Number crunchers can still make a profit post-Jackson

Except in a few discrete areas, recoverable After The Event (ATE) premiums and Conditional Fee Agreement (CFA) success are no more. In their absence claimants face a quandary; how do they and their lawyers determine if a case is viable to proceed? Unfortunately such a discussion inevitably involves a great deal of mathematics, something at which lawyers will have to become much more adept when advising clients on the economic viability of a case.

To demonstrate some of the issues, let's take an example - not an easy one. For this purpose we assume the claimant will still seek to utilise available CFAs/ATE insurance.

If the case proceeded to trial an ATE premium could well be 35,000 (assuming a policy limit of 100,000 for adverse costs and own disbursements). The lawyer's success fee on a CFA could be 60,000 (i.e. a 100 per cent uplift), plus a 30,000 success fee for counsel.

Under the old recoverable regime, a client could reasonably expect to recover their ATE premium and success fees from the opponent, and thus their net return would be 100,000 less any unrecoverable own fees.

Under the new regime, assuming the same ATE and CFA package is in place, the claimant would need to deduct a 35,000 ATE premium and 90,000 success fee for the solicitor and counsel. The client's net damages recovery is zero, in fact they would still have a liability for 5,000.

It's a stark reality of the new cost regime that previously economically viable cases will no longer be so unless there are changes to how the funding structure is applied. The difficulty is that despite a change in the cost regime, the risk has not changed. Both the insurer and lawyer face the risk of losing as they did before.

Calculating viability

Is there then a way to fund the cases? Leaving CFAs to one side, there might be depending on the availability of own side's fees insurance. Assuming the lawyer and counsel are prepared to be engaged on a deferred fee (i.e. they don't charge the client as the case goes along) but equally expect to be paid their fees if the case is lost then the claimant could buy ATE insurance with a contingent premium as before to protect some of their lawyer's deferred fees. This would not allow for the lawyer to make a success fee but could make the case economically viable if deferral is possible.

Taking the example above, with own side's fees cover instead of a CFA, the insurance premium would now be 35 per cent x 190,000 = 66,500 (or 70,490 including IPT). The claimant's net recovery would now be 39,150.

These examples assume the case succeeds at trial. In reality many cases will settle earlier so the picture may be better. For instance, the insurance premium in the last example might well be discounted, by say 50 per cent, if the case settles pre-trial. Under those circumstances the client's net recovery would increase to 74,395.

Of course this assumes a 100 per cent damages recovery. Clearly some discount would have to be applied for litigation risk.

The picture could be improved still further if the claimant has the resources and is prepared to contribute some of the cost of the premium upfront. It might be that the ATE insurer would offer a part-paid/part-deferred premium option. On that basis, assume the premium were now 22 per cent of the insured limit, the total would be 41,800. If 50 per cent of the premium is paid upfront, the client's upfront contribution would be 20,900, with another 20,900 to pay if the case succeeds. If the insurer offers a similar discount of 50 per cent for early settlement, the client's total liability for the premium would be 20,900. Applying this to the client's recovery would mean a net damages recovery of 89,100, again before applying any discount in the damages for settlement and any unrecoverable element of own fees.

The suggestions here are based on some very big assumptions.

1. Will lawyers and/or counsel be prepared to defer (but ultimately payable) fees on the basis they are insured, without a corresponding uplift?

2. Will the insurer agree to insure most of the costs in the litigation, including sizeable amount of own fees cover? The examples were on the basis of full cover which is very unlikely in the absence of an upfront premium, given insurers need some risk alignment with the policyholder.

One thing is clear; claimants will be far more incentivised to settle cases earlier to take advantage of any discounts in ATE premiums. However, it will also be a point not lost on the defendant when making settlement offers, i.e. they too will likely try to second guess the claimant's increasing cost liability to their own side's ATE insurers or lawyers (where a CFA exists), and undoubtedly seek to use it to their advantage when making offers.

Calculating the margins in litigation is something that must take place at the outset and on the basis of working through various factors including, the likely settlement trigger points and the client's ability/willingness to contribute some cost towards a premium in a bid to bring the overall premium rate down.

However, the most crucial aspect will be the the accuracy of the cost budget and the court's attitude to costs management.