The big event

For the past ten years of the niche business of after-the-event legal expenses insurance, only one thing has remained constant: the fact that the goalposts are always moving. The question everyone connected to the ATE insurance market is asking now is how far and how soon are the goalposts going to move again?

Last year brought more changes and potential changes causing more uncertainty for insurers and solicitors, but the biggest changes may still be around the corner. I am of course referring to the recommendations contained within Lord Justice Jackson's review of civil litigation costs which, if implemented, would have a profound effect on litigation insurance and funding.

Sir Rupert recommends ending the recoverability of ATE premiums, and CFA success fees, from the losing party across all areas of litigation, to be replaced by 'qualified one-way costs shifting' in certain areas. Some believe these changes could be fatal to the ATE insurance market.

So, will the 'noughties' prove to be just an interesting blip in the history of litigation funding or will its highly volatile past help it weather all the storms to come so that it remains a key part of the litigation landscape for the decade ahead? Also, whatever happens, what can solicitors expect while all this gets sorted out?

To answer these questions we must first accept that there is more than one ATE market in reality. The markets for personal injury, lower-value civil and commercial litigation and high-value commercial litigation are all distinct. It is strongly argued by some insurers that they are interconnected. For instance, I was at quite a lively debate of ATE insurers who disagreed over the extent to which the income streams of personal injury cross-subsidise the other areas of litigation. I think everyone agrees that one affects the other, but the degree of interdependence seems to be a matter for each insurer individually. What is clear is that we cannot assume that developments always affect each part of the market in precisely the same way. The products are shaped by different market forces.

At the frontline: personal injury

The ATE market for personal injury has been at the frontline of the costs war since it began. It is therefore the most exposed to legislative change and indeed seems to be the prime focus of Jackson LJ's report.

For fast-track RTA cases, it was all change again following the MoJ fixed costs reforms that came into effect on 31 April 2010. The reforms introduced a new fixed costs structure that, by its very nature, changed the dynamic for ATE insurers, who in turn have had to adjust their premiums to fit with the new process. On average, premiums for cases that fall within the new streamlined procedure have reduced, while the premiums on cases that fall outside have increased as the latter are viewed as representing a greater risk to insurers.

If you regularly use ATE insurance for RTA cases through a delegated authority scheme, now might be a good time to undertake a review of the ATE market, to ensure that your facility remains competitive following the MoJ reforms. It his highly likely that insurance facilities that do not attempt to reflect the recent changes will become susceptible to attack at detailed assessment.

Separately to the MoJ reforms, Sir Rupert Jackson has recommended a system of one-way costs shifting, which would mean that an unsuccessful claimant falling within the scope of the regime would not be exposed to an adverse costs order, unless they fail to beat a defendant's part 36 offer. If introduced, this system would obviate the need for any adverse costs insurance and there is real debate over whether any ATE market could be sustained by insuring own disbursements in isolation. Whether it is a killer blow or not, this would clearly be seriously damaging for the ATE personal injury market.

In catastrophic injury and group litigation cases, CFAs and bespoke ATE insurance are commonplace because alternative forms of funding are usually either unavailable or insufficient. A CFA and ATE combination approach proved to be highly successful in Corby Group Litigation v Corby District Council [2009] EWHC 1944 (TCC), in which TheJudge brokered a multi-million pound insurance policy in support of Collins' sizeable CFA commitment.

One-off ATE insurance could, in theory, work alongside third-party funding where a seriously injured client or claimant group has no money to fund the substantial disbursements liability. Some would abhor the idea of a client's compensation being divided between the victim and a profit-making professional funder, while others might see it as a necessary tool of last resort. Whatever your view, rule 9.01(4) of the Solicitors' Code of Conduct currently prohibits solicitors from acting in association with a business that solicits or receives contingency fees, which, I understand, applies to third-party funders. CFAs and ATE insurance are therefore still the principle mechanism for transferring risk from personal injury litigants and group claimants with high-value claims.

The lower-value civil and commercial litigation sector

One of the most significant changes for those dealing with ATE insurance in the lower-value civil and commercial arena appeared to take a lot of people by surprise.

It has long been the case that, once proceedings are issued, the opponent must be notified of the existence of an ATE insurance policy in order for the insured to be entitled to seek to recover the ATE premium inter partes. Since the decision in Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134, it was accepted by all parties that it would be sensible to impose an obligation on the insured litigant to notify the opponent of any 'trigger points' at which the premium would increase (i.e. the premium staging, steps or discounts).

The rules on notification of ATE policies changed on 1 October 2009, with the introduction of a new practice direction supplementing parts 43-48 of the CPR and this led to a new N251 form. Certain details about the policy must now be disclosed within seven days of policy inception, even if the policy is taken out prior to the commencement of proceedings and this included, among other things, the staging of the premium.

While the new rule on notification applies to all areas of litigation, the details about the insurance that the insured litigants are now obliged to disclose have the greatest tactical effect on low-value commercial litigation. Both sides will now know, for instance, exactly how much cover the insured has.

For claimant defamation lawyers and insurers, there was a rollercoaster ride at the beginning of the year with the then justice minister, Jack Straw, threatening to cap CFA success fees at ten per cent. These changes were not implemented but claimant costs in defamation proceedings are highly vulnerable to the impressive media lobbying machine and ATE insurers have recoiled away from this area over the last year.

It is the recommendation of Sir Rupert to end recoverability of ATE premiums that is set to most adversely affect ATE insurers in the low-value commercial litigation arena. This is because his recommendation to remove recoverability of ATE premiums would apply without any corresponding protection for the claimant via one-way costs shifting, or indeed without any corresponding inflation of levels of damages. There is real concern that, if the recommendation is adopted, SMEs will not be able to bring claims unless they have significant claim value that will allow them to afford premiums and success fees from their compensation. For many, losing recoverability will make their claims uneconomic to pursue and their access to justice will be curtailed.

High-value commercial litigation

The high-value commercial litigation sector has generally been the more docile part of the ATE insurance market, but, over the last three years, the commercial market has had the feel of a giant stirring from its slumber thanks to the racket being caused by its louder, more excitable relation '“ third party funding '“ and the publicity following Lord Justice Jackson's review of civil litigation costs.

The emergence of the 'nascent' third-party funding market, as Lord Justice Jackson described it, has so far proved to be a graft upon which the high-value commercial ATE insurance has grown. In the last year, the market has supported several times more multi-million pound risks than in previous years. The availability of ATE and third-party funding will no doubt have contributed to the ten per cent increase in 'big ticket' litigation being reported in the last quarter of 2009 (as reported by Geraldine Elliot of Reynolds Porter Chamberlain on 2 June 2010).

Whether this symbiotic relationship continues or whether one will outgrow the other is hard to tell at this stage, not least because Lord Justice Jackson's report has recommended removing the 'Arkin cap', exposing funders to unlimited third-party costs orders at the court's discretion.

Awareness of ATE insurance (particularly the availability of deferred and contingent premiums) has been, up to now, quite limited in the world of high-value commercial dispute resolution, but this is changing with the emergence of branded packages, like Addleshaw Goddard's 'Control' and Mishcon de Reya's 'Protect'.

Even the Jackson recommendations are having a positive effect for ATE insurers who have seen an upsurge in high-value commercial applications as a result of the increased air time the market is receiving in the wake of the report.

Even without recoverability, finance directors and in-house counsel will still find ATE insurance attractive as the deferred and contingent premiums would only be paid from the award, if and when the damages are received. This is proved by the fact that ATE insurance is sold successfully in non-recoverable forums internationally in high-value commercial litigation.

What can solicitors do?

Many of the answers to the uncertainties above are now in the hands of a coalition government which may not see these issues as a priority for a long time. However, that doesn't mean that the various recommendations yet to be implemented will not have an effect. Costs masters and judges may now feel empowered to make judgements about ATE insurance and pre-empt the recommendations, when before they felt they should not interfere with what has been a necessary but fragile market, having to scratch out an existence upon constantly shifting sands.

The safest approach for any solicitor to protect their client '“ and themselves '“ is to search the market for the best deal. Another, very recent, authority (Kris Motor Spares Ltd v Fox Williams LLP [2010] EWHC 1008 (QB)) demonstrates again that the burden of proof remains on the insured to prove the premium is reasonable.