Legal Aid, Sentencing and Punishment of Offenders Bill

Memorandum submitted by Firstassist Legal Expenses Insurance Ltd (FLEIL) (LA 86)

The need for ATE insurance in Human Rights actions against Multinational Corporations

Firstassist Legal Expenses Insurance Ltd ("FLEIL") has been active in the Legal Expenses market since this class of insurance was first permitted in the 1970s. Its insurance capacity is provided by Munich Re, one of the world’s largest insurance groups.

FLEIL was the first company to offer deferred and conditional premiums. Unusually in the ATE market it specialises in larger and often complex risks. For this reason it has particularly broad experience of cases outside the "run of the mill" personal injury market.

What does ATE do?

After-the-Event insurance is designed to protect the policyholder (usually the claimant) against their potential liability to pay legal costs to the opponent if a legal action is unsuccessful. The policy also normally covers the claimant’s own disbursements and can include cover in respect of the claimant’s own solicitor’s costs.

The origins of ATE and recoverability

ATE was developed in the 1990s in response to plans to reduce the availability of Legal Aid as well as in recognition of the fact that "Middle England" was unable to access the Courts for fear of the costs implications of losing an action. The principle that the ATE premium should be recoverable under the "loser pays" rule was established under the Access to Justice Act 1999. The development of ATE and the introduction of recoverability were both driven by Government policy.

ATE shares many of the characteristics of CFAs, in that they are both designed to provide a service for individuals unable to fund a case from their own resources. ATE premiums are usually only payable on successful cases and the premium is only due on success, in like manner to the lawyer’s fees under a CFA.

An individual contemplating litigation needs to be able to meet the costs of their own lawyer as well as the possibility of having to meet the costs of the opponent if the case fails. The CFA deals with the former and ATE the latter. Without both elements of support, most individuals are unable to bring claims. They are either unable to meet the costs of their own lawyer or would face ruin if the case failed.

The cost of ATE

The cost of ATE depends mainly on the amount of cover required and the merits of the case. In the high-profile Trafigura case a premium of £9.2m has been found (in the SCCO) to be a reasonable and recoverable premium for a case where the insurer faced a possible claim for £15m.

In Human Rights cases, defendants are likely to incur significant costs, which means that a high level of ATE cover is required. This in turn necessitates a premium commensurate with the risk. Such premiums are almost always going to exceed the means of the claimant(s) and may in some cases exceed the damages awarded.

Its use in Human Rights cases

The use of ATE and the importance of recoverability is particularly driven by:

- The financial resources of the claimant;

- The financial resources of the opponent;

- The likely damages;

- The merits of the case.

Human Rights cases typically involve claimants of limited means and opponents of far greater means and expertise. Without ATE, the opponent would be able to "burn off" the claimant(s) by incurring substantial costs or by applying for a security for costs order. The former is frequently employed in order to put pressure on the claimant, its solicitor and the ATE insurer. The latter is a routine tactic employed by defendants to prevent the development of an otherwise strong case.

The use of CFAs and ATE is often the only alternative to Legal Aid. The availability of Legal Aid has been in decline for more than a decade and the reforms proposed in the LASPO bill will accelerate the decline.

It is ironic that having set up the CFA & ATE regime expressly in order to permit the reduction in Legal Aid provision, the Government is now intent on removing both Legal Aid and its replacement (CFAs & ATE) from the reach of most of the population. In cases involving multinational corporations, CFAs and ATE are now the sole funding option capable of holding such organisations to account.

Our experience in such cases

We have extensive experience of insuring a wide range of cases, including around 40 Group Actions. Most of these have a "David & Goliath" alignment of claimant and defendant. Amongst these actions have been cases for:

- Environmental impairment (generally, but not only, pollution) causing personal injury or damage to property

- Health & Safety failings leading to wide-spread personal injury

- Product liability (e.g. defective pharmaceutical products)

- Competition law abuse (price-fixing and other market abuse)

A number of these involve claimants from outside the UK but where the defendant is based in the UK.

None of these cases could be funded by Legal Aid and the CFA/ATE approach is the only means by which the actions can currently be brought.

The impact of the Jackson reforms on these cases

Ending recoverability will have two principal effects. First, it will mean that the damages in cases which can proceed will be eroded by the cost of the ATE premium and by the success fee under a CFA. Second, where the likely damages are low relative to the likely costs, a case is unlikely to be able to proceed, simply because the law firm and/or the ATE insurer would not be able to recover from the damages the costs they need to provide their services. This obstacle increases as the merits of a case approach 50%. So there will be fewer cases brought and those that are brought would see the damages reduced, usually substantially, by the cost of the CFA success fee and the ATE premium.

The Jackson report highlights the risk to defendants of cases funded by CFAs and ATE, and refers to a need to redress equality of arms. In our experience, the defendant has the key advantages of financial superiority and greater access to expertise in most litigation of this type. Removing recoverability will inevitably exacerbate the existing inequality and, in effect, totally preclude such cases from reaching the light of day.

The MoJ’s impact assessment (MoJ 080 of 27th April 2011), on which the LASPO bill is based, states: "the proposals aim to reduce costs while ensuring that parties who have a valid case are able to bring or defend a claim". In our opinion, this statement is manifestly inaccurate for most litigation where one party is financially stronger; the proposals favour the financially stronger party.

How the inequality of financial means adversely affects claimants who challenge stronger opponents and escalates costs.

The following are examples of conduct which we have experienced in cases for which this company has provided ATE insurance.

Security for costs

ATE is invariably arranged in order to protect the claimant from the risk of having to meet the opponent’s costs. The knowledge that a case has ATE backing should reassure the opponent that their costs will be met if the case can be successfully defended.

Despite this, it is not uncommon for a financially-strong opponent to make, or threaten to make, an application for security for costs, having been advised that ATE is in place.

The application will seek to argue that ATE insurance does not provide adequate security for the defendant’s costs should the claim fail. The application will typically argue:

(i) that the insurer may decline to pay the claim at all (voidance or repudiation), or

(ii) that the insurance may be inadequate to meet to full extent of the claimants’ liability.

Voidance is extremely rare in ATE, despite misleading representations to the contrary. My company has only resorted to this extreme measure twice (in over 3,000 concluded cases). On each case the Judge found that our insured had manufactured evidence which was central to the claim.

Voidance on grounds of material misrepresentation or non-disclosure is virtually inconceivable in group actions.

With regard to adequacy of cover, we have always provided sufficient cover to meet the opponent’s costs.

Costs caps

A claimant may successfully obtain a cost capping Order, so as to restrict the claimant’s liability for costs to an affordable amount (usually the maximum available insurance). However, there is nothing to prevent the defendant from applying to increase the costs cap during the life of the case. This has the effect of applying pressure on the ATE insurer to increase its exposure to the case, or risk the case failing.

Where there is a costs cap, the defendant is likely to incur costs far in excess of the cap, secure in the knowledge that the claimant is unable to match that spending in bringing the claim.

In both cases the defendant can apply pressure on the claimant and increase the risk that the claim will fail, not because the claim lacks merit, but purely because of the superior financial resource available to the defendant.

Concentration of effort

A large well-resourced legal team can make life very difficult for a smaller team with finite resources. Examples include:

· use of a "heavier" team of barristers in Court, making extensive disclosure requests (which will divert the claimant’s lawyers from their main focus),

· late amendments to the defence (which will again dilute the smaller legal team’s focus as a case approaches trial).

Procedural points

In such cases the defendant is likely to employ a large law firm. That firm may well be mandated to employ all available processes to frustrate a claim. This will delay a claim or increase costs, to the detriment of the claimant.

Counterclaims, in some areas of law, are similarly used as a means to weaken the position of a claimant.

In our experience, despite such claims being settled, the response of powerful defendants to the costs recovery process is one of delay and obstruction.

These examples serve to illustrate the need for the financial power of a stronger party to be balanced by the protection afforded by ATE. Without recoverability, it is inevitable that the power of the stronger party will be used in an oppressive way to defeat legitimate cases which will have no other means of reaching the court.

September 2011

Prepared 14th September 2011