Government embraces Jackson and proposes ATE ban

After much anticipation, the government’s consultation on key reforms proposed by Lord Justice Jackson’s report on civil litigation costs finally begins.

For most insurers it has been worth the wait. There is no doubt that this announcement heralds a new era in civil litigation.

Fears that the report would gather dust following the demise of the Labour government have proved unfounded, as the coalition seems determined to push ahead with some of the key reforms. In many ways the report is a gift for a new government intent on cutting costs in the public sector and, in particular, the NHS Litigation Authority.

“This is about cutting costs for the government. I think they are particularly looking at this from the perspective of cutting the costs of clinical negligence claims to the NHS budget,” notes law firm Stephensons partner, Andrew Welch.

The key proposal embraced by the government is the scrapping of the recoverability of success fees by claimants and after-the-event (ATE) insurance in “no win, no fee” conditional fee agreements (CFAs). If the proposals go ahead, claimants will have to pay their lawyer’s success fee. It is also proposed to allow damages-based agreements (also known as contingency fees) in litigation before the courts.

Access to justice

The proposals have been embraced by the insurance sector. Allianz divisional claims manager (technical), Roy Hebburn, says: “We see this as proof positive of the coalition's intention to deliver on their commitment to reduce unnecessary costs in the judicial system and deliver a better outcome for the consumer.”

Not all in the sector are happy. Legal expenses insurers have long attacked the reforms as a potential barrier to access to justice. DAS head of legal policy, Kathryn Mortimer, criticised the government’s embrace of the Jackson reforms.

“The government’s arguments are that this will reduce litigation costs by firstly, removing the need for ATE insurance to cover adverse costs, and secondly, the payment of success fees to lawyers. This rationale is misplaced,” she explains.

“ATE removes unmeritorious claims from the system, as does the fact that the lawyer is acting under a CFA and is carrying the risk in respect of their own costs. Qualified one-way costs-shifting would result in an increase in claims frequencies which defendants would have no option but to pay off on a commercial basis, regardless of merit.”

Overall costs are proportionate

When unveiling the consultation, justice minister Jonathan Djanogly had little consolation for the legal expenses sector. He criticised ATE insurance as fuelling the compensation culture, and made it clear that the government has swung its weight behind BTE insurance.

The consultation will also seek views on Lord Jackson’s recommendation of a 10% increase in general damages, as well as introducing a new test to ensure that overall costs are proportionate.

QBE’s head of strategic claims management, Mike Noonan, notes that this proposed increase in damages could mean that an insurer will incur the same costs as they do at present through the recoverability of success fees and ATE premiums. He added, however, that the reforms would still be advantageous for most insurers, providing clarity and certainty for the sector when it comes to assessing damages, which will in turn help with reserving practices.

Some, however, are quick to point out that not all of Jackson’s suggested reforms have been taken on by the government, most notably the issue of referral fees.

The new climate

“Concern over success fees and ATE premiums has been identified by both lords Young and Jackson. However, the measures Lord Jackson proposes are intended as a package and we support the introduction of those recommendations if implemented as a package,” says Zurich’s head of technical claims Alan Hunter.

“If only parts are implemented then we would doubt whether the objective of proportionate costs and access to justice will be achieved.”

The overall approach set out by the Ministry of Justice – cutting back on CFAs and ATEs – may not be universally welcomed, but it is clear that change is finally coming.

Companies will need to ensure they are ready to embrace the new climate. Berrymans Lace Mawer head of policy development Alistair Kinley, says: “The most switched-on insurers and lawyers – claimant and defendant firms alike – will already be planning how to adapt their business models for the post-Jackson era."

JACKSON’S KEY REFORMS

Conditional fee agreements (CFAs)

CFAs have given rise to success fees, where a fee is only payable in the event of a favourable outcome; and ATE insurance, which covers potential liability for an opponent’s costs. Under current legislation, the successful party can recover the success fee and the premium from the opponent. Jackson proposes abolishing ATE premiums and success fees.

What’s happening? The government will consult on this proposal. This will require primary legislation if implemented.

Contingency fees

Jackson favours the introduction of contingency fees, a key feature of the US legal system, where the lawyer’s fee is extracted from the client’s damages.

What’s happening? This proposed reform will also form part of the government’s consultation.

Fixed costs in the fast track

Jackson recommends the costs of personal injury cases worth up to £25,000 should be fixed. According to QBE’s Mike Noonan, this would apply to 95% of personal injury cases.

What’s happening? Nothing.

A ban on referral fees

In his report, Jackson called for referral fees to be scrapped because “they add to the cost of litigation without adding any real value to it”. He suggests that if this recommendation was rejected, referral fees should be capped at £200.

What’s happening? The Legal Services Board is examining the effect of referral fees and is set to offer its views in the next couple of months. The likelihood of the board backing a ban seems unlikely following the submission of reports giving a green light to the practice.