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No win no fee reforms divide insurers

The Government plans to make claimants who win their court case pay their own lawyer's "success fee" and the premium for any after-the-event (ATE) insurance out of the compensation they are awarded.31 Mar 2011

The decision comes despite opposition from around 70% of those who responded to the Ministry of Justice's November 2010 consultation paper.

Other measures to be implemented by the Government include a 10% increase in general damages; a 25% cap on the success fee that can be deducted from damages in personal injury cases, and a system of 'qualified one way costs shifting' (QOCS). This will mean that in almost all cases personal injury claimants who lose their action will not be liable to pay the defendant's legal costs.

Claimant representatives and after-the-event (ATE) insurers, however, maintain that abolishing the recoverability of success fees and ATE premiums will restrict access to justice and put claimants' damages awards at risk.

Defendant representatives and general liability insurers, on the other hand, are in favour of the changes, pointing to the disproportionate costs caused by the current regime where, according to one insurer, claimant's costs in personal injury claims in 2010 represented, on average, 142% of the compensation received.

In a response paper published this week the MoJ said its reforms were necessary to rebalance the civil litigation system in England and Wales:

"Some weaker cases which are currently brought will be deterred," the paper said (80-page / 1.05 MB PDF). "Taken as a whole, the package of measures will restore a much needed sense of proportion and fairness to the current regime – not by denying access to justice, but by restoring fair balance to the system. Defendants should benefit from more proportionate total legal expenses, with legal costs for the NHS falling by around a third."

In a separate consultation paper also published on 29th March, the MoJ set out further proposals for actions brought in county courts, including raising the small claims limit so that more cases are dealt with quickly on an informal basis, and extending the scope of the streamlined process for dealing with low value road traffic accident personal injury claims introduced in April 2010.

Recoverability

The reforms implement key recommendations made by Lord Justice Jackson in his January 2010 report on civil litigation funding. Central to those recommendations was the issue of recoverability of success fees and ATE premiums.

At present many civil actions (and the vast majority of personal injury claims) are brought on a 'no win no fee' basis under a conditional fee agreement (CFA) with a lawyer, backed up by ATE insurance which covers the claimant against the risk of having to pay the defendant's legal costs if the claimant loses the case.

If the claimant wins, the defendant (or its insurers) must, in addition to the claimant's solicitor's basic costs, pay the lawyer's success fee and an enhanced ATE premium. But if the claimant loses the case, no ATE premium or success fee is payable and the ATE insurance will cover the claimant's liability to pay the defendant's legal costs. As a result, cases can be brought at no financial risk to the claimant.

Under the Government reforms, however, recoverability will be abolished and claimants will have to pay the success fee and premium themselves. There will be one limited exception. In clinical negligence cases, ATE premium relating to the cost of expert reports will remain recoverable.

In addition, in personal injury cases, the amount that can be taken out of a claimant's damages to pay the success fee will be capped at 25%. This means damages covering care and loss will be ring-fenced from any success fee deduction, protecting future care costs.

As part of the package, the Government will also introduce a 10% increase in 'non-pecuniary' general damages for all claimants, such as damages awarded for pain, suffering and loss of amenity.

Responses

Seventy one per cent of those who responded to the November 2010 consultation paper disagreed with the proposal to abolish recoverability of success fees, with views clearly divided along claimant and defendant lines. Similarly, 69% of respondents thought ATE premium should remain recoverable from the defendant.

There was more consensus in favour of the 10% increase in general damages, although in most cases this was because respondents thought damages awards are too low.

Even though it will increase their compensation bill, however, most general liability insurers who responded supported the increase as part of an interlocking package of reform.

Qualified one way costs shifting

QOCS will remove the risk that, if he loses the case, a claimant will be liable to pay the defendant's costs - except in limited circumstances.  Those are: 'exceptional behaviour' (where the claimant has acted fraudulently, frivolously or unreasonably) and where the claimant is very wealthy.

The proposal has been criticised because claimants will not know for certain from the outset whether or not they will qualify for QOCS.

At the moment, the Government is only proposing to introduce QOCS for personal injury cases including clinical negligence claims. The normal costs principle that the loser pays will continue to apply in other cases.

One consequence - not unwelcome to the MoJ - is that QOCS will drastically reduce the need for claimants to take out ATE insurance, which covers them against the risk of having to pay the defendant's costs. The paper adds: "When they do, they will pay the premium themselves, which will encourage the market to set more reasonable premiums".

Other measures

The MoJ plans to tighten up the 'part 36' rules on settlement offers. An additional sanction (equivalent to 10% of the value of the claim) will be payable by a defendant who does not accept a claimant's reasonable offer that is not beaten at trial.

There will also be a new general rule that only reasonable and proportionate costs may be recovered from the losing party, taking into account the value, complexity and importance of the claim.

In addition, the Government proposes to lift the current restriction on contingency fees (damages-based agreements or DBAs) in the courts of England and Wales.

DBAs are another type of 'no win no fee' arrangement where the lawyer's fee is related to the amount of damages awarded rather than the work done by the lawyer. If a claimant wins the case, the costs recovered in the normal way from the other side would be set off against the 'DBA fee' due to the claimant's lawyer. In personal injury cases, the amount lawyers could deduct from the damages would be capped at 25%.

Next steps

Changes to the CFA regime will require the Government to pass primary legislation while some of the other changes can be effected by amendments to the court rules.

The paper does not include a timetable for this, but the Government says it wants to see the measures implemented together, as a package.

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