Legal expenses - ATE: End of the road?


With the government giving the green light to implementation of Lord Jackson's civil litigation reforms, Leigh Jackson details the adverse reaction of legal expenses insurers and whether this sounds the death knell for the ATE market.

While almost 18 months have passed since Lord Justice Jackson published his Review of Civil Litigation Costs, the controversy surrounding the report has not.

The review, the most wide-ranging reform to civil claims since Lord Woolf's Civil Procedure Rules were introduced in 1999, has now been backed by the Ministry of Justice, which plans to implement many of its recommendations via primary legislation "as soon as parliamentary time allows".

With the reforms set to introduce qualified one-way cost-shifting in personal injury cases and bar claimants from recovering after-the-event insurance premiums from defendants, the MoJ's move has split the insurance industry. While defendant insurers hoping to stem the tide of rising PI claims costs have welcomed the reforms, the legal expenses industry — fearing for its future — is enraged by the decision.

"In most cases, the introduction of qualified one-way cost-shifting would remove the need for ATE cover at all, which is a fatal blow," says DAS chief executive Paul Asplin. "Obviously this will only apply in personal injury cases but most of the business in the market is PI-related, so it effectively kills the market as it stands today. It is a hammer blow that the market cannot survive."

Although the introduction of qualified one-way cost-shifting applies to PI cases, there will still be scope for ATE products to be used in other areas, such as clinical negligence and the wider commercial arena. However, this has done little to placate most LEIs.

"There is not much left for ATE insurers," Mr Asplin continues. "It doesn't affect commercial ATE business but that it is a small part of the market. There are some signs of growth in the sector — particularly linked to the emerging concept of litigation funding — so there is potential but it is small compared to what is being written today."

With PI claims the most cost-effective side of the ATE industry, insurers' anxiety lies in the fact that, without this part of the sector, it would be unable to cover more expensive products, such as clinical negligence, and still make a meaningful profit. "To be able to write those cases with very high levels of indemnity we have to have a balanced book of business," Jason Smart, chief executive of Elite Insurance, explains.

"The basic rule of insurance is that the good pay for the bad and you need the spread of low-value personal injury cases. If implementation goes ahead, the viability of the market disappears even though we do a lot of rate-based cases in commercial insolvency and clinical negligence."

Despite the negative outlook of most legal expenses insurers, others remain optimistic that the market can survive the changes. David Vine, ATE business development manager at Allianz Legal Protection, argues that legal expenses cover still has a fighting chance of survival.

"Opportunities in the ATE sector remain," he says. "There is a need for ATE within clinical negligence but the market will look different. It will be smaller and far more price sensitive. The consumer will be paying its own premiums and will have a much bigger stake in the game from now on."

In addition, with a bill to bring about the changes still to be formulated and scrutinised by parliament, any permanent modifications to the civil costs system are not yet set in stone. "Everybody is disappointed with the outcome but there is still a lot to take in," says Tony Buss, managing director of Arag. "Depending on how the bills are drafted there might be a market and there might not.

"The worst case scenario is that the market will collapse but it depends on the detail. I know many of our competitors think the market is destined to fail but we are not quite sharing that view. The jury is out on this one."

Preparing for change
The foreman may not have delivered his final verdict yet but there is equal danger in the market being left in limbo. There is a choice to be made: either prepare for the changes or hope they never come to pass.

Arc Legal director Richard Finan argues that insurers have to begin to diversify their product base to operate effectively in the post-Jackson era. "The ATE market will start to concentrate more on non-PI litigation and a number of them have already started to develop experience in those sectors," he says. "The ability to recover the premium will also be removed in those cases but they are riskier by their nature with higher quantum values. As the purchaser of that policy tends to be corporations rather than individuals the lack of recoverability in this area would be a barrier."

Mr Vine says that the market needs to begin to adapt — and quickly — by putting measures in place to gain a stake in a much smaller market. "We have to look forward," he says. "There are so many other things going on that could be brought to the market. We have to rethink our proposals and see what the consumer needs from our proposition.

"We are already working with our commercial colleagues to bring together a non-PI ATE product for contract professional negligence and that is an area which will grow and develop going forward."

BTE replacement call ridiculed
While some insurers are hoping to gain a meaningful foothold in the potentially competitive clinical negligence space, there is considerably more scepticism over the use of before-the-event cover as a potential replacement for lost ATE income.

In his review, Lord Justice Jackson promoted the use of stand-alone BTE as a potential funding option for individuals or small companies who may not be able to afford a day in court but this has been largely dismissed by legal expenses insurers.

"Jackson's knowledge of BTE is about the same as his knowledge of ATE — minimal," Mr Asplin says. "He didn't put forward any proposals whatsoever as to how all of these people without ATE are going to be able to buy BTE cover.

"The reality is that the people who need this product are from a lower socio-economic group. In many cases, these people do not buy personal lines insurance, such as home cover. So there is no way they will be buying BTE. The idea that BTE will come along and solve these problems is complete nonsense. It is just not going to happen."

Any potential for widespread adoption of BTE cover would also depend on the way the product is distributed and marketed. Tim Roberts, senior partner at Parabis, says that an innovative method of selling BTE insurance could help take-up. "In countries like Germany, BTE it is a proper stand-alone product, where its value is appreciated and policyholders pick it up," he says. "How do you capture the public perception? Maybe by linking it to a brand created out of the Legal Services Act or via affinity providers would help."

Mr Finan agrees that stand-alone BTE cover, in its current form, will not serve as a replacement for ATE but might become more widely used with help from the government. "We don't believe that the stand-alone market will take off in the UK. Domestic consumers have become accustomed to a low-cost add-on model where they can buy a good comprehensive policy on for around £20 to £25," he says. "We can't see the UK market reaching a position where they are paying £200 for the same product on a stand-alone basis.

"BTE needs to be brought into government discussions. To assume the BTE market will just automatically pick up these risks and write products is unrealistic."

Pre-determined path
However, Lord Justice Jackson's stance on BTE was not the main bone of contention for legal expenses insurers. The MoJ announced its plans to implement the Jackson Review on 29 March 2011 — just weeks after the consultation on reforms closed on 14 February.

With the MoJ having received in excess of 600 responses, the legal expenses industry has accused the government of whitewashing the process, claiming that it is highly unlikely the MoJ reviewed all the responses in so short a space of time.

"They must have been on a speed reading course," Mr Buss asserts. "It is unbelievable. Everyone could see they weren't listening and had already made their minds up. It is quite clear that the consultation was a complete waste of time."

Mr Smart is equally strong in his criticism of the MoJ, arguing that if the responses had been considered their position could have been different. "If I could read up to 600 responses to a very detailed consultation, within a matter of mere weeks, I would be a professor," he says. "You cannot consider all those responses, which were predominately against these proposals, debate them and come up with a constructive response in a few weeks.

"It would be ridiculous for Jonathan Djanogly [Parliamentary Under-Secretary of State at the MoJ], the MoJ and Lord Chancellor Kenneth Clarke to turn round and claim they have properly considered the responses. It would totally undermine their position. Clearly it has not been done."

Despite the fact most insurers seem to agree that the consultation was sped through, Mr Vine concedes that legal expenses insurers have not done enough to prove that their products deserve a place in the market and create access to justice at a proportionate cost.

"We are where we are," he says. "The claimant lobby has been too quiet and too slow to tackle these issues in the past. There are some very good arguments about the validity that good ATE products bring to the marketplace. But we allowed the defendant lobby to win the argument. If the government had taken longer to form its responses it still wouldn't have changed things."

With LEIs feeling largely pessimistic about the prospects of the post-Jackson landscape, is there any hope that parliamentary scrutiny will result in significant changes to the current proposals?

"Get real, is the short answer to that one," retorts Lamp chief executive Alan Cousins. "The implementation of Jackson has cross-party support. And cross-party support means that it will happen. There are some clauses here which may be modified but the bulk of Jackson will be implemented.

"The measures are not aimed at hitting the ATE market but at slashing legal costs. If someone was to come up with a better way of tackling legal costs hopefully someone would listen. But, at this stage, no-one has."

There is a glimmer of hope for the legal expenses market, however — namely the House of Lords. The second chamber has previously rejected rushed through legislation and Mr Buss believes there is an outside chance it could happen again.

"You only need to look at last year's draft Conditional Fee Agreement Bill to see that it was rejected by the House of Lords on a number of key points. These points are still valid," he explains. "In this case, the bill has been rushed through, which was one of the points that had been made before. It is at odds with a number of independent reports and hasn't dealt with the possibility of unintended consequences."

He concludes: "If the same view was taken it might have trouble getting through the House of Lords. There is still a lot to go through but the devil will be in the detail."

ABI backlash

As well as the Ministry of Justice coming in for criticism for its support of the Jackson Reforms, the Association of British Insurers has faced a backlash from legal expenses insurers for its pro-Jackson stance.

DAS left the organisation over the issue last year, while Financial & Legal and Elite are both currently considering their positions as ABI members.

A spokesman for the ABI says: "We are not looking to cut off the income stream of ATE insurers; as a trade association we have to further the aims of our members wherever possible. We are not here to do a cost-benefit analysis on different types of insurance. We must look at the overall picture to see what action needs to be taken."


The Jackson reforms in numbers
600 - more than 600 responses were sent to the Ministry of Justice for its consultation on the Jackson Reforms.

200 to 300 - the potential cost of a stand-alone before-the-event insurance premium. Buying the cover as an add-on currently costs between £20 and £25.

109 - number of recommendations made by Jackson in the report.

44 - percentage of potential claimants that would reconsider legal action due to the costs involved.

20 - there are currently around 20 insurers operating in the ATE sector.

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