Higher standards required

One of the more interesting aspects of the recent Rogers Case - Rogers v Merthyr Tydfil Borough Council (2006) - is the annex to the judgment of the Court of Appeal. In it, Lady Justice Smith expressed her concerns about certain operation features of the funding arrangements for personal injury litigation following the Access to Justice Act (1999).

At the outset, it is important to put the annex into context. Rogers was a public liability (slip and trip) action and Lady Justice Smith specifically makes reference to the experience of one after-the-event (ATE) underwriter which may not, of course, be representative of all ATE underwriters.

Nevertheless, those points of detail apart, it is clear that the Court of Appeal used Rogers to signal its disquiet about the current role of ATE insurance in litigation.

Flawed system
The intention of the Access to Justice Act (1999) in respect of most personal injury cases was to replace legal aid with the dual mechanism of conditional fee arrangements (CFAs) and ATE insurance, whereby all claimants would have equal accessibility to the courts as a private litigant who could independently afford to fund a claim.

But the reality of the current system is that these claimants are in a much better position than a private litigant, because the system is flawed. As Lady Justice Smith commented: "I find it difficult to believe that parliament intended that claimants should be in so much better a position than a private litigant."

Nowhere is this better illustrated than when considering a basic requirement for any litigation: prospects of success. Prior to 1999, a solicitor advising a private litigant would usually be looking for prospects of at least 60% - probably more - before advising on litigation. This would continue to be a fundamental touch point all the way through the case, including trial. Is the same true now? Not always.

Solicitors will routinely proceed with cases where they assess the prospects to be no more than borderline at 51%. Why? Because the claimant on a CFA, who is protected by ATE insurance, has no real financial stake in the success or failure of his litigation.

Yes, he sometimes attracts a higher premium from an ATE insurer due to low success prospects, but that is in itself meaningless because he will rarely be asked to pay the premium.

This leads to another curious aspect of the current system. The costs of litigation are not being met by premiums collected from the claimant insured. Rather, the costs are being met principally by the defendant liability insurers. Much of the period since Access to Justice has been populated by the rather unedifying spectacle of satellite litigation, as liability insurers and ATE insurers used the courts to try to establish the basic ground rules for premium recoverability.

And this fundamental tension continues still, with no obvious sign of resolution. Indeed, Rogers itself has probably done little to clarify what is or is not recoverable, a point acknowledged by the court.

Financial incentive
Lady Justice Smith was also unimpressed by risk assessment, or the lack of it, in the current system. Previously, a solicitor would continue to make a proper assessment of his client's prospects and the financial risks involved, especially in the lead up to trial. This is no longer the case.

She observed: "What concerns me is that the ATE system does not provide any incentive for the claimant's side to have a second and more rigorous look at the merits […] it appears that the claimant can just carry on." Poor cases simply attract higher premiums. But, as noted above, the claimant has no meaningful financial interest in the success or failure of his litigation.

However, wasn't the CFA system designed to ensure that solicitors were strongly incentivised to only proceed with strong cases? Apparently not, if we are to believe the quoted failure rate of case at trial for at least one ATE insurer.

Lady Justice Smith reflected: "The figures we have seen suggest that the ATE insurance market is not managing at all well, at least on cases that go to trial."

She concluded: "It seems to me that this lack of rigour is resulting in the system being more expensive (especially to the premium paying public) than it should be. I do not know how these problems could be rectified. However, I felt it right to draw attention to them."

Continuing uncertainty
So, where does this leave the ATE insurance market? It is widely recognised that the market is already fragile, with few underwriters prepared to provide significant capacity, and the satellite litigation of recent years together with a continuing uncertainty about the recoverability of premiums has done nothing to encourage new entrants.

One of the paradoxes is that liability insurers would like to see a larger, more competitive ATE market, but it is their behaviour that is the major barrier to new entrants. Arguably, the best way to encourage new entrants is for the existing market to take steps to rectify the problems identified by Lady Justice Smith, while at the same time providing a degree of certainty and stability.

Let us be clear. Some aspects of the system are probably here to stay. It is difficult to see, for example, how the market can backtrack on the practice that a litigant has, in reality, no financial risk in his litigation.

By the same score, that means the principal paymasters of the system are the liability insurers. But there are things that can be done to both drive down premiums and reduce the tensions that exist between those insurers and their ATE colleagues.

Best practice
At ACLP we spend a great deal of time analysing the performance of our solicitors and working with them to establish best practice, be it in risk assessments or case management. That partnership - of underwriter and solicitor - is at the heart of what we do and it has enabled us to consistently take a leading role in the provision of realistically priced fully underwritten ATE insurance throughout the troubled years since Access to Justice.

Better risk assessment translates into lower premiums, but it is a hands-on role for an ATE insurer; not suited perhaps, to a remote underwriter who is not too concerned about a long-term involvement.

We have also been vocal in highlighting the practices of solicitor speccing of cases and so called "ghost policies". These practices, which are barely acknowledged by the Law Society, are in fact, commonplace and are undermining the CFA/ATE model by siphoning away the best cases and leaving the more risky cases for the insurance pool.

More should be done by the Law Society to outlaw any practice which arguably amounts to self insurance and has no place in a regulated environment. Other ATE insurers should also make a stand against the practice, rather than in some cases, turning a blind eye or even worse, participating.

Transparency is also important. Of course, liability insurers challenge premiums when there is such a range of prices and pricing models. If ATE insurers are not prepared to be more open about the composition of their premium structures - including the thorny issue of commissions - then they should expect the challenges to continue. We were among the first in this market to seek an open dialogue with liability insurers and would encourage others to do the same.

If the ATE market is to have a long term future, it would do well to heed the message from the Court of Appeal. The problems are there, but can be rectified - perhaps it's simply a matter of raising our standards? IT

Peter Dobie is underwriting manager for Allianz Cornhill Legal Protection