Pitfalls for the unwary

In recent years it has become more difficult for legal expenses insurers to avoid making payments under policies but as high-profile actions involving schemes such as TAG have shown, LEI insurers are now looking to recoup losses paid out by bringing claims against solicitors. As more and more claimants in personal injury and commercial disputes are now looking to LEI as a way of funding litigation, it is worth looking again at the potential pitfalls for solicitors.

Last year, AXA, as alleged assignee of NIG, issued proceedings against 89 solicitors' firms, alleging that they acted in breach of duty when they conducted thousands of claims funded by LEI insurance. AXA claimed that NIG, as LEI insurer, was owed two duties of care by the defendant's solicitors as follows:

• The duty to risk assess the potential claims at the outset, in line with a prescribed policy laid down by NIG.
• The duty to conduct the case with reasonable care and skill and to continue to assess cases to ensure that they continued to have reasonable prospects of success.

It is alleged that the panel solicitors concerned breached those duties by taking on claims worth less than £1,000 with a less than a 51 per cent chance of success, and that they failed to notify insurers on other cases when prospects deteriorated below 51 per cent.

Statute barred

The claim (AXA Insurance Ltd v Akther & Darby Solicitors and others [2009] EWHC 635 (Comm)) came before the Commercial Court in March this year when Flaux J made a preliminary finding on limitation and commented that the insurer was 'not getting what it was the panel solicitors' duty to ensure that it got'. He held that the damage from the breach of duty to vet the claims occurred when the risk was initially assessed and insurance policies were issued, a decision which means that many of the claims commenced by AXA will now be statute barred.

Although this was only a first instance decision, it will be welcomed by professional indemnity insurers and personal injury practitioners involved in TAG type schemes, as they have been under particular scrutiny in recent years with detailed questions being incorporated into proposal forms. Although the decision means that many potential claims against personal injury practitioners who were vetting claims at the start of the Millennium should now be statute barred, there remains a danger in relation to the other alleged duty where practitioners have pursued litigation on behalf of clients knowing that the chances of success have dropped below 51 per cent.

Lessons to be learned

It is important in every case where a solicitor acts in a claim funded by LEI insurance to consider the nature of the relationship between the solicitor, the LEI insurer and in some cases claims management companies, as the duties owed will vary from case to case. However, there are some broad lessons to be learned from recent decisions, and, although the list below is by no means exhaustive, solicitors acting for clients whose claims are funded by LEI would be wise to pay particular attention to the following:

• Consider whether there is a need to inform your client if you have an interest in recommending an LEI insurance policy, for example, if you are on a claims management company's panel (each case will turn on its facts but see 'Update: costs', Solicitors Journal 153/10, 17 March 2009 and scheme cases such as Garrett v Halton BC [2007] 1 All ER 147, the more pro-solicitor Tankard v John Frederick Plastics [2008] EWCA Civ 1375, and this year's decisions Findley v MIB [2009] EWHC 90130 (Costs) and Ibbertson v MFI & Ors [2009] EWHC 90132 (Costs)).
• Take caution when investigating the claim at the outset particularly, as with many commercial disputes, when you are taking your clients' word on the prospects of success and have not yet seen all relevant documentation.
• Be careful when assessing part 36 offers which are within the brackets of what might reasonably be awarded at trial.
• Keep the prospects of success under constant review, taking into account experts' reports, disclosure and witness statements; obtaining updated opinions from counsel if necessary.
• Check the terms, conditions and exclusions of the LEI policy carefully to see if you are being asked to procure that the claim has a 'better than evens' chance of success. In most cases, there is now a condition precedent to this effect in the terms and conditions. You should also check to see what your notification obligations are as many insurers like to be kept informed of all material developments.
• Keep a close eye on the limit of indemnity under the policy and ensure that this is kept under continual review particularly as defence costs can climb dramatically once proceedings are issued.

Balancing act

By taking the above measures, litigation practitioners should be able to balance the competing demands of providing a good service to clients with reducing the risk of a claim by either the client or, in some circumstances, the LEI insurers. As claims funded by LEI are likely to increase with the economic downturn and the abolition of Legal Aid, these are risk management issues that no practice can afford to take lightly.

Copyright & permissions