Posted by Matthew Pascall, senior underwriting manager at Legal Futures Associate Temple Legal Protection
After-the-event (ATE) legal expenses insurers are increasingly asked to insure large volumes of relatively low value cases, often on a delegated authority basis whereby the solicitor assesses the merits of their own cases and issues policies of insurance on the insurer’s behalf.
These cases bring their own unique challenges. This article reviews the approach underwriters generally adopt when asked to provide cover.
There is nothing commercially sensitive about the fundamental principle of insurance – if the cost of claims exceeds premium income, it doesn’t work. If they balance out, there is no return on the capital at risk for the insurer. So there needs to be a reasonable margin.
But what about the client? If they can’t afford the premium, they simply won’t take out the insurance.
Some ATE insurance premiums are deferred and contingent, regardless of the amount of cover provided. As a result, the insured has to pay the premium only if and when they are successful. Other insurers might defer payment of a portion of the premium or ask for a single payment ‘up-front’.
Whichever model is adopted, the premium still has to be paid and (it is assumed) paid out of the damages the client will recover or expects to recover. It follows that the premium has to be affordable in the context of the value of the claim.
For most cases a reasonable rule of thumb is that the premium will usually be affordable where the likely damages are at least twice the likely cost of the litigation to the insured.
There are many good claims brought for damages that are likely to be significantly less than twice the cost of bringing the claim. These cases present a real challenge for insurers. So, how does an insurer such as Temple meet the challenge?
There are five factors to consider when looking to insure low-value cases: the volume of cases, the number and value of adverse costs orders that are likely to occur within any given batch of cases, the likely damages claimants are going to recover, disbursements, and reliable partners.
How many claims are likely to need insurance? A sensible and realistic estimate of the number of insurable cases is required. In some situations, this will be an informed guess and in others the estimate can reflect actual experience.
Likely adverse costs orders
No one likes talking about losing but the insurer needs to know. Actual experience and data always helps, but it is necessary – and insurers have to work with sensible and realistic estimates.
The value of the claims
This is currently one of the most difficult issues to be addressed. Our good friends ‘sensible and realistic’ are more important than ever when estimating just how much clients are going to recover.
The starting point is that no one gets 100% of their actual loss; the vast majority of cases settle on the basis that reasonable clients will want to settle for a good offer rather than risk a trial. If an insurer gets this wrong, they end up with a premium that simply isn’t affordable or is too low to make the exercise commercially viable.
Disbursements can only be insured and funded if they are necessary, reasonable in amount and proportionate in the context of the claim as a whole. An example of an uninsurable disbursement might be a solicitor presenting a £12,000 psychiatrist’s fee for a report in a case worth £6,000.
There are a number of excellent companies that are identifying cases, carrying out calculations of loss and then referring them as ‘issue ready’ to solicitors. Not unreasonably, they need to charge for their work.
Insurers are not always confident that such charges are recoverable as disbursements because the reports may not be complaint with CPR part 35, although there are sensible arguments that can be advanced to the effect that, if the company had not done the work, the solicitor would have done and would have charged more.
Nonetheless, insurers cannot insure or fund what might be regarded as a referral fee and this can be problematic.
Good partnerships are essential for ATE insurers. If an insurer is going to cover a high volume of relatively low-value cases, they want to know from the outset they are working with people who ‘know their stuff’. That begins with providing the information discussed above.
Large volumes of cases cannot be referred individually to underwriters. One solution is to give firms undertaking these cases the fullest possible delegation, empowering them to issue insurance on the insurer’s behalf and manage the cases without having to obtain consent to issue proceedings; also, to make, reject or accept offers.
And finally… getting the price right
By in-putting reliable data, some actuarial calculations can usually give clients a premium that works for them. The process can take a little time but once everything is in place, ATE insurance can give clients the security they need to pursue these cases.
By way of example, low-value cases suitable for ATE insurance may embrace financial mis-selling (including motor finance, mortgages and pensions) as well as actions against the police and other public authorities.