SERVICIO INFOVÍA PLUS DIRECTO

9.1 The Government‟s policy: ATE insurance premiums should no longer be

recoverable from the losing party.

9.2 AJAG believes that ATE premiums should remain recoverable from the losing party. We accept that change is needed to meet the policy objectives of reducing costs, and we have therefore developed an alternative package for reduced recoverability and other reforms which we set out in section 14. Our comments here should also be read in the context of our criticisms of the proposed QOCS scheme, which we believe loses many of the advantages and in particular the checks and balances against unmeritorious claims that ATE provides.

9.3 The benefits in summary of ATE:

Maintains and supports access to justice

Provides “equality of arms” against powerful opponents Covers wide range of claims, not just personal injury Gives claimants certainty

Covers disbursement and investigation costs Deters fraudulent cases

Weeds out unmeritorious cases

Provides defendants with costs cover to avoid nuisance payments Does not have policy restrictions like BTE (qv)

Operates in a competitive market with tight margins

There is a better way of both cutting costs and maintaining these advantages

9.4 Recoverability of the ATE premium is an essential support to access to

justice for most claimants, who are not able otherwise to fund, or risk funding,

the cost of their claims. Recoverability was introduced as part of the package of measures to replace legal aid in personal injury litigation and to provide an alternative method of support for the MINELAS.

9.5 Moreover, ATE is not solely about personal injury cases. By way of example, Amtrust provide ATE products in many classes of businesses as follows:-

41 Actions against the police

Appeal Assault Building Disputes Consumer Protection Contract Disputes Dental Negligence Employers/Public Liability Employment Financial Irregularities Industrial Disease Insurance Claims Intellectual Property Miners Lung Disease Misc

Occupiers Liability Product Liability Road Traffic Accident

9.6 The ATE market is highly complex as this range of products demonstrates. Not every insurer provides such a full range, as there is specialisation too, both in the type of claims covered and the stage at which cover is offered. Much of the litigation carried out by small business is supported by ATE, for example. It is important to note that the proposed QOCS system will only apply to personal injury, yet it is

proposed to remove recoverability of ATE premiums from all forms of civil litigation, including all those listed above, so small business litigants or consumers or those involved in disputes with their builders for example, will face a “double whammy” of the risk of an adverse costs order on the one hand, and no insurance to meet it on the other.

9.7 If ATE premium recoverability is abolished for any category of case, it will lead to a reduction in the consumer’s right to redress for the wrong they have suffered. This would be especially evident for personal injury cases, where negligent third parties would go unchecked. Abolishing recoverability of premiums would distort the level

playing field between vulnerable claimants and powerful insurers and public or

private bodies.

9.8 Restricting recoverability in certain categories of case would result in either a withdrawal from the market by ATE insurers in their entirity, or much higher

42 premiums on those high risk cases which still require cover. If the claimant was then expected to pay for the premium themselves, most would opt to take the risk and not insure or even more likely, not bring the case at all. AJAG’s

consumer survey is a clear indication of behaviour patterns: claimants are extremely risk averse to legal costs, especially when uncertain.

9.9 ATE premium levels are largely based upon the amounts paid for uncapped defendants’ costs in lost cases. It is they who are in large part responsible for the level of the premiums due to their disproportionate costs claims. It is interesting to note that there are no proposals from the Government to control defendants’ costs expenditure in any way whatsoever. Whilst the QOCS proposal may reduce this exposure, it does not elminate it entirely. We do not accept that it would work out cheaper in the end, anyway, except by reducing the overall number of claims and thus access to justice for ordinary people.

9.10 When considering any changes to the current system for ATE insurance, which

after 10 years of challenge and legal precedent has now finally settled down, the Government should remember the basic principles of insurance.

9.11 The purchase of insurance, involves an exchange of uncertainty (risk) for certainty (premium). Premiums, set actuarially by underwriters, are held in the "common pool" to meet the liabilities of future claims, plus an allowance for costs and expenses and a small profit margin. It is the basic principle of all insurance, that the premiums of the many pay for the claims of the few.

9.12 Any proposal to reduce or remove ATE premiums from "the common pool" would undermine the basic insurance principle, as there would be a much reduced common pool of money to meet the same level of future claims costs. ATE insurers would still meet the same level of claims but from a much reduced common pool. The claims of the few would have to be paid by the premiums of the few. QOCS does not provide the answer to the problem, as will be explained in the later section relating to this proposal.

9.13 However, QOCS only affects post litigation liabilities, which suggests that it would have little effect on the overall claimant costs exposure, at the least for

unrecovered disbursements. The uncertainty of QOCS does not remove the need

for ATE insurance, as we explain further in our comments on QOCS and on disbursements.

9.14 ATE is an essential element of access to justice for ordinary people, who need the certainty that ATE guarantees. One of the main barriers to good claims being pursued is the claimant’s fear of the personal costs consequences. ATE can entirely remove that fear in way that any QOCS system cannot, due to the subjective application of the disqualifying provisions of QOCS, which inevitably will be retrospective.

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9.15 Recoverability is key to this. It is not fair that the claimant should meet the cost of the claim or litigation which is only necessary due to the fault of the defendant.

9.16 Very few ATE policies are voided for the very genuine reason that ATE keeps

unmeritorious claims out of the system (at no cost to the defendants). One of the

advantages of the ATE system is that cases are risk assessed by the ATE insurer, as we explain below.

9.17 Moreover, ATE insurers help discourage fraud. ATE policies do not pay the claimant’s costs when fraud, false or misleading information is provided by claimants, who are themselves liable for the consequences of their fraud. It is to the benefit of everyone in the system, claimant and defendant alike, to eradicate fraud, and ATE insurers when assessing claims help to achieve this. QOCS does not provide such an additional check.

9.18 There needs to be a reality check between the extent of allegations of fraud and the actual incidence of fraud, including the screening and detection efforts of the claimant side of the industry, by both solicitors and ATE providers. There is no benefit to anyone in pursuing such illegitimate cases and if there is evidence of fraud when a case is proposed for cover, then the ATE insurer will not support that case. They and their solicitors are successful in deterring fraud, as the true figures on the incidence of fraud reveal.

9.19 ATE provider DAS reports that whilst defendant liability insurers routinely allege fraud in hundreds of their cases, in only a small proportion of those allegations are they substantiated. Whilst liability insurers regularly use this tactic, it does not mean that there is a general issue with fraud. In 2010, DAS 80e had only 6 cases where the allegations could not be refuted and those cases were therefore discontinued. Given DAS’s case load in 2010, this represents a rate of less than

0.018%. ARAG encounters fraud in 0.02% of cases, a similar percentage. Most of

these relate to either staged accidents or exaggerated claims. Their typical costs liability as a consequence is in excess of £10,000. Templeton report that they have only had to repudiate around a dozen claims in the last 12 months on the basis of misrepresentation of the facts.

9.20 These small numbers demonstrate that the ATE insurers’ vetting procedures

and those of their solicitors are extremely rigorous and that it is highly unusual for an insured case to have any element of fraud.

9.21 A real grievance of the ATE insurers is the fact that liability insurers could do more to assist ATE insurers and claimant solicitors in combating fraud. When they allege fraud before proceedings, the liability insurers do not produce the evidence to support the allegations. If they did so, and the allegations were well founded, then the case would be rejected. Templeton’s further view is that not enough is done to make the public aware of the penalties for lying.

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9.22 Should ATE premiums no longer be recoverable, then this important brake on fraud would be lost, as QOCS does not provide such a second stage check, beyond the initial assessment by the solicitor. The additional costs of fraud to the industry and to society that would result have not been factored into the impact assessments.

9.23 Of course, it is not just fraud claims that are screened, but all cases are

reviewed for their prospects of success before cover under ATE will be offered.

This function of ATE, which also is not reproduced by QOCS, means that many cases, which solicitors thought to be worthwhile and in which they have already offered a CFA, are subjected to a second litigation risk assessment by the ATE providers, who reject a significant proportion of cases as not suitable to proceed, cases which liability insurers often never see. This is a double check which helps weed out unmeritorious cases, an advantage ATE has over the flawed QOCS proposed alternative, which does not provide a similar reassessment of the case.

9.24 Whilst some straightforward cases can be dealt with by solicitors under delegated authority against strict criteria, higher risk and higher value cases are

individually assessed. Overall, Financial and Legal reject around 25%, but looking

at individually risk assessed cases Elite and Templeton each reject 63%; ARAG rejects 67% of such cases; Amtrust rejects 61.37%, and LAMP rejects 55%. DAS 80e declined 38.7%

9.25 Clinical negligence provides an excellent example of how ATE helps prevent unnecessary claims and litigation: we give more detail on this in section 13.

9.26 ATE premium levels are based in large part on the amounts paid for “un-

capped” defendants’ costs in lost cases. Whilst defendants may complain of high ATE premiums (which comparatively they are not), they are largely responsible for the premium levels because of their disproportionate (uncapped in contrast to the claimant) costs bills when they succeed.

9.27 As an example, Elite’s average ATE premium is £682 across the full range of

personal injury to commercial litigation with up to £5m of cover. Templeton’s average premium is currently £632. Financial and Legal’s average ATE premium is £395 with up to £100,000 of cover. ARAG’s average premium is £1017 and LAMP is £802.89.

9.28 Looking at the difference between different types of risk: DAS average: motor £360, EL £ 860, PL £1,400, industrial disease £3,000 and clinical negligence, £8,000. Amtrust’s average premium rates, determined by actuarial reviews: RTA, £395; EL/PL/OL, £800; Industrial disease, £2200.

9.29 Turning to the other side of the equation, Elite’s average claims payment on a

policy is £8,222. Their highest overall payment was £1.75m. Financial and Legal’s average payment is £2,840, with the highest in 2010 being £20,100. ARAG’s

45 average payout is £6521. ARAG report that the percentage of cases in which they pay defendants’ costs varies by type of case, ranging from 1% in motor cases to over 10% in industrial disease cases.

9.30 Abolition of ATE recoverability outright will further distort the already unlevel litigation playing field which favours defendants, which distortion will be further exacerbated by the QOCS alternative. The vulnerable in society will be prejudiced as their access to justice will be reduced because they will be discouraged from litigation through the financial uncertainties they will face as individuals under QOCS, which pressure is not felt by insurance companies.

9.31 Without recoverability, for the reasons outlined above, there will be an

inevitable increase in fraud and frivolous and unmeritorious claims. ATE

provides a benefit to the defendant, in that claimant ATE cover means that a defendant does not need to consider an “economic settlement “ or “nuisance value” payment, because if the insurer successfully defends the claim, the defence costs will be met by ATE. This benefit is lost under QOCS.

9.32 Without recoverability, the ATE personal injury insurance market may cease to exist and other ATE markets will be affected by the changes. These are expensive businesses to run, as shown by the limited margins illustrated below. If ATE does survive in the absence of recoverability, it could only do so in a very different form. The market will move from insuring high frequency/low value risks to low frequency/high value risks. The shift will lead to less certainty and more volatility for ATE insurers who would need reinsurance support to protect ATE solvency margins and protect adequate capital requirements. Reinsurance support is currently not widely available for the ATE market due to (1) the catastrophic losses incurred by Lloyd’s in connection with the former Claims Direct and TAG failures and (2) existing relationship interests amongst reinsurers and defendant insurers.

9.33 Without recoverable ATE, risk aversion by claimants will mean many perfectly

good but problematical cases will fall by wayside, as claimants will not be able to afford, nor solicitors to bear, the cost of the premiums in these cases; nor will claimants risk litigating without the certainty of protection ATE provides.

9.34 It should be borne in mind that the more restricted ATE recoverability becomes, the higher the premiums will be, unless other steps are taken to limit the risk exposure (see our suggestions in section 14). This is the inevitable operation of any insurance market. If ATE becomes the preserve only of the complex high cost risk, high disbursement claim, without less riskier ATE insured cases to spread more generally the overall risk, it is inevitable that premiums would rise. If this were to occur, they may well become unaffordable to the average claimant if he was to be expected to meet the premium personally.

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9.35 The cases where ATE recoverability is particularly necessary include those

cases where ATE protection is needed to cover potentially high pre and post litigation investigation costs and high costs risks to the claimant in the event of failure in meritorious but complex claims. We do not believe QOCS offers a viable alternative, for the reasons advanced in section 10.

9.36 Such serious matters would include those liability admitted multi track accident cases where causation and consequential quantum are in dispute. Disbursements are potentially high, as is the defendants’ costs risks, including in the context of a part 36 offer. ATE is essential to underwrite these. Realistically, they are little different in risk to multi track liability disputed cases.

9.37 Disease cases, whether fast track or multi track, can be problematical due to high early investigation costs, often including very specialised medical evidence, and the comparatively high proportion of cases that ultimately cannot proceed. Recoverable ATE is essential for these cases so the winning cases can balance out the losing ones, or those that cannot be taken forward.

9.38 Elite were offered 212 industrial disease cases and 117 industrial deafness cases last year. They rejected 134 or 63.21%, and 67 or 57.26% respectively. DAS believe disease cases are already unprofitable. Any changes to recoverability will mean this class of risk is uninsurable.

9.39 The problem is particularly acute for clinical negligence claims, which we deal with in detail in section 13.

9.40 Recoverable ATE is essential for those test cases with implications beyond the individual case in point including responding to defendants‟ appeals. Without provision for such matters of public importance, which by definition are unpredictable and only concluded on appeal, the law may not develop, as the claimant may not wish to take further uncertain, difficult to insure risks.

9.41 DAS insured the important retained organs test case at Alderhay Hospital, in which claimants eventually won damages. Elite were offered 55 appeal cases last year, of which they accepted 23 or 41.82%

9.42 Elite insured 5 of the 21 judicial review cases proposed to them last year, a rejection rate of 75.24%, ensuring meritorious cases could proceed; and poor cases were not supported.

9.43 ATE insurers operate in a highly competitive market. There are no excess profits to be made, and indeed certain types of business are generally loss making, such as disease claims. There is no evidence to suggest that if the claimant was liable to pay the premium, market forces would push premiums down. As indicated below, there is already an active and competitive ATE market, and margins are not excessive.

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9.44 A typical example is ATE insurer Elite, one of the largest ATE insurers, who have provided policies for over 2,500 law firms. Their net margin is only 7%. Financial and Legal’s net margin for 2011 is forecasted at 14%. DAS 80e net margin is circa 10%: their first 5 years of trading resulted in technical losses. ARAG works to a combined ratio of 95% producing a margin of 5%. Amtrust Europe does not solely deal with ATE, but on the basis that operating costs are applied proportionately, their net margin is circa 10%. These margins are not excessive and reflect the competition amongst ATE providers.

9.45 Indeed, many insurers put their ATE portfolio into run- off in the early days due to incorrect pricing, and not appreciating the number and costs of claims. These include NIG, Wren, Goshawk, Catlin, Atrium, Lexington, St. Paul and Europ Assistance.

9.46 The disproportionate power imbalance between ATE and liability insurers is

demonstrated by the fact that in 2009, just 20 liability insurance companies

owned a 94.6%share of the UK private motor insurance market.

9.47 The small scale of the ATE market is in contrast to that of liability insurance, with total premium income of £13.2 billion (Motor, £9.96bn, General Liability, £3.3 bn.). Although the liability insurers complain about the impact of claims on their business, they have not indicated by how much they would reduce premiums or