Recovery position

The publication of the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Bill 2010 has confirmed the government's intention to implement many of the changes recommended by Lord Justice Jackson. The bill was presented to parliament on 21 June 2011 The committee stage of the House of Commons took place on 6 September 2011, with the Public Bill Committee expected to report to the House by 13 October 2011.

But there still remains some doubt as to what will be in and what will be out with news of Jack Straw securing parliamentary time on 13 September to debate the issue of referral fees and whether they should be banned once more.

LASPO proposes (among other things) to:

• prohibit the recoverability of ATE premiums; and
• introduce damages-based agreements (contingency fees) for contentious business.

If all goes to plan then clause 43 of LASPO will introduce a new provision, together with section 58C, into the Courts and Legal Services Act (CLSA) 1990, which will place a statutory bar on ATE recoverability premiums, with the limited exception of expert report fees in clinical negligence cases.

Clause 41 of LASPO will allow damages-based agreements for contentious business by amending section 58AA of the CLSA 1990.

The bill makes no reference to qualified one-way costs shifting (QOCS) and it is presumed that this will be introduced by rules of court. More recently a Civil Justice Council working party has been created to look at the implementation of the Jackson reforms, which will no doubt seek to influence further such contemplated change.

Growing fears

So what is the consensus on LASPO? As you might expect there are concerns. The Law Society is concerned that the government proposals will not comply with the interlocking package of Jackson proposals. They consider that QOCS might create uncertainty for claimants as they will not know what, if any, adverse costs liability they may face.

This theme not surprisingly is also argued by Access to Justice Action Group, with uncertainty for claimants who will have a natural risk aversion to costs risks which means good cases will not be brought. They quote a consumer survey they conducted which stated that 77 per cent of people would be put off bringing a claim, however small the risk.

In terms of damages-based agreements, it is argued that claimants will lose a large part of their compensation (up to a quarter of the damages will go to the lawyers, not the claimant), and that a very high proportion of claimants will be worse off and so will be disincentivised to use the damages-based agreement model.

They concluded that there would be a loss of choice as there will inevitably be contraction in the market with fewer solicitors able to make personal injury work viable and with fewer (if any) ATE insurers.

ATE even has support from members of the public; Sarah Thornton commented in The Guardian recently on a court victory against The Daily Telegraph: 'I eventually found lawyers willing to work on a conditional fee agreement (CFA). I also signed an after-the-event insurance contract so I would be covered if I lost the case and had to pay the Telegraph's legal costs. After four months, the Telegraph took the review off the web, then, after ten months, they offered a partial apology, but still refused to settle... After two and a half years and repeated costly court applications by the Telegraph, we ended up at a trial.

''No win, no fee' agreements combined with insurance policies are the only means by which people who aren't rich and famous can defend themselves from abuses of power. Unfortunately, draft legislation is threatening to undermine the viability of CFAs.

'Buried in the LASPO bill, which has just been approved by a parliamentary committee and is going on to be read by the House of Lords, is a passage saying that the ATE insurance premium can no longer be recovered from the losing party. In other words, the claimant (i.e. me) will have to pay it. The insurance premium on my case well exceeded my damages of £65,000, so, despite winning, I would be remortgaging my house this week if the legislation were already in place. Should it become law, it would prevent ordinary people from holding powerful institutions to account.'

Bad start?

So is it a 'bad start' and are these critics right about what is going to happen on the ground? I believe such critics may be taking an unduly harsh view of the LASPO bill, in arguing it will fail to deliver the promised cost savings and will damage access to justice. More importantly, they also underestimate the market's ability to innovate and create business models that can embrace the legislation, provide a service to the consumer and still make a profit.

The response will be different depending upon what part of the market we are concerned with. It may be the case that smaller personal injury firms that deployed an ATE strategy will withdraw from this area of work because they will not be able to recover the risk premium from their clients' damages if only ten per cent is added to general damages.

However, for larger firms, I suspect they will be able to fund the risk, collect the work and improve their risk reviews to sieve out the losing cases earlier, and so manage to recover sufficient margin on fixed or variable fees.

Competition and the market perspective on what the client will or will not accept in this area will, in all probability, drive the financial model. Those with larger claims, trade unions for example, will perhaps look at a third party funding model in the future with the funder providing the cover, passing the cost onto the solicitor who in turn apportions some of the cost to the client and some to his margin.

At the before-the-event (BTE) end of the PI market the challenge is, as usual, consumer awareness. This probably is the more interesting area to keep an eye on in terms of reacting to what the consumer will require. Until now BTE has been tacked onto another insurance policy sale (such as motor and household), but with alternative business structures just around the corner BTE insurers can perhaps for the first time build 'product' into their BTE policy by running it as part of the service offering through their own or affinity-branded law firm.

It is perhaps ironic or even serendipitous that the legislative timeline for the licensing of ABSs seems to align perfectly with the need to innovate BTE in the aftermath of the LAPSO bill. Is it a sign?