Jackson Review digest

The Review

At the beginning of the year, the government commissioned Lord Justice Jackson to review the costs of civil litigation and make recommendations on how to best control them. Many industry players viewed this as a step toward reforms that could potentially revolutionise the claims process.

But while the hefty preliminary report is heavy on detail, it gives few firm recommendations on how to change existing procedures. However, it does suggest some new conclusions that could have a major impact for insurers if they make it onto the statute book.

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 “after the event” (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.

While Jackson accepts that the “no win, no fee” culture is here to stay, he questions whether the existing level of success fees and ATE premiums are too high and if they should continue to be recoverable.

Nichola Evans from Browne Jacobson says: “ATE insurers will want to be involved in the dialogue on whether or not ATE premiums are reasonable and appropriate, whether the premiums should be recoverable and also whether access to justice can be preserved where there is an ATE and a success fee.”

Scrapping the “loser pays” principle

Lord Jackson believes the “loser pays” principle otherwise known as cost shifting, which sees the unsuccessful party paying the opponent’s costs, could be abolished in specific areas such as personal injury claims. This would eliminate the market for ATE insurance, which according to the report can come “at a very high price” for insurers.

“The essential problems we have with the civil justice process, particularly in relation to personal injury claims, is the disproportionate nature of the legal costs and associated transactional costs, such as ATE premiums,” says AXA head of liability claims and professional services Matthew Scott.

“I hope that some of these recommendations will be taken up and implemented because we can’t afford to keep going on with the compensation process in civil procedures when it costs so much money.”

Non-recovery of costs by defendants

The review promotes the idea of “one-way cost shifting,” particularly in the realm of personal injury claims, where only the claimant can recover costs.

In Jackson’s view, this would provide better access to justice and allow claimants to recover all of their damages. Mike Noonan, head of strategic claims management at QBE, says insurers should welcome this proposal. “One-way cost shifting means insurers would give up their right to cost shift but it means that in the vast majority of cases that they pay, they don’t have to include ATE insurance.”

But he adds that steps would have to be taken to ensure against “have a go” claimants who pursue weak cases knowing they will not be liable for the defendant’s costs. “If this was safeguarded by new protocols, I think most insurers would be happy with one-way cost shifting.”

However, David Johnson from the Forum of Insurance Lawyers takes a more cautious view. “In the absence of any hard statistics, it is not difficult to imagine that the combined amount of costs recouped by insurers in connection with claims that have been successfully defended, may pale into insignificance when compared with the combined amount that insurers have to pay out to claimants in relation to ATE premiums.”

US-style class actions

Lord Justice Jackson is keen on promoting the US model of collective actions where a “no costs rule” applies. In his view the current costs regime acts as a disincentive for claimants hoping to seek common redress. He suggests that removing costs would improve access to justice, as well as helping unsuccessful defendants escape substantial cost liabilities. Scott says that such a move, if implemented, must be treated with caution.

“I don’t want to see insurers spending a lot of money in administrative costs when dealing with highly speculative class actions and having to pay out disproportionate costs whether they succeed or fail.”

Contingency fees

Lord Justice Jackson again appears to favour the US system, where the lawyer’s fee is extracted from the client’s damages. This means the losing side would be liable for these fees, a reform that could see significant implications for the industry.

“For insurers the key concern here would centre on the issue of contingent costs, which would see the losing side in a case paying an additional layer of costs. This extra cost would be based on the amount between assessed costs and the amount by which the contingent fee exceeds this,” says Evans.

A fixed costs regime for personal injury claims

Lord Justice Jackson is proposing the costs of cases worth up to £25,000 should be fixed. According to QBE’s Noonan this would apply to 95 % of personal injury claims and give many insurers something to smile about.

“This would be attractive for insurers because it means there would be certainty about what the costs would be. Secondly, it means that when the damages claim is resolved, there shouldn’t be any room for arguments about costs,” says Noonan.

“Before the event” (BTE) insurance

The report raises interesting proposals about BTE insurance, a policy that is put in place to cover legal costs should a claim ever occur. Lord Jackson asks whether this cover should become mandatory in motoring policies. Scott welcomes the suggestion of a shift in emphasis from ATE to BTE insurance in legal claims.

“One of the key questions is whether there should be a greater role for BTE insurance. This clearly upholds a good insurer’s principle of spreading the risk and cost as wide as possible.”

But Evans warns this may push up the cost of premiums. “The Motor Insurance Bureau believes that as many as 20% to 25% of drivers remain uninsured. If BTE becomes a compulsory element of motor insurance, does this mean there will be more people driving around uninsured?” asks Evans.

Raising the bar for the small claims track

The small claims track is the normal route for any personal injury claim under £1,000. However, Lord Justice Jackson suggests this threshold could rise to £5,000 to eradicate a large number of cases from the fast-track route where the costs of lower value cases can be disproportionate.

Noonan believes that raising this bar would present an exciting but challenging situation for the industry. “Because no costs will be recoverable, people will be making these claims directly themselves without a solicitor. We would have to show they are getting at least the same amount of money from us directly, if not more, than under the current model.”

He adds that a third party such as an ombudsman service may be required to help people with complaints against an insurer.

Costs management

The review strongly suggests that adopting a simpler, more streamlined approach to the litigation process could be key in cutting costs. Lord Justice Jackson asks whether pre-action protocols, which outline the steps that parties should take before court proceedings, could become less onerous. Similarly, the report suggests the process surrounding the disclosure of documents and statements and electronic material in particular should become more cost effective. Recommendations include limiting the amount of disclosure available to a party and estimating costs at the start of the disclosure process.

Will these reforms happen?

Lord Justice Jackson’s review has given the industry much to mull over. However, given the current political landscape there is little guarantee these reforms will materialise.

The review marks the beginning of a consultation which ends on 31 July, while the final report will not appear until December. This means that any reforms cannot be put into law until the following year, when there could be a new government with a completely different view of the report’s potential.

“Arguably nothing will change in relation to costs as a result of this report during the lifetime of this government, no matter what Lord Justice Jackson eventually recommends. So to that extent, speculation over future consequences are almost a waste of energy at this stage, says John Bundy, director of legal services at Garwyn.

However others remain more positive.

“On the whole, the report has been well received and I think it is a real opportunity for us to change things. But there is a long way to go and when it comes to the implementation of the act next year it will interesting to see if all of these opportunities will still be there,” adds Noonan.