Written evidence from the Forum of Insurance
Lawyers (AJ 38)
FOIL (The Forum of Insurance
Lawyers) exists to provide a forum for communication and the exchange
of information between lawyers acting predominantly or exclusively
for insurance clients (except legal expenses insurers) within
firms of solicitors, as barristers, or as in-house lawyers for
insurers or self-insurers. FOIL is an active lobbying organisation
on matters concerning insurance litigation.
FOIL has over 3,000 members.
It is the only organisation which represents solicitors who act
for defendants in civil proceedings.
EXECUTIVE SUMMARY
The Government's proposals should be extended to
include provisions to ban referral fees, to abolish the indemnity
principle and to introduce pre-action costs management.
It is particularly important that the financial impact
on the market of a ban on referral fees be considered in combination
with the other reforms.
FOIL believes that the implementation of the Government
reforms will achieve the following:
A reduction in legal costs overall, and greater proportionality.
Greater access to justice for defendants.
Reduced costs on the taxpayer and society as a whole.
Continued access to justice for claimants.
A fairer litigation regime, particularly for personal
injury litigation.
EVIDENCE
In this submission FOIL will focus upon two of the
questions raised by the Justice Committee:
Do the proposals to implement the Jackson report
recommendations on civil court funding and costs adequately reflect
the contents of that report?
What are the implications of the Government's proposals?
THE JACKSON
RECOMMENDATIONS
1. In his Final Report Lord Justice Jackson made
it clear that he viewed his recommendations as "a coherent
package of interlocking reforms". FOIL endorses that view
of the proposals: whilst there are aspects of the reforms which
are disadvantageous to FOIL members and their clients, FOIL believes
that overall the package represents a careful balance of the interests
of all parties involved in litigation and that, as such, it is
inappropriate to pick and chose between the provisions.
2. The current consultation on the Jackson recommendations
covers a more limited range of issues which, if implemented, would
significantly reform the civil litigation landscape, particularly
with regard to personal injury claims. FOIL believes the proposed
package represents a very significant step forward in creating
a litigation environment in which money damages disputes can be
resolved at much lower cost, and in which access to justice is
achieved for both claimant and defendant.
3. In addition, FOIL members are following with
interest the other proposed developments including the extension
of the Portal and fixed recoverable costs on the fast track, costs
and case management through the current court pilots, and the
proposed pilot of a predictable damages tool.
4. There is a further recommendation which FOIL
believes should be included within the package of priority provisions—the
banning of referral fees. The current government consultation
considering the banning of cash payments to potential claimants
under the Conduct of Authorised Persons Rules 2007 is welcome
but deals solely with this isolated issue. Referral fees create
other, more widespread, problems which need to be addressed. Whilst
the government has indicated that it will await the outcome of
the Legal Services Board's consultation before reaching a view,
FOIL believes that the issue is so closely linked with the issues
in the Jackson consultation, and has such a significant effect
upon the legal services market, that it should be included within
the current proposed reforms, to enable the financial impact of
the abolition of referral fees to be considered alongside the
impact of the other changes.
5. As Lord Justice Jackson indicated in a lecture
in November last year, the issue of referral fees is inextricably
linked with recoverable success fees and overall cost levels.
A significant percentage of the costs currently paid by defendants
to claimants is absorbed in the payment of large referral fees
(sometimes as much as 50%): if they were no longer paid, substantial
sums would be freed up which would enable success fees to be reduced,
for the benefit of claimants, the taxpayer and society as a whole.
6. FOIL agrees with this analysis of the market:
the combined effect of the reforms including the banning of referral
fees would drive down success fees to lower levels than those
currently listed in CPR Part 45. As it stated in its consultation
response to the LSB, FOIL is concerned that this impact on the
market has not been addressed in the economic impact reports commissioned
by the Legal Services Board which largely confine themselves to
reviewing the market as it stands at present.
7. Obviously, the combined effect of reform to
CFAs and referral fees is not considered either in the impact
assessments which accompany the Jackson consultation, as referral
fees are not part of the current review. In its own impact assessment
the Ministry of Justice concludes that:
"In line with the overall objective of reducing
the cost of civil litigation, claimants using CFAs are likely
to be worse off in aggregate as a result of the package".
FOIL believes that this view is too simplistic as
it fails to take into account the changes to the market which
the reforms would drive. The market for legal services, particularly
for personal injury, is mature and sophisticated and, as Lord
Justice Jackson emphasises, it will respond to change.
8. To enable the full picture to be appreciated
it is vital that inter-related provisions be considered together.
Even without reform on referral fees the research of Professor
Fenn, for Lord Justice Jackson, indicates that 61% of claimants
will be better off and 39% of claimants will be worse off. FOIL
agrees with Lord Justice Jackson's view that including a ban on
referral fees within the package would result in far more than
61% of claimants benefiting from reform and would significantly
reduce the number of those claimants who would be worse off. There
is the potential here for a significant win:win solution, reduced
costs for defendants without reducing claimants' damages.
9. In addition, FOIL believes that it would be
convenient to include, within the proposed legislation, provisions
to allow for the abolition of the indemnity principle and to allow
for pre-action costs management, both of which are recommended
in the Jackson Report.
THE IMPLICATIONS
OF THE
GOVERNMENT'S
PROPOSALS
A reduction in cost
10. FOIL believes that the Government proposals
will result in an overall reduction in litigation costs, to a
more proportionate level. This change would reverse the escalation
in costs being experienced currently. To quote just one set of
figures, to give an indication of how disproportionate costs have
become: in 1999, in motor cases, for every pound paid in damages
a further 38p was paid in costs. By 2009 that figure had risen
to 87p. In EL/PL cases the ratio increased from 37p to 93p for
every pound, an increase of over 250% in ten years.
11. One of the major flaws in the current system,
which creates cost inflation, is the lack of control by the claimant.
The claimant has no responsibility for his costs, win or lose,
and therefore has no interest in the level of costs charged. As
one of the claimant participants in the research conduced by Charles
River Associates for the LSB commented, claimants don't "give
a monkey's" about the level of costs as the insurance company
will pay them. The Government's proposals will subdue this damaging
indifference: by requiring claimants to pay a proportion of the
costs themselves claimants will have an incentive to shop around
and make cost-effective decisions on pursing their claims in a
proportionate manner.
12. It should be remembered that the first impact
of the reforms will not be upon claimants but upon their lawyers.
All suppliers of services have an indirect interest in ensuring
that their clients or customers are in a financial position to
pay their fees but claimant lawyers are in a different position:
they have a direct interest in the level of costs they recover
from their opponent without reference to their client. Under the
reforms claimant lawyers will have their own incentives to become
more competitive and keep costs proportionate.
ACCESS TO
JUSTICE FOR
DEFENDANTS
13. FOIL believes that the Government's proposals
will enhance access to justice for defendants. The recent judgment
of the European Court of Human Rights in MGN v UK has highlighted
that justice is not just a matter for claimants, but also requires
that a defendant is able to put forward and pursue a legitimate
defence in an environment which treats all parties fairly.
14. It is frequently argued that when considering
access to justice issues the focus should be upon claimants and
that little sympathy should be extended to those who find themselves
paying costs in personal injury claims, firstly, because costs
are paid by insurers and injured claimants should have priority
over shareholders in insurance companies: and secondly, because
the "polluter pays"—only those who are at fault
are required to pay legal costs. Both of these arguments are flawed.
15. As Lord Justice Jackson succinctly notes
in his report the effect of the changes of the funding regime
in 2000 was that the burden of financing a huge swathe of litigation
was transferred from taxpayers (through the legal aid scheme)
to opposing litigants. Ironically, in many cases those opposing
litigants are funded by taxpayers—through the NHS, local
councils, public authorities etc. With regard to insurance companies
their funds obviously come from premiums, which many individuals
and businesses are struggling to pay in the current economic climate.
Under the current rules millions of other individuals are required
to pay the costs of those involved in personal injury litigation.
Once legal costs become disproportionate a painless route to litigation
for one section of the community is only obtained through the
imposition of an excessive burden on society as a whole.
16. The neat phrase "polluter pays",
adopted from the environmental context, is designed to give the
impression that high legal costs, and a system which focuses entirely
on the claimant, is justified as those paying costs are in some
way "guilty" and therefore less deserving of appropriate
treatment. This argument is false. When a business or an individual
faces a claim and is held responsible for causing an injury or
death, that defendant will have no direct responsibility for paying
costs as these will be paid by the insurer. Higher costs, therefore,
do not act as a just punishment, or deterrent to a wrongdoer:
it is not the "polluter" who pays but millions of ordinary,
"innocent" taxpayers and purchasers of insurance.
17. Under the current personal injury litigation
system defendants pay all of the costs in all cases,
whether the claimants win or lose. A defendant which loses a case,
in which it may have raised a reasonable, but ultimately unsuccessful,
defence, will be required to pay not only the costs of the claimant
who has been successful but, in many cases, a further sum equalling
the costs, as a success fee to the claimant lawyer with the aim
that it be used to cover the costs of unsuccessful cases in the
future. Lord Justice Jackson is particularly critical of this
characteristic of the system, that defendants pay all of the costs
of both winners and losers: the reforms would reduce this unjustifiable
burden.
CONTINUED ACCESS
TO JUSTICE
FOR CLAIMANTS
18. It is useful to consider exactly what the
phrase "access to justice" means. Throughout the development
of civil litigation and funding procedure the right to bring proceedings
has never been interpreted as a right to bring proceedings without
cost. It is notable that although Art 6 enshrines the right to
a fair trial in both civil and criminal proceedings, and includes
the provision of free legal advice within the definition of a
fair criminal process, there is no right to free funding for civil
actions within the declaration. By way of example, until the year
2000 potential claimants seeking damages for personal injury were
able to apply for legal aid to bring a claim, subject to means
testing. In the event that the claim was successful the Statutory
Charge was applied to enable the Legal Aid Board to recoup the
costs which had been incurred from the successful claimant's damages.
19. The rules on civil costs within this jurisdiction
operate currently on the basis of costs shifting, requiring the
losing party to pay the costs of the winning party. However, the
rules have never required the losing party to pay a full indemnity:
an award of costs on the standard basis requires the losing party
to pay a proportion of the winning party's costs, with the remainder
being made up by the winner. The rationale of the principle is
to protect the losing party from the direct effects of the costs
agreement that the winner has entered into with his or her legal
representative.
20. The concept of full compensation with the
defendant paying all costs, without any risk to the claimant,
is a very recent phenomenon. The "inviolable principle"
of full recovery which, it is frequently claimed, is at the heart
of the personal injury civil justice process, only became possible
following the changes to the CFA rules in 2000. Before 2000 it
was accepted, without controversy, that claimants would lose a
proportion of their damages in costs—a situation which still
exists in Scotland and Northern Ireland.
21. The claimant lobby has argued that if the
system is changed only claimants with strong cases will be able
to find representation. Lord Justice Jackson considered this argument
is detail in preparing his final report. In his recent response
to the Government proposals he indicates that in his view the
new arrangements will not deny access to justice to claimants
who have strong claims. He views with scepticism the claim that,
following the reforms, fewer "risky" cases will be taken
on, because he believes "that (with certain honourable
exceptions) claimants with risky cases are already unable to find
CFA lawyers". He quotes various statistics which confirm
that "cherry-picking" of strong cases is routine, and
that a very large percentage of claims unlikely to be successful
are removed from the system at an early stage. The vast majority
of claims pursued under a CFA are successful. The current CFA
regime increases costs enormously but does nothing to increase
access to justice. The additional costs are merely a windfall
for claimant lawyers.
22. It is claimed that without the success fees
from winning cases to support tougher cases they would not be
pursued. It is easy for claimant lawyers to state that under the
reforms cases with prospects below a certain percentage will not
be taken on but there is a danger here of maths being used as
a smoke-screen. Given the opportunity to put data behind its claims,
even under the current system the claimant lobby was not able
to put evidence before Lord Justice Jackson to show that current
levels of success fee are required to fund "lost cases".
If, under the reforms, success fees became irrecoverable, client
pressure and competition would reduce their level and the level
of hourly rates, firms would become more efficient, and the higher
damages from a rise in general damages and from the amended Part
36 rules would provide claimants with more money from which to
pay success fees.
23. If costs are reduced work practices will
change. A proportionate amount will be spent on achieving access
to justice for claimants, in place of a disproportionate amount.
In effect this is the process that has already shaped defendant
firms, as a commercially demanding insurance industry has driven
down fees and required firms, in a very competitive market, to
develop or die. In the claimant field the reforms recommended
by Lord Justice Jackson will reshape the market to some degree;
in a more competitive market claimant firms are likely to become
leaner and fitter. Undermining this competitive environment by
allowing disproportionate costs ultimately rewards inefficiency
and waste.
A FAIRER SYSTEM
24. As with so many aspects of the law, on the
issue of funding the devil is in the detail. Rules introduced
with the laudable motive of increasing access to justice and ensuring
that individuals could continue to fund litigation after the removal
of legal aid have resulted in a litigation landscape so disproportionate,
expensive and out of control that in the recent Court of Appeal
case of Pankhurst v White [2010] EWCA Civ 1445, a case
involving catastrophic injury and very large damages, the claimant's
funding arrangements were described as "grotesque".
25. The claimant lobby has been vociferous in
its defence of the current rules, arguing that any change would
impact detrimentally upon vulnerable claimants. In truth, over
the past fifteen years the claimant lobby has consistently made
the same claim in response to many proposed changes. When CFAs
were first proposed, to be available in tandem with legal aid,
ethical and consumer protection issues were raised by claimant
lawyers as an argument against their introduction. In 1996, with
Lord Woolf reviewing the issue of access to justice, concern was
being expressed at the possibility that fixed costs might replace
CFAs. In 1998, with the Government proposing to introduce CFAs
with recoverable success fees in place of legal aid, the claimant
lobby argued that under such proposals access to justice would
be harmed. It is now argued that those same "damaging"
CFAs are essential to maintaining access to justice.
26. If the government reforms are introduced
the forces of the market will take effect, greater competitiveness
will be introduced and, overall, costs will be reduced without
affecting claimants, who would be empowered with the ability to
control their own costs. "Access to justice" is an emotive
phrase and liable to be abused but if a just result is to be achieved
for all parties it is vital that the debate is widened, beyond
the limited interests of claimants, to examine all of the facts.
January 2011
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