Everyone involved in litigation funding is awaiting a Court of Appeal judgment that will determine the future of conditional fee arrangements. In the meantime the system has ground to a halt.
But, writes James Lumley, the answer could be staring everyone in the face
The current system of litigation funding has ground to a halt. Conditional Fee Arrangements (CFAs), the replacement for legal aid in personal injury cases, are standing in the dock of the Court of Appeal awaiting judgment from the Lord Chief Justice, Lord Woolf, the Master of the Rolls, Lord Phillips and Lord Justice Brooke.
Just about every party that has a stake in the system is clamouring to give evidence: the insurance companies, lawyers – both claimant and defendant – claims assessors such as Claims Direct and the Law Society. And for once, everyone is in agreement. A solution is needed. And soon. A decision in Callery v Gray is expected by the end of this month, but it seems unlikely that the Court of Appeal can end the litigation funding crisis. On the face of it, the system seems clear enough. Before 1995, when CFAs were not permitted, the only realistic option for personal injury victims was to apply for legal aid under a means test. If it was not awarded, they would have to drop the case or fund it privately, a situation that effectively made it impossible for most middle class people to seek redress in the courts for their injuries. Now, after a period when CFAs and legal aid operated side by side, legal aid has been abolished for personal injury cases.
Ironically, it was the first Labour Lord Chancellor for a generation, Lord Irvine, who effectively privatised legal aid. Under the new system, accident victims must come to private arrangements with lawyers if they want to take legal action. If they have a case, their lawyers will offer them an after-the-event insurance policy which will pay their legal fees and expenses should the case fail.
If a claimant lawyer wins a case, or secures a favourable settlement, he or she can charge an uplift on their fees – often as much as 40%, and occasionally up to 100%. These fees, including the uplift, are paid by the losing party, which is also covered by an insurance policy.
The unsuccessful defendant’s insurer is also required to pay the claimant’s after-the-event insurance policy. If the case fails, the claimant’s solicitor is left out of pocket. But the uplifts personal injury lawyers receive when their cases are successful are designed to make up for those cases that fail. It certainly looks neat on paper. An unpopular and inefficient public service – the Legal Aid Board – has been abolished and replaced by a system under which everyone wins. Everyone, that is, except the defendant’s insurers and those members of the public whose cases are considered too complex or risky to take on.
Before April 2000 it was not nearly so bad for these insurance companies.
When CFAs were first introduced by the last Conservative Lord Chancellor, Lord Mackay, claimants were expected to pay for the cost of their after-the-event insurance and the uplift on their lawyers’ fees out of their damages. But in April last year, the system was changed to make CFAs more attractive – a political necessity given the fact that the legal aid safety net was being removed.
Now insurers of unsuccessful defendants must pay the other side’s legal fees including the uplift as well as the after-the-event insurance premium. In short, the losing party’s insurance company pays for the winner’s insurance policy.
Fed up with solicitors charging what they saw as excessive uplifts on easy cases, this has proved an expense too far for the large insurance companies that have tended to shy away from providing the more specialist after-the-event cover.
They are refusing to pay out until the system is reviewed. This has forced the fast-tracked Court of Appeal test case Callery v Gray – a simple rear-end motor shunt in which the client took out an after-the-event premium and the lawyer charged an uplift of 40%.
More than 150,000 cases have been put on hold until the outcome of the case is known.
The questions that have arisen in Callery v Gray are straightforward and strike to the heart of CFAs. Is it reasonable for a solicitor to charge an uplift of 40% on a simple motor accident claim that has not even gone to court?
And if liability is admitted early, which it often is, and the case does not go to court, which it often doesn’t, why does the claimant need an insurance policy? Where is the insurable risk on a claim that is bound to succeed?
Claimant solicitor Kerry Underwood, the managing partner of Underwoods, says: “Whatever view one takes of the concept of recoverability of success fees and after-the-event insurance premiums in conditional fee cases, everyone agrees it has led to a long and damaging period of uncertainty for clients, solicitors and insurance companies.”
David Gravell, chief operating officer of Claims Direct, which competes with Underwoods for work, agrees. “Certainty. That is what I want to see come from this. Certainty for the client and certainty for the industry,” he says.
Stripping away all of the esoteric complexities of insurance, what the parties want to know is who should pay for litigation.
Should it be the state, the lawyers, the insurance companies, or the person on the street? Should the costs of litigation come out of people’s damages or be met by the loser? One thing is certain. Contrary to some reports, the Court of Appeal will not rule against the recoverability of after-the-event insurance premiums. Eye witnesses in the court report that, when the defence counsel suggested scrapping recoverability Woolf openly laughed. It is a solid bet that insurers will still have to pay the costs of the winners’ insurance premiums, however early cases are settled.
That is the view of the Lord Chancellor’s Department (LCD), which drew up the relevant legislation. “The Government believes reasonable success fees and insurance premiums should be and are recoverable,” says an LCD spokesman. “This belief extends to policies taken out before proceedings are issued in a particular case, a position it is said that the Court of Appeal has indicated in Callery v Gray that it supports.”
So the real issue is quantum. What is a reasonable success fee, and what is the reasonable price of an insurance policy?
The answer is up in the air at the moment.
Claimant lawyers would like to keep their 40% uplifts, but insurance companies want to reduce it to 10%. Charging 40% uplifts on straightforward cases would allow lawyers to continue to profit heavily from CFAs. The insurance companies want to reduce uplifts to a level that would no longer make it worthwhile for solicitors to take on CFAs. These are negotiating positions. A recoverable uplift of 25% might be a compromise solution.
As for insurance premiums, Claims Direct believes its policy, which comes in at around £1500, is fair. But it seems unlikely that the court will agree.
It is also highly unlikely that the judges will be able to come up with a formula in this case that satisfies all the parties. Further test cases are almost inevitable.
So, Callery v Gray aside, what is the future for litigation funding?
“We are not in a happy situation,” says John Pickering, a claimant personal injury partner at Irwin Mitchell. “The system in this country is not and has never been perfect. When legal aid was in place, it did not extend to the middle income bracket. The Government saw conditional fees as a panacea, and they are not a panacea. What is needed is a suite of funding options.”
Solicitors, insurers and the courts cannot rely on a simple capping of the uplift or premium. Risky cases should be allowed a high uplift and a correspondingly high premium. Less risky cases should be given a lower uplift and a lower premium.
Pickering’s answer is more radical. “There is absolutely no doubt about it. We must bring back legal aid,” he says.
Martin Staples, senior partner of Vizards Staples & Bannisters, agrees. “The cheapest thing to do would be to bring back legal aid – but that would be politically unacceptable. The next best thing would be to rule against recoverability, but the Government would lose face with that as well.”
Of course, another alternative would be the introduction of a US-style contingency fees system, whereby winning lawyers take a percentage of the damages.
Defendant lawyers are attracted by the idea, but claimant lawyers tend to oppose it, no doubt wary of all the bad publicity such a practice would generate. Insurance companies believe a contingency system would lead to large increases in the damages being awarded to cover legal costs, which is not a prospect they relish.
The argument, however, is more than just financial. Pickering says: “Insurance premiums are just too high and solicitors are too exposed. The system has forced people to look at cases much more commercially rather than on the basis of social need. My firm has had a strong ethos of carrying a reasonable amount of risk, but we can carry only so much. The danger is that a lot of cases will slip through the net.”
Pickering believes that under the current system, access to justice is becoming severely curtailed.
Just last week Lord Phillips, chair of the Civil Justice Council, called for a review of litigation funding. “Costs are not working well,” he told The Times. “We need to find a solution.” Of course it is not so easy to calculate by how much costs have risen. As legal aid no longer exists it is the insurance companies that are picking up the bill.
Furthermore, if claims assessors or solicitors are allowed to charge an uplift of 40% on a straightforward personal injury claim, what is the incentive to take on more difficult cases?
However, many believe there is a solution to the crisis under everybody’s noses.
A significant proportion of the 150,000 cases that have been put on hold until the Court of Appeal clarifies the situation might not need to be funded by CFAs. Insurance insiders believe that a very high proportion of accident victims have before-the-event legal expenses insurance built into their general household and motor policies.
Phil Bell, liability insurance manager at Royal & SunAlliance (RSA), guesses that up to 70% of RSA household and motor policies have legal expenses policies built in to them.
These typically allow policyholders to spend up to £50,000 on legal fees – ample for most cases. On top of that the company is proposing to add legal expenses cover as a matter of course to all its household and motor policies.
Unfortunately most people appear blissfully unaware that they have legal expenses insurance.
“If you asked 100 people if they had legal expenses cover, the majority of them would probably ask you what you were talking about,” Bell says.
Legal expenses cover itself is remarkably cheap. A year’s cover for up to £100,000 of legal expenses can cost just £15.
Claimants with a before-the-event policy do not need to take out CFAs at all. They can pay their legal fees in the traditional way. And although their lawyers cannot charge an uplift, they are at least guaranteed payment.
“If around 70% of people have before-the-event insurance, it seems the problem could be significantly reduced,” Bell says.
So why are clients not using their existing cover?
“We try to filter people for before-the-event cover,” Gravell, of Claims Direct, says.
Staples says claimant solicitors do ask their clients if they have before-the-event cover – but he says they should go further.
“More and more people have legal expenses cover,” Staples says. “But it is not enough for the lawyer to ask if the client has a policy. He should ask to look at their existing policies and act accordingly.”
There is a growing feeling among some defendant lawyers that claimant solicitors have been quick to embrace CFAs so they can get massive uplifts on easy cases and therefore will not be keen to discover that their clients have before-the-event cover.
And until the change in the rules, it was not exactly in the insurance companies’ interests to point out to policyholders who had not read the small print that they had cover – for fear they would actually use it, very possibly against themselves.
Gravell is not taken by the before-the-event argument. “A number of before-the-event insurance policies are quite restrictive,” he says.
Nevertheless, greater use of before-the-event insurance might be the solution to a particularly thorny problem. Conditional fees with their accompanying uplifts and insurance premiums have an important role to play, but only in difficult or risky cases, when neither insurance companies nor defendant lawyers have any objection to large uplifts and high premiums.
So if the question behind the complexities of Callery v Gray is ‘who should pay for the costs of litigation?’, then the simple answer is the client.
For most cases cheap and available before-the-event legal insurance is the answer.
Lawyers, insurers – and the Court of Appeal for that matter – should focus on setting aside CFAs for the more complex cases.
