What next for ATE?

After all the hype, lobbying, debate and publicity, 1 April looms closer. From then ATE premiums will be irrecoverable for most forms of litigation but the impact of these changes is dictated mainly by the area of law in question.

Arguably commercial and non-injury litigation may be hardest hit. Eradication of premium recoverability applies across the board so a client incepting a policy before 1 April can recover their premium, whereas those incepting policies after 1 April cannot. They will have to pay the premium themselves, either upfront or via their damages recovery (with a deferred premium option). This will render some cases uneconomic as the claim value may simply be too low to allow for the cost of an ATE premium or success fee.

The commercial ATE market will continue to exist post-April. While the rules have changed over recoverability, the risk of an adverse cost order are ever present. Contrary to views over the expense of ATE insurance, it’s still the most economical way of guarding against the risk of paying adverse costs, save for those clients who have the benefit of a commercial before the event insurance policy (which often carry very limited protections). Own disbursements and own solicitors’ fees cover will also remain available.

The question is how will pricing of ATE be altered? It is likely that a diverse range of pricing mechanisms will be promoted by the ATE market. Price-driven competition will be key as underwriters strive to win business, with clients seeking to secure the most competitive offer to maximise their claim recovery. Many pre-April litigants benefiting from ATE were to some extent detached from the cost, as it was recoverable. They often had the backstop luxury of knowing that even where the ?full premium was not fully recovered, ?the insurer would effectively write-off the balance. No such luxury will exist ?post-April.

As the largest broker of ATE insurance and litigation funding, we have found market opinions mixed. Some underwriters believe more flexible structuring around a deferred and contingent premium model will be the main market. Others hope the ATE premium will become more akin to traditional insurance with upfront premiums making the real impact.

Range of reactions

Some lawyers may baulk at upfront premiums but there could well be sound advantages to paying for an upfront premium versus a contingent offer, particularly where the upfront element is priced aggressively lower than the lowest deferred offer. Portfolio ATE insurance remains a possibility but is complicated, not least because many insurers will be testing new rating models and keeping a close eye on competitor movements. It’s probably not prudent in such a fluid environment to align oneself in the short-term to any given product or pricing model.

For large value commercial disputes, there is little change. Such cases rarely depend on recoverability. Rather, recoverability has been a barrier to product development to some degree. Removing the shackles of how premiums are priced gives insurers greater flexibility to create innovative solutions, helping them balance the risk of heavyweight cases where the swings on their underwriting accounts can, and have been, the most volatile.

Insolvency litigants (specifically persons acting as trustees in bankruptcy, administrators, liquidators or companies in liquidation or administration) are being treated as an exception to the abolition of recoverability of ATE premiums until April 2015 (see the Saving Provision of LASPO Order dated 18 January 2013).

ATE insurance for adverse costs has ?been integral to giving insolvency practitioners the ability to pursue claims ?on behalf of creditors and, for a little ?while longer at least, insolvency cases have a reprieve.

Ironically, claimants bringing claims for libel or defamation enjoy another exemption to the abolition of recoverability, despite the disproportionate amount ?of weight the supporters of reform gave ?to the impact of CFAs & ATE on freedom ?of speech.

In fact, publication and privacy proceedings have been a very small part of the ATE market’s output to date. Now with this exception, it may be more relevant – increasing the irony even further.

Personal injury claimants will also lose the ability to recover ATE premiums for own disbursements which could lead to funding problems. This will mainly affect law firms in designing structures that allow them to bankroll no win, no fee arrangements for a client, rather than affecting the clients themselves.
A smaller, more specialist form of ATE market for own disbursements will emerge to help law firms deliver these structures. The question is whether products will exist to help all PI law firms large and small.

PI claimants are not anticipated to need adverse costs cover. Implementation of qualified one-way costs-shifting (QOCS) means claimants will not be exposed to adverse costs if they lose. However, despite QOCS, an ATE market will need to exist on the fringes to provide adverse cost cover for claimants who fail to beat a defendant’s Part 36 offer (one of the qualifications giving rise to the catchy name).

Victims of medical negligence are in the same boat as PI claimants with one notable exception; they will be able to recover an ATE premium for the cost of expert reports commissioned to investigate liability and causation. This was a much-needed concession, but victims of severe brain or spinal injuries caused by non-medical negligence may wonder why the exception is not available to them.

Clinical negligence has been an important area for many ATE insurers over the last decade. It is anticipated that insurers will segment their products to allow for the element of recoverability that survives.