What's up in the ATE market?

' There has never been much love lost between prosecution and defence insurers, but news last week that some 'after-the-event' (ATE) insurers were refusing to pay claims surprised even experienced operators in the market.

How widespread the problem has become is hard to gauge. Norwich Union is the first insurer willing to raise the problem publicly, and has vowed it will be looking to the courts to reclaim unpaid costs. Others, including Zurich, are thought to be taking a more cautious approach, but are actively investigating the problem.

A spokeswoman for Zurich says: "Zurich seeks to avoid litigation where possible in favour of mediation; however this is an issue to which we are giving consideration."

What ATE insurers are being accused of is using small print in insurance contracts to renege on claims. The most common is that there was a material non-disclosure, or misrepresentation of fact by the claimant - that is, he or she lied to the court.

Peter Dobie, underwriting manager of legal expenses insurer Allianz Cornhill Legal Protection, says: "The whole point is that litigation is uncertain. We recognise that we will lose cases, and we can lose them for a whole variety of reasons, but essentially it is down to the judge.

"However, if you wanted to have recourse it would be against the solicitor, but even this is exceptional. What we would never do is leave the policyholder high and dry."

But the mud-slinging doesn't stop at non-payment. As revealed in last week's Insurance Times, some ATE insurers are being accused of issuing 'ghost policies'. These offer dramatically cheap cover, but under an agreement they will never be claimed on.

The price difference is huge. Anecdotally, a claimant will pay £350 for a full fast-track road traffic accident policy, but just £60 for the same ghost policy. In these cases solicitors are effectively self-insuring behind the fig leaf of a traditional ATE cover note.

Advisory note
The Law Society raised its concerns in an advisory note issued to members on 13 October last year. The note warns that the FSA regulatory regime is on the horizon. It then focuses on what exactly makes up a contract of insurance.

It states: "Solicitors' retainers may be construed as contracts of insurance in certain circumstances: a contract under which a provider agrees to meet a specified obligation on behalf of the recipient immediately that obligation falls due."

The note then ducks the main issue by stating that the Law Society was "considering what types of arrangements may be caught".

At this point it is hard to identify which companies may be involved in either this practice or the similar one of 'speccing' where a solicitor will take the risk of losing the case completely in-house without any form of insurance.

All too often, defence insurers will take the existence of legal expenses insurance as a given, or ask the briefest of questions.

Dobie says: "We are saying to defendant insurers: ask the questions, probe, find out who is behind this. Get in people's faces, find out what is going on.

"The problem with solicitors self-insuring is that it is possibly illegal, as I am not aware of any solicitor that is regulated to offer insurance. But if it were legal, how many solicitors have the financial might to hold the right money in reserves for four or five years?"

There is a wider problem with speccing than just the financial insecurity of a solicitor's office. When these companies decide to take on these cases they cheerily pick the best cases, those they are convinced they will win.

As with all markets, the basket of risk that is left behind is therefore lower quality, leading to premium inflation and further struggles between the prosecution and defence insurers over pricing.

Dobie says: "By solicitors speccing they have driven up prices and therefore decreased access to justice.

"Then liability insurers look at the ATE market and say the prices are too high."

Non-payment of claims, ghost policies and speccing are symptoms of the same problem, the lack of clarity and trust that exists in certain areas of the market.

That solicitors are self-insuring or taking on ghost policies would seem to give a pretty clear indication of how much value they put in insurers' services. And that some ATE insurers seem to be cynically ducking their responsibilities in paying claims also speaks volumes about the level of trust between the two sides of the industry.

Norwich Union director of technical claims Dominic Clayden says: "We pay out but at the point when we win we are not getting paid. The whole thing really annoys me."