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At a recent litigation funding conference I listened with particular interest when I heard one of the speakers say that the ATE insurance market had squandered its opportunity to produce a competitive environment in order to ensure its long term survival. The thrust of the argument was that Sir Rupert Jackson would not have felt so compelled to recommend abolition of ATE premium recoverability if the market been more competitive.
This is a theme that I have seen recur in a number of places recently and I have asked myself the question on each occasion, is it a fair allegation to make and if so, at what point did we, as a market, purportedly miss the ‘opportunity’?
Presumably the industry’s clock started ticking following the judgement in Callery v Gray [2002] UKHL 28 which, despite seeing a number of issues affecting ATE insurance and recoverability tested to the satisfaction of the nascent ATE market, also recognised that competition was a problem. Lord Hoffman said, “ATE insurers do not compete for claimants, still less do they compete on premiums charged…” I would suggest that it was from this point that we were on notice that the market would be kept under close scrutiny.
Lord Hoffman cited the fact that neither the policyholder nor their legal advisers had any interest in the cost of the premium as his reason for believing that market forces did not operate sufficiently and therefore that regulation of the ATE market was required. This is an accusation that I’ve heard many times since.
Lord Hoffman viewed the courts as the only guardian of market regulation. He said “There is only one restraining force on the premium charged and that is how much the costs judge will allow on an assessment against the liability insurer.” The courts had unwittingly inherited the horrible responsibility of being the de facto regulator of ATE premium pricing and it was never assumed at any stage that market could (or would) charge reasonable premiums without a regulator of some description.

Still in the Woods
At this point in the development of the market, despite the difficulties the courts had in determining what was reasonable and what was not, underwriters had one, quite keen, eye on what might happen at Detailed Assessment. They were reluctant to see their premiums reduced and thereby expose their policyholder to a premium shortfall, which the insured would remain liable to pay out of the damages recovered. Similarly, legal advisors were equally careful to avoid premiums that appeared unusually high, in order to minimise the client’s risk of being left with an irrecoverable shortfall. Accordingly, for the most part, pricing strategies were relatively restrained. Certainly, as an underwriter at the time, it did not feel like we had a licence to charge whatever we liked. Quite the reverse in fact – I felt that the market was price sensitive because of concerns regarding potential premium shortfalls.

However, there was one form of pricing strategy that emerged and began to undermine market competitiveness and which even now prevents certain parts of the ATE market from operating under normal market forces – a development that instantly dissolved any fear both legal representatives and the claimant may have held about the risk of a shortfall (as well as the underwriters on the ground who set the individual pricing). It was of course the introduction of the premium shortfall waiver. This arrangement has many names (e.g. Premium Indemnity Guarantee (‘PIG’) or premium shortfall cover, amongst others) but whatever you call it, the effect is the same. The policyholder doesn’t care what the insurer is charging because their liability for the premium is limited to the amount that they (or in reality the insurer) can justify is recoverable inter-partes. If there was a problem with market forces before, this development made the problem far worse.

Fortunately, the one-off commercial litigation market predominantly operates in a more traditional manner, as settlements tend to be reached on a global basis which means that the premium is simply another liability that has to come out of a shared single pot. Well-advised commercial litigants are therefore careful to ensure that any premium incurred is competitive, to maximise their net recovery. Any risk of a shortfall at Detailed Assessment then becomes secondary, as the costs may well never be assessed. Also, full shortfall cover is most commonly used the context of injury litigation, where the average premium and therefore the potential shortfall is smaller.

Had the courts enforced the indemnity principle more rigidly when faced with premium shortfall waivers for the first time, then what would competition in the personal injury market look like today? Was this a missed opportunity?

I am not entirely convinced that contractual shortfall waivers are out of the woods yet in any event – a challenge might still come. The indemnity principle is still supposed to exist.

To compound matters, the courts reduced their own effectiveness to act as a guardian of reasonableness in respect of ATE premiums after the next big milestone case of Rogers v Merthyr Tyfil (COA) by saying that judges do not “have the expertise to judge the reasonableness of a premium except in very broad brush terms, and the viability of the ATE market will be imperilled if they regard themselves (without the assistance of expert evidence) as better qualified than the underwriter to rate the financial risk the insurer faces”.
Indeed, Lord Hoffman was cited as justification of this approach because he described the courts as “wholly unequipped” to deal with the assessment of the premium in Callery v Gray.

Did the Rogers judgement go too far in constraining judicial interference? Was this another missed opportunity?

It is so often assumed that “viability” in the context of the ATE market means to protect insurers from having their premiums too readily assessed down arbitrarily but if we look at Lord Hoffman’s judgement in Callery v Gray, he was concerned by the effect judicial interference could have on price fixing premiums at artificially high levels. He said “the costs judge has absolutely no criteria to enable him to decide whether any given premium is reasonable. On the contrary, the likelihood is that whatever costs judges are prepared to allow will constitute the benchmark around which ATE insurers will tacitly collude in fixing their premiums”.

Is the market made healthier by judicial constraint? If the courts do too little competition suffers. If the courts do too much, reasonableness becomes a fixed concept which is also non-competitive. There has to be a middle ground…

THE MIDDLE GROUND

There are signs that the courts are aware of this middle ground and recognise that the burden of proof to establish that a premium is reasonable remains with the insured and not the paying party, even though the paying party still has to contest the premium using evidence to assist the court. In the recent case of Kris Motor Spare v Fox Williams [2010] EWHC 1008 (QB), the court made it clear that in order to contest the premium the defendants must produce some evidence that the premium is unreasonable but, critically, Simon J went on to say “If an issue arises, it must be raised by the paying party. This is not to reverse the burden of proof. If, having heard the evidence and the argument, there is still a doubt about the reasonableness of the charge that doubt must be resolved in favour of the paying party.”

This judgement reminds everyone that a middle ground is achievable and that reasonableness is judged case by case on the basis of evidence. It is all too common for the claimant to put little or no evidence forward in support of the reasonableness of the premium (sometimes no attempt has been made to explore market comparables). Without reiterating, as Kris Motor Spares does, that the burden is on the claimant to prove the premium is reasonable and that the existence of evidence is decisive, a perceived lack of competition will continue to undermine the credibility of the market.
Is a lack of market competitive an erroneous perception or a reality? As an independent broker, I can testify to the competition that occurs between insurers in respect of the policy coverage they offer, the customer service they provide, the policyholder protection that applies and the reporting obligations that they insist upon. All of the insurers are different in their attitude to and delivery of claims payments, the small print of their policy wordings, their reporting procedures and their approach to risk assessment. Competition on all these grounds is often greatly under-rated. For example, where the ultimate premium payable seems cheap, but the policy doesn’t respond to interim adverse costs orders incurred, you could find yourself wishing you had selected the cheapest alternative policy with such cover, if you then incur an interim award that you cannot pay.
When it comes to price, the prospect of global settlements and liability for any shortfall means that in some areas there is strong competition, despite the negative commentary referring the contrary. Many solicitors will negotiate firmly for the best deal on behalf of their clients to improve their own offering, regardless of who the paying party really is.
However, the personal injury ATE market cannot escape the fact that premium shortfall waivers act as an incentive to the insurer to push the boundaries on what is recoverable inter-partes, knowing that the insured really doesn’t care whether the premium they have incurred is reasonable or not. To compound matters, with the reluctance of the courts to interfere with pricing following Rogers v Merthyr Tydfil, some insurers may feel that the risk of a shortfall is so minimal that agreeing to waive the same is of very little consequence to their account. In fact I would say that, rather than using premium shortfall guarantees to charge exorbitant premiums, most insurers offer such guarantees because they are so confident that their premiums will not be reduced on assessment.

THERE IS STILL TIME…

No wonder then that the spotlight is on competition in the personal injury arena. Regrettably, the whole ATE market is tarred with the same brush. The question for rule makers is whether they can find a way to inject greater price competition. In my view, if the courts took a more robust view on the claimant’s burden of proof to ensure that there is at least some evidence to show that the premium is reasonable, shortfall waiver or not, this will force downward pressure on prices, whilst affording the insurance community the opportunity to justify the premium, thereby minimising the risk of damaging the market.

Whether opportunities were missed or not; whether the market is competitive or not now, the personal injury market still has time to operate in the way that it once did. If everyone has a stake in the inter-partes recovery process, competition is assured and our future made safe.

Matthew Amey is a director of ATE insurance broker TheJudge (http://www.thejudge.co.uk)