Over the past year, it has become increasingly difficult to obtain after the event (ATE) insurance for lower value multi-track work. Additionally, where ATE cover has been offered, the premiums could be as high as 40-50% of the level of indemnity sought. In some instances, lower value multi-track claims (values of £25,000 – £100,000) with good prospects have not been offered any ATE cover.
Until 2013 and the commencement of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), additional liabilities, such as success fees and ATE premiums, were recoverable as part of a successful party’s claim for costs. Since April 2013, these additional liabilities are paid out of the claimant’s damages, and therefore subject to a pre-determined cap.
In addition, in claims for personal injury, qualified one-way costs shifting (QOCS) was introduced. This meant that, unless a claimant was found to be fundamentally dishonest and the claim failed, the claimant would not be required to pay the defendant’s costs. This, in turn, has meant that the amounts that ATE insurers might have had to pay out have been drastically reduced (essentially limited to their own disbursements and Part 36 risks); therefore, ATE premiums for personal injury work have been slashed.
QOCS does not apply to other areas of civil litigation, so there has been no reduction in the amounts that ATE insurers might have to pay in those cases. It seems that ATE premiums for other litigation types have increased. Perhaps this is to make up for the lower premiums payable in personal injury claims, which, particularly for lower value claims, could lead to them being disproportionate.
For example, if a client enters into a conditional fee arrangement (CFA) with deductions set at a cap of 35% of damages, and the client is awarded £100,000, then the most that can be deducted from their damages is £35,000.
From this £35,000, the success fees for the solicitor and counsel must be paid, along with the ATE premium. In this scenario, you might want an ATE policy to have an indemnity limit of, say, £70,000. This would be broken down as £50,000 for costs liability to the opponent and £20,000 for own disbursements. For a £100,000 claim, the issue fee alone would be £5,000. This allows £15,000 for other court fees, expert fees, and any other disbursements.
If an insurer was prepared to offer cover with a limit of £70,000, the premium would be likely to be staged, rising to something in the region of £28,000 – £32,000 (40-45% of the limit of the indemnity limit) if the case progressed to a trial.
In this example, such a premium would use up almost the entire sum to be deducted from the client’s damages. Of course, the client is unlikely to care how the £35,000 is split between solicitors, counsel and ATE insurer.
Does the ATE premium represent good value for money?
There are few instances where anyone paying for insurance would pay a premium equal to 40-45% of the policy’s indemnity limit. However, litigation is very different to most other risks for which insurance might be obtained.
For example, most people will not need to make a claim on their house or contents insurance in any period of insurance. However, with litigation, you know that, at the end, one party is going to be claiming their costs from the other; the risks are therefore higher. In the example outlined above, solicitors (and often barristers) will have already considered the merits of any claim to be good, as evidenced by the fact that they have already agreed to act pursuant to a CFA. This should provide some reassurance to ATE insurers.
Further, consideration would almost always be given to settling the claims. It is still the case very few claims progress to a contested trial.
According to statistics from the Ministry of Justice, a total of 494,000 civil claims were issued in the quarter between July and September 2016. In the same period, 283,000 judgments were given, but 85% (242,000) of those were default judgments (that is, no defence was filed). This suggests that just 15% (42,000) were contested claims determined by the court.
Looking closer, it appears that 12,675 trials took place in the quarter (the same level as the previous year). Approximately two thirds were small claims, and the remaining third were made up of fast and multi-track trials. There therefore appears to be only a small risk to the ATE insurer of a case proceeding and then losing at trial. To put it another way, very few cases progress to a full trial; therefore the risk that any case (and particularly a CFA/ATE funded case) would, first, go to a contested trial, and second, lose at trial (thereby requiring the ATE insurer to pay the defendants costs) would appear to be low. Even if the claim is withdrawn at an earlier stage or settled with no order as to costs, it’s unlikely that the ATE insurer would have to pay out for the full indemnity limit (which is based on having to pay the defendant’s costs if lost at trial).
It must be accepted that an ATE insurer takes on the risk that it may have to pay out at the conclusion of the case. However, solicitors and barristers actually incur the costs and funding of the case as it progresses. They potentially risk more than the ATE insurer. Is the level of premium reflective of the actual risk taken on by the ATE insurer?
In our example, the deduction from damages is capped at £35,000. If the ATE premium of £28,000 is paid from that, £7,000 would be left for the success fees of the solicitors and barrister. This is despite the fact that they have worked on the case up to trial, incurred significant costs in doing so, and ultimately succeeded in recovering £100,000 for their client.
Their reward is £3,500 (assuming they split the remainder equally between them), which seems a little harsh bearing in mind that the ATE insurer receives £28,000 having done very little.
It could be argued that all three (solicitor, barrister, and ATE insurer) are taking on more risk than the client, who may have already sustained damage or losses but is not risking losing anything financially because they are being funded by a CFA and ATE insurance. In the event of their claim being unsuccessful, they won’t have to pay anything themselves.
Challenges to ATE premium levels are nothing new. Defendants had been challenging them prior to LASPO’s commencement, and have continued to do so.
Even as recently as 17 February 2017, the level of an ATE premium was raised in Rezek-Clarke V Moorfields Eye Hospital NHS Foundation Trust. This was a clinical negligence claim (in which some elements of ATE premiums are still recoverable from defendants) where the total costs claimed were £72,320.85. This included an ATE premium of £31,976.49; therefore, about 50% of the total bill was made up by the combined costs claimed by solicitors, barristers and experts. On assessment, the Senior Court Costs Office (SCCO) held that the ATE premium was disproportionate and unreasonable. Accordingly, it was reduced it to £2,120. As this case is post-LASPO, proportionality was the key factor that outweighed whether the premium was reasonable or necessarily incurred. In Rezek-Clarke, the level of premium bore no relationship to the value of the claim.
The premium had been calculated by reference to medical reports, the costs of which were also considered to be unreasonable and disproportionate. The claimant’s solicitors were also criticised for failing to investigate alternative policies.
Factors which have an impact on ATE insurance
There are a number of factors which are likely to have an impact on ATE insurance.
Jackson LJ’s proposals to introduce fixed costs for civil claims in the multi-track up to a value of £250,000, if implemented, would incorporate a large volume of different types of cases. It’s likely that this will provide some certainty to ATE insurers, as they would be better able to assess the total potential liabilities across their portfolio of cases based on the case values. I would expect to see a reduction in premiums in those circumstances.
Recent reforms increasing the small claims track in personal injury claims will also have an impact on the ATE market. These are due to take effect in October 2018. The ATE market is likely to shrink as many lower value personal injury claims are removed from it under the reforms. Although the premiums may be relatively small individually, ATE insurers could therefore see a significant drop in their revenues. This could lead to ATE insurers increasing premiums in other areas to cover losses or move away from covering lower value multi-track cases. They could then focus on higher value claims where costs/value ratios are more beneficial and there is more scope for charging higher premiums.
There are many criticisms about the level of legal costs aimed at the entire industry, including solicitors, barristers, and ATE insurers. Where solicitors and barristers are able to provide evidence of their work to justify their costs, it is more difficult to justify the level of an ATE premium, which is based on an assessment of risk.
However, with fewer defendants being liable to pay these, and claimants knowing how much will be deducted from their damages, will they care how that deduction is split?
There will always be a market for ATE insurance, as litigants will always seek to minimise their liabilities. This is particularly so in the event of a loss. But looking forward, we must consider how the availability and affordability of ATE could change, and how ATE policies are to be funded in future.