Changes to litigation funding and insurance from April 2013


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The previous cost rules, which greatly favour claimants, have changed for proceedings issued after April 2013.

Lawyers are allowed to charge a success fee of up to 100% more than their usual hourly rates in the event of success, whilst at the same time agreeing to charge less than normal rates if success is not achieved. In the personal injury market that usually involves complete "no win, no fee" agreements, whereas in commercial matters firms such as Fladgate are willing to act on a "partial conditional fee agreement" involving a success fee of less than 100% in return for a partial discount if success it not achieved. Under England’s cost shifting rules, the success fee was included in the costs which the unsuccessful defendant can be ordered to pay. That cost shifting of the success fee ended in April.

Also, "after the event" costs insurance has grown rapidly in recent years. That allows a party, usually a claimant, to insure the risk of not recovering its own costs from the other side and being liable to pay the other side’s costs, because it loses the case.

Premiums are substantial, but usually deferred until the end of the matter. Furthermore, in return for a higher premium, the premium is usually only payable in the event that the party succeeds in the case. The premium counted as part of that party’s costs and so, if the usual order for costs was made, it was the losing party who had to pay the premium. So the claimant got the benefit of very valuable insurance cover, whilst the only party that might have had to pay the premium was the defendant. From April, the insured has had to pay the premium from the proceeds, and has not been able to include it in the costs claimed from the other side.

The political justification for the previous regime was that it increased "access to justice", particularly as the government had almost extinguished the Legal Aid Scheme which gave state funding to impecunious litigants. However, not only were such people able to benefit, but also those in higher income brackets, who would still have found claims far too expensive to bring, also managed to get their "access to justice". As a result, the insurance industry, particularly in personal injury claims, had to meet a substantial increase in claims and costs, and the increased level of claims for medical negligence against the National Health Service particularly alarmed the government.

From April, the most that a successful party is able to recover is the equivalent of the normal charges calculated on an hourly rate. Where that will have the biggest impact in commercial matters is on the cases where the claims are not particularly large, and yet the costs are potentially high. Cases that appear feasible on the basis that the lawyers’ success fees and the insurance premium will be paid by the defendants, if anyone, will become unfeasible if those sums have to be paid out of the proceeds of the litigation. Also, the potential costs’ burden on the defendants will now be less, making them more inclined to fight.

On the positive side, for the first time English lawyers are able to enter into "damages based agreements" which will allow the lawyers to take up to 50% of the total recovery. What effect that will have on the London litigation market remains to be seen.

Paul Howcroft, Partner, Fladgate LLP (phowcroft@fladgate.com)

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