Why ATE?
After the event insurance has had a bad press, but Brian Dunk says it is a perfectly good way of funding private litigation, provided a few simple principles are followed
From a relatively simple concept, after the event (ATE) insurance has become quite complex and, in the view of some, equally corrupt in a surprisingly short space of time. This is a problem for the profession because ATE should play a vital part in encouraging access to justice in a conditional fee agreement (CFA) environment. ATE is a key element in government plans for privatised litigation, being designed to help secure external funding and adverse costs protection for unsuccessful clients.
Solicitors really need the ATE insurance market to work more efficiently than it does. This is because CFAs need ATE to align the interests of solicitors and claimants. It is not just an issue of protecting adverse costs. Solicitors who do not offer ATE to their clients as one of the funding options ('speccing') expose the client to an undisclosed solvency risk (ie, the firm's own) and potentially compromise their own integrity on offers of settlement. This, in turn, can lead to allegations of negligence for under-settlement or folding early. And, for those who say there is no litigation risk on simple claims, there is one important question: 'Where is the unconditional admission of liability?' There is also an argument that 'speccing' (acting as their own insurer) means that solicitors now commit a criminal offence under FSA rules.
Despite this, ATE is often ignored, mainly because it is considered expensive '“ the logical consequence of solicitors selectively insuring only their riskier cases. Exploitation by companies such as Claims Direct and The Accident Group has made defendants suspicious of all ATE policies. Which means that we have claimant solicitors avoiding ATE because it is contentious, thus further distorting the market!
To add to the integrity issues, we now also have the concerning development of 'ghost policies', whereby introducers (including solicitors) exchange a promise 'not to claim' by way of a letter of indemnity or 'side-letter' in return for a very high commission - sometimes 80 per cent. Advocates of ghosting say the client has a valid policy and that the practice encourages good risk management. But these arrangements lack integrity and transparency '“ no one is telling the client about the exchange of risk or who is going to pay their claim, no financial security is taken for the transferred risk and the insurer is disguising its real liability of a full cut through from the regulator.
Another contentious development is 'grossing up'. There is nothing objectionable with commission in itself, but certain insurers are failing to control the retail premiums for their policies. They state a net premium to a solicitor and retrospectively allow them to add commission to whatever premium level they can get away with ('or recover locally'). This lacks integrity and very likely defrauds HM Customs on insurance premium tax.
While advocates will again state the client has a full disclosure, the interesting question is this '“ when does a high commission become a 'secret profit'? When linked to other issues such as tied loan agreements, we enter the world of secret profits and misrepresented costs of funding. As secret profits or distorted APRs do render consumer credit agreements unenforceable then the pack of cards will collapse, bringing solicitors, insurers and banks down on top of them. It's the next high profile Defence Group.
So can solicitors use ATE insurance with integrity, discriminate between good and bad products and participate in the rewards of good risk management? Yes, yes and yes again '“ provided they seek specialist advice.
The security of the underwriter must be a primary consideration given the history of ATE so far. Many of the newer insurers are not UK-regulated and this is because solvency margins are softer in the EU where broadly an ATE insurer can underwrite four times the volume, the same capitalisation would allow in the UK. So, as the Financial Services Compensation Scheme only applies in the UK, offshore and EU entities may not be as strong and provide less policyholder protection.
Beware that many trade directories list ATE schemes where the status of the provider is unclear. Many schemes are arranged by cover-holders '“ intermediaries who underwrite and issue policies for insurers under binding authorities with exclusive business commitments. This is itself an interest they should disclose as they are effectively 'tied' to one insurer and because a third of such schemes have 'disappeared' from various tables in the last three years, careful diligence is required.
Then we should consider the policy cover carefully because policies differ considerably. Unlike the Road Traffic and Employers Liability Acts, where a minimum cover is prescribed, there is no prescribed standard cover. For example, some policies cover counsels' fees, others do not. In my view, policies with additional benefits such as premium recovery shortfall, loan guarantee protection and death/
accident benefits are open to formal challenge.
Whether premiums can be considered proportionate is a subject in itself and cannot be simply judged on whether the premium is paid in one stage or three. The answer depends upon the client's needs and the firm's litigation mix. The golden rules are to put the client first:
(i) Give full written disclosure of insurance and claims manager interests including any referral fees and commissions or profit-sharing arrangements.
(ii) Accept no preconditions from introducers on insurance, medical or funding supplier.
(iii) Objectively and continuously review the ATE insurance market for the most appropriate policies for your clients. Solicitors must record formally why they have chosen each scheme, arranging the most appropriate for their own caseload, typically a delegated authority for simple fast-track with all claims that are complicated, high-value or with high trial potential individually market-tested.
Recognising that the necessary insurance and market knowledge is a new expertise, it makes business sense for solicitors to retain a specialist and independent FSA intermediary to provide objective analysis and advice.