Unexpected outcomes: The impact of the Jackson reforms on PI claims and costs

John de Waal QC explores the impact of the Jackson reforms on professional indemnity insurance and claims

Social science, apparently, groups unintended consequences into three types:'¨

1. a positive, unexpected benefit;

2. a negative, unexpected detriment; and

3. a perverse effect contrary to what was originally intended.

The intended consequences of the Jackson reforms, or the January 2010 Review of Civil Litigation Costs Final Report, are well known. This article attempts to consider what unintended consequences there might be for professional indemnity insurance (PII) and professional indemnity claims in the UK.

Woolf reforms

Readers who were in practice 14 years ago will recall the Woolf reforms that led to the birth of the Civil Procedure Rules (CPR). Invited in 1994 by the then Lord Chancellor, Lord Mackay, to review the rules for civil procedure, the Master of the Rolls, Lord Woolf, persuaded him that a wider review was needed. Woolf's aims were to:

1. improve access to justice and reduce litigation costs;

2. reduce the complexity of the rules and modernise terminology; and

3. remove unnecessary distinctions of practice and procedure. '¨

All of this was to be underpinned by an investment in information technology.

The investment in IT did not happen. The second and third objectives have been achieved; whether the first has is debatable. It is certainly true that litigation itself has reduced in that far fewer claim forms (or writs, as they are called by the mainstream media) are issued and few of those come to trial. But, it seems likely that there has been a type (3) unintended consequence - the perverse effect being that pre-action (or protocol) costs have increased disproportionately.

In their paper 'More Civil Justice? The impact of the Woolf reforms on pre-action behaviour' (commissioned by the Law Society and the Civil Justice Council in 2002), Goriely, Moorhead and Abrams concluded that the cost savings achieved through an increase in the number of settlements of lower-value claims were negated by front-loading of costs by defendants. This is hardly surprising since, if defendants were to be required to provide a detailed response to a letter of claim rather than just reply 'denied' to a letter before action or a statement of claim, then more work and cost would be involved. Of course, from a litigator's point of view, that might be unintended consequence number (1) as well - a positive, unexpected benefit.

A particularly perverse consequence of the introduction of conditional fee agreements (CFAs) - which were intended to achieve access to justice - was, as acknowledged by the urgent need for reform which led to Jackson, a bloated claims culture.

Supported by a CFA, success fee and recoverable after-the-event (ATE) premium, a claimant with a case that most lawyers would recognise would not probably succeed at trial could obtain some kind of settlement from insurers, who simply concluded that the combination of defence costs and the residual risk of an uncertain outcome, particularly if the case was issued in the county court, meant the case was not worth defending to trial. Once all the CFAs that were signed up to 31 March 2013 have worked their way through the system, that perversity will at least have gone.

Jackson reforms

In his report, Jackson LJ acknowledged that "in some areas of civil litigation, costs are disproportionate and impede access to justice. I therefore propose a coherent package of interlocking reforms, designed to control costs and promote access to justice".

The essentials of the Jackson reforms are:

• success fees under CFAs and ATE premiums will no longer be recoverable from the losing party;

• contingency fee/damage-based agreements (DBAs) will be allowed;

• a ten per cent increase in general damages in injury cases;

• qualified one-way costs shifting (QOCS) in injury claims;

• introduction of proportionality tests and costs '¨management; and

• other changes to Part 36, rule 3.9 (relief from sanctions) and rules relating to disclosure, witness statements and expert evidence.

The most dramatic effect of Jackson is of course on personal injury/clinical negligence claims. As was well reported at the time, in February 2010 Dominic Clayden, director of technical claims at Aviva, said that "Aviva has computer modelled Jackson's final report and found that civil litigation costs under the proposed system would increase, rather than fall as intended".

It would be interesting to see the data that was inputted into Clayden's computer: certainly claimant lawyers will be worse off, perhaps the ten per cent increase in general damages balances that out, which would certainly lead to an increase in reserves for insurers.

Current PII market

The reforms come at a time when the market is already volatile. Claims arising out of the 2007/8 crash are still working their way through the system. In volume, if not always in value, 60 per cent of solicitors' negligence claims arise out of conveyancing. Many small solicitors' firms pay up to five per cent of fee income for PII - much more if the firm is principally involved in conveyancing. Cover for valuations for lending for surveyors is as much as 15 per cent of fee income.

At the same time, the assigned risks pool (ARP) is being phased out. From October 2013, the Solicitors Regulation Authority (SRA) will operate a system whereby insurers offer a three-month extended policy period to firms that cannot obtain PII for the following year. Firms unable to get insurance on the open market face the prospect of being closed.

The market cost of ARP to underwriters was about 20 per cent of their total gross written premium. People close to the market suggest this development will lead to increased competition as new providers enter the market and possibly lower rates. Perhaps the rate will finally decline, as was anticipated when the Solicitors Indemnity Fund (SIF) was closed.

The good news

I believe the long-term effect of Jackson on PI claims, and hence PII, will be a good one in that the amount paid out in claims will come down, thus reducing rates. This is for two reasons.

First, as anecdotal evidence already suggests, the volume of claims arising out of non-contentious business will simply reduce. It will no longer make financial sense for claimant lawyers to underwrite poor claims either on the basis that they know that what they lose on the swings they will win on the roundabouts, or on the basis that they can hold the defendant to ransom and extract a settlement during the protocol period or at mediation. This is because the costs playing field is now level.

Secondly, and following on from that, more claims will fight to trial and, because more will fight, more claimants will lose. It is a truism, but in professional negligence claims, while it is relatively easy to establish breach of duty, proof of loss is often more difficult, and claimant lawyers still tend to forget that tricky bit in the middle - causation.

There may therefore be more litigation, in the sense of '¨cases taken to trial, but in the context of a lower volume of '¨cases overall. Mostly importantly, reserves will be reduced '¨and that will affect rates and renewals. This is all good news.

The less good news

However, it seems that the introduction of costs management, the new proportionality test and other changes to the rules will produce a flood of claims arising out of contentious business.

If you put to one side claims arising out of failures to comply with time limits and limitation, there have been relatively few claims resulting from failed or unsuccessful litigation in this jurisdiction. That is one reason why barristers have had a relatively easy time.

In his final report, Jackson pointed out that litigation is in many instances a project which both parties are pursuing for commercial ends; thus, he says, as with any commercial '¨project, a budget should be set at the beginning.

However, the problem with this analogy is that, while those involved in a building project, for example, can allocate a prime cost sum to what might be called the 'known unknowns', most litigation is, by definition, full of 'unknown unknowns'. The intention is good but the analogy is poor. The process itself is expensive - junior members of my chambers are already reporting that case management conferences listed for 30 minutes are taking 90 minutes, while district judges, who '¨have had one day's training, are struggling to do their jobs '¨and manage their costs budgets.

The complexity and uncertainty of the new rules about '¨cost management (rules 3.12 to 3.18) and the new 'proportionality rules' principle (rules 44.3 & 44.4) will mean that any dissatisfied but well-advised litigant will want to '¨review any concluded case to see if his solicitor could have managed the process more cost effectively.

Once a costs management order has been made, the court, when assessing costs on the standard basis, will have regard to the receiving party's last approved or agreed budget for each phase in the proceedings and will not normally depart from it. As importantly, for the first time ever, the question of whether costs are 'proportionate' will carry greater weight on assessment than the question of whether they are otherwise reasonable or not.

Thus, it seems there is endless scope for a paying party to argue that his solicitor has mismanaged the costs budgeting process so that he ends up paying more, or a receiving party '¨so that he ends up receiving less.

Changes to other parts of the CPR, which have perhaps been overshadowed by changes to costs and thus not been given the attention they deserve, will also have a great impact on the litigation process. Rule 31.5 requires the parties to agree on appropriate disclosure; rule 35.2 allows the court to give directions limiting issues in witness statements; rule 34.4 applies cost budgeting to expert evidence; and the changes to rule 3.9, relief from sanctions, makes it much stricter.

Compliance with all of these rules requires litigators to be much more proactive and to spend much more time (and thus cost) thinking about procedural issues with their clients and anticipating the issues the opposing party might raise.

Litigation is by definition a process involving conflict and arising out of conflict; Jackson has tried too hard to produce order out of something that is essentially dysfunctional. The rational response of a dissatisfied party will be to look back at the conclusion of any case and consider what disclosure has been missed, which issues were neglected, which sanctions had been imposed, and what costs were overpaid '¨or unrecovered and seek recompense.

An early decision on rule 3.9 is that made by Edwards-Stuart J in Venulum Property Investments v Space Architecture [2013] EWHC 1242, an architect's negligence case where the claimant who had missed, at the end of the limitation period, the deadline for filing its particulars of claim, was refused a retrospective extension of time. That decision would undoubtedly have gone the other way before 1 April and one assumes that it will lead to a 'loss of opportunity' claim against the lawyers who thought they had 28 days to file the particulars, rather than 14 days.

Negligence claims culture

Jackson will produce a perverse unintended effect of a new culture of negligence claims arising out of allegedly mismanaged litigation, i.e. a category (3) perverse effect. Unless you are a professional negligence lawyer, of course, in which case it might be a category (1) effect - a positive, unexpected benefit.

John de Waal QC is a barrister at Hardwicke chambers '¨(www.hardwicke.co.uk) who specialises in property and property-related professional indemnity claims