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After-the-event insurance targeted by civil litigation costs review

Out-Law News | 20 Jan 2010 | 2:01 pm | 4 min. read

Successful claimants would have to pay for their after-the-event (ATE) insurance cover and their lawyer's success fee out of their damages if controversial proposals to reduce the costs of litigation come into force.

The recommendations are part of a package of reforms published this month by Lord Justice Jackson following a year-long, comprehensive review of the civil justice system.

Lord Jackson was asked to undertake the review because of senior judges' growing concerns about escalating costs in civil court actions: costs which are often disproportionate to the issues – and the money – at stake.

The final report, which runs to 557 pages, makes 109 recommendations, all of which are aimed at promoting access to justice at proportionate cost. 

Key to the proposals is a plan to give claimants a financial interest in the level of costs incurred on their behalf by preventing them from being able to recover ATE insurance premiums or success fees from the defendant.

The report concludes that this, along with the other recommended measures, would result in a more proportionate costs system that would significantly reduce the costs payable by liability insurers to claimant solicitors.  

But the Association of Personal Injury Lawyers (APIL) has strongly criticised the report for shifting costs away from the wrongdoer and on to the claimant.

"An emphasis on the cost to defendants of litigation misses the point that it is the defendants who generate claims through their own negligence," APIL said.

"Claimants do not ask to be injured and, when they are, defendants and their insurers routinely erect every barrier possible to prevent them claiming the compensation which they need and to which they have a right."

ATE premium

Many civil actions, particularly personal injury claims, are brought on a "no win no fee" basis under a conditional fee agreement with a lawyer, backed up by ATE insurance covering the claimant against the risk of having to pay the defendant's legal costs.

If the claimant loses the action, the insurance will cover the defendant's costs and no ATE premium is payable. But if the claimant wins, the defendant pays an enhanced premium, plus the lawyer's basic costs and a success fee. Effectively, claims can be brought at no cost and no personal risk to the claimant.

Lord Jackson identifies such arrangements as "the major contributor to disproportionate costs in civil litigation in England and Wales". His solution would not abolish ATE insurance or success fees altogether. But it would be the claimant who pays, not the defendant.

The proposal is likely to be welcomed by liability insurers, but was very strongly opposed by ATE insurers during the consultation process.

"Nevertheless it is my firm view that the present regime of recoverable ATE insurance premiums is one of the factors that have driven up litigation costs," Lord Jackson concludes. "I do not believe that this element of the cost regime should be maintained in order to support one section of the insurance industry".

By way of compensation for claimants, the report also recommends increasing damages for personal injury by 10% and capping lawyers' success fees at 25% of the damages awarded. 

"In the majority of cases this should leave successful claimants no worse off than they are under the current regime, whilst at the same time ensuring that unsuccessful defendants only pay normal and proportionate legal costs to successful claimants," the report states. "It will also ensure that claimants have an interest in the costs being incurred on their behalf."

Another recommendation is to encourage the wider uptake of 'before-the-event' (BTE) insurance for individuals and for small businesses. The report comments that BTE is still under-used in England and Wales, even though the premiums are much lower than for ATE.

Costs shifting

Lord Jackson also proposes changing the 'loser pays' principle (where the loser pays the other side's costs) for certain types of claim.

For personal injury cases, the report recommends a form of 'one-way' costs shifting, which would mean a losing defendant would have to pay the claimant's costs but a losing claimant would not have to pay the defendant's costs.

The court could only order costs at a reasonable level, taking into account the financial resources available to the parties and their conduct. The intended result is to "take away the need for ATE insurance in the first place".

Other claims identified as suitable for a similar regime are clinical negligence, judicial review and defamation, but the report says further consultation is needed in this area. For class actions (other than personal injury class actions), however, the normal 'loser pays' principle would remain, subject to the court's discretion to order otherwise.

Fixed costs

Another controversial proposal is to apply fixed costs to all personal injury cases in the court's fast track. This would cover claims worth up to £25,000 and would significantly extend the new fixed costs regime currently being introduced for road traffic accident personal injury claims worth up to £10,000.

In cases not involving personal injury, the report suggests a dual system (for the present, at least) with some types of claim subject to fixed costs and others subject to a cap on recoverable costs. But, Lord Jackson comments, "the ideal is for costs to be fixed in the fast track for all types of claim".

Other measures

Other recommended measures for controlling costs include encouraging defendants to accept a claimant's offer of settlement by increasing the claimant's damages by 10% if the damages awarded by the court are less than the claimant offered to accept.

The report also suggests potential litigants should be encouraged to use alternative dispute resolution procedures, such as mediation, but ADR would not be made mandatory. In addition, various proposals are made to improve court processes and training.

Lord Jackson is also in favour of overturning the current ban on contingency fees, subject to careful regulation. This would allow claimant lawyers to agree to be paid a percentage of the settlement sum or damages awarded.

The final report, published on 14th January, was welcomed by the Lord Chief Justice, Lord Judge.

"The judiciary has been concerned for some time that the costs of civil litigation are disproportionate and excessive," he said. "Lord Justice Jackson’s fundamental review addresses these questions head on."

The Master of the Rolls, Lord Neuberger, said the report was imaginative and realistic.

"The measures the report proposes will ensure that legal costs are reduced, and that civil justice will be more efficient and fairer," he said. "All interested parties have been fully consulted and their views have been reported and considered."

"The time for discussion and debate is over: it is now time for action," said Lord Neuberger. "I hope that the Ministry of Justice will give these proposals the same enthusiastic and practical support which the judges will give them."

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