, possibly as much as £500 per policy.

This amount is pure profit for the solicitor who may pay a percentage to the broker or underwriter with whom the arrangement exists. Considerable sums could be involved - a portfolio of 1,000 claims would 'recover' a not insignificant £500,000, where the potential profit for the solicitor could be as much as £400,000.

Putting it bluntly, in our view it amounts to a scam.

But if the claim is lost potential problems arise. A prudent solicitor might maintain an 'adverse costs' fund to ensure that there is sufficient to pay any such claims. This fund could be loosely described as a self-insurance contract.

Pocketing the proceed
However, we very much doubt that this happens in practice and even if it did, the solicitor would need to be regulated under FSA rules before providing a contract of insurance. In reality, we suspect that the solicitor and broker or underwriter pocket the proceeds as part of their profits.

Ultimately, the liability for an adverse costs order will rest with the unsuccessful claimant who, no doubt, will seek an indemnity from his solicitors under the ATE policy that he thought he had.

The claimant could be left high and dry if the solicitor is not in a position to pay.

In our opinion such conduct could amount to a criminal offence as under Section 15 of the Theft Act [1968], which states that "a person who by any deception dishonestly obtains property belonging to another with the intention of permanently depriving the other of it shall on conviction ...be liable to imprisonment for a term not exceeding 10 years".

It seems plain to us that by using 'ghost' policies where there is no policy and cover in existence the solicitor is deceiving the paying insurer into believing that a valid policy of insurance exists. He is also deceiving his client. This may be criminal conduct if a court were satisfied that the solicitor had acted dishonestly.

Furthermore the solicitor, together with the broker or underwriter, may also be guilty of conspiracy to defraud the paying insurer in such circumstances.

If a sham document is produced as evidence of the existence of a policy that does not in fact exist - in other words, the document is telling a lie about itself - then an offence may also be committed under the Forgery and Counterfeiting Act [1981].

Both the Law Society and the FSA should take a dim view of such activities which, quite apart from being potentially criminal, amount to a breach of trust. From a public relations perspective this is very damaging to both the legal profession and the insurance industry.

In the event of there being prosecutions involving such 'ghost' policies, then if convicted, the perpetrators of such frauds would be at real risk of custodial sentences, especially where the fraud is widespread or high in value

Lawyers and insurers must be vigilant. If in doubt they should require a copy of the policy. If this raises further issues then question the lawyer and policy insurer or underwriter.

Some may argue that surely the fraudulent solicitor will have to pay. Don't be so sure. High value claims can take years to come to fruition and circumstances can change within law firms. Nor can it be assumed that the solicitor is always able to pay.

Remember that any court order will be against the unsuccessful claimant, who no doubt thought he was protected by a policy of insurance. If the solicitor cannot pay for whatever reason then any indemnity for the claimant will be worthless.

Widely condone
The professional indemnity insurers could be asked to pay. But that will depend on the terms of the professional indemnity policy and the extent of the knowledge of any fraudulent activity within the solicitor's practice.

If the activities are widely condoned or no questions are asked, or there are no checks or balances in place, then insurers may repudiate the claim on the ground that the solicitors failed to take reasonable steps to identify and prevent fraud.

The lawyer could be seen as simply being entrepreneurial. We don't agree. This activity amounts to sharp practice and could be illegal. It needs to be exposed for what it is. If the emerging ATE market is to survive it can only do so by ensuring that the right premium is paid for the right risk.

The legal profession and the insurance market must clean up its act. Failure to do so will be very damaging for the reputation and public perception of both. IT

' Hugh Price is director of insurance at Hugh James Solicitors, Andrew Manners is a specialist criminal partner at Hugh James