Insurance claims on a knife-edge

The new rules over premium recoverability in conditional fee agreements have created a real headache for lawyers, writes Frances McCarthy

All those who are involved with conditional fee agreements (CFAs) have endured a torrid time over the past few months.As from April the claimant lawyer's success fee in a successful conditional fee case can be recovered from the defendant.

The insurance industry has made it plain that large up-lifts on straightforward cases will not be tolerated and will be challenged.

The Senior Costs Judge PT Hurst, in his guidance to judges (see pages 39-41), has not stated how the rules should be interpreted.

But provided claimant lawyers are reasonable in their approach, do proper risk assessments, and can justify the success fee, it is likely that this will not present too many problems.

The issue that has proved to be more contentious is the recoverability of the insurance premium taken out by the claimant to cover the risk of paying the defendant's costs in a case which is lost.

This again came into effect in April.

The government has confirmed to the Association of Personal Injury Lawyers that all such premiums should be recovered whenever taken out and whenever the case settled.

Problems have arisen because insurers have taken the view that the rules should be interpreted to mean that such premiums should only be recovered if the case has been litigated - because the liability for costs does not arise until that time.

Although expressed as a point of principle, it appears to have come about primarily because some after-the-event insurers have dramatically increased the level of their premiums since the introduction of the regime in a way not anticipated by the insurers.The insurance premium is defined in the rules as 'the sum paid or payable for insurance against costs liability taken out after the event that is the subject matter of the claim'.

There is nothing in this definition to indicate that the insurance must be taken out after the litigation starts, and provided that the taking out of the insurance was reasonable and the level of premium justifiable, the premium should be recovered in full.

But the fact that insurers have indicated that they are going to argue this point means that until it is resolved by the courts, claimants' solicitors are left in an impossible position.

Should they advise their conditional fee clients at the outset that their insurance premiums may not be recoverable? Should they refrain from taking out a policy until the issuing of proceedings? The problem is that many providers insist that the policy is taken out at the time of entering into a CFA, and certainly before a letter of claim is written.

Therefore, the claimant solicitor would have to opt not to sign up with one of those providers - which are generally those with the most claims experience - and trust in being able to find a policy at the point of issue from one of the remaining insurers.

This can be extremely difficult and once a policy is refused it becomes even more difficult to get a quote.

Premiums on policies taken out at this point are invariably much higher than premiums taken out at earlier in the case.

Where the risk is spread over a large number of policies, the premium will be lower and the individual claimant will be faced with a large premium.It will then be open to the judge to decide that it was unreasonable to wait before taking out a premium when a cheaper premium could have been taken out an earlier stage.

Where the premium is in the thousands, this is not the sort of burden that a claimant or his solicitor would be able to tolerate.Much can be achieved by continued dialogue between paying insurers and after-the-event insurers.

Discussions have been taking place to ensure that suitable test cases are litigated as quickly as possible, but they are unlikely to reach the Court of Appeal before the summer of 2001.

In the interim, claimant solicitors must act to protect claimants and this will mean ensuring that insurance is in place, even if this means a battle with the paying insurers.Frances McCarthy is president of the Association of Personal Injury Lawyers