A leading after-the-event (ATE) insurer recent told us, without explanation, that they categorically did not want to receive any further applications from a well-known firm of solicitors. I found out later that the insurer was taking this position as a result of an event that arose in the past that had resulted in the insurer losing money in a way which they did not find palatable.
We can assume that the incident was somewhat more concerning for the insurer than a single lost case giving rise to a legitimate claim. Insurers don’t like to receive claims but at the same time, it is the risk of losing that justifies the existence of the product. For a firm to be excluded in such a public fashion, then there must have been a more fundamental disappointment.
It is not the first time an underwriter has declared to me they are not minded to look favourably upon applications from a particular law firm or fee-earner based on some event which upset them in the past. However, it is an unusually formal step to effectively blacklist the firm. It would be disastrous on many levels if the practice of boycotting firms becomes more prevalent.
For solicitors, being blackballed by one insurer is disconcerting, but not the end of the world. However, it does raise an interesting question about the position a firm would find itself in if, for whatever reason, a reasonably large number of insurers decided to blackball them. In theory it could happen if an event was public enough. Indeed, liability insurers share information about insurance fraud and claims payments so is it impossible to think that a firm’s dispute with one ATE insurer might not result in contamination with other ATE insurers? With all the lobbying meetings and discussions that are taking place to respond to the Government’s consultation on civil litigation costs at trade body meetings and so on insurers will no doubt have increasing opportunities to swap tales of success and of woe.
At what point does being blackballed by a number of insurers lead to a Rule 2 crisis. Sir Rupert Jackson identified the fact that there are “somewhat less than 20” active ATE insurers and within that there a smaller group of leading players. If a significant proportion of the leading players turn their backs to you, what are you to do? The position could prejudice the client’s ability to get insurance.
For insurers, the problem with blacklisting is that it is a very blunt instrument. It is generally not the firm as a whole that is at fault for whatever incident has given rise to the boycott but the actions or omissions of an individual – a single partner or fee earner in a particular department. Unless the complaint is aimed directly at a Principal of the firm or the firm is very small, firm wide bans may unfairly penalise the firm as a whole. What is more, the chances are, if an ATE insurer has suffered a significant loss of an unpalatable nature that same individual will also have caused the firm a significant loss as well and it won’t be long before that same fee earner has moved on from that firm, one way or another. An insurer’s systems will need to be robust if they intend to keep such individuals from applying again.
Moreover, blackballing is very antagonistic. Underwriters have long taken the expertise or track records of individuals and firms into account as part of their due diligence on a case or scheme. There is nothing to stop insurers attaching significant weight to involvement of a particular firm or barrister. With that in mind, I am not really sure why it is necessary to announce a decision to bar a firm from making an application to them. This will no doubt lead to bad feeling and counter-recriminations that may backfire on the insurer, however properly they may have acted.
There are situations of course where sharing information is important, if not mandatory. There are regulators that the insurer can and should turn to where they feel that a firm has acted in breach of its obligations. Firms have been reported to the FSA and the SRA by insurers. However, beyond this any reticence about working with that the firm should remain private.
Lastly, I am concerned about the impact the practice of blackballing can have on competition and the health of the market. We must not underestimate the importance of a competitive ATE market given the fact that a lack of price competition is cited as a reason for Lord Justice Jackson’s recommendations, recommendations which could very well spell the end of the market at least as we know it.
It is one thing to blackball a firm because of concerns over the firm’s ability to effectively represent their clients or because of a credible risk of fraud but quite another because the insurer is not apparently their “favourite” insurer. When insurers start to refuse business because they don’t feel they are the preferred insurer then this completely undermines a competitive marketplace.
I am not so naïve to think that firms don’t have their favourite insurer, obviously the growth of the delegated authority market has led to unprecedented reliance on a single source of insurance capacity. However, favourites change. The products are constantly evolving and what might seem like the best product one day will almost certainly be improved upon by another insurer hungry to gain market share. The only way that a firm can begin to appreciate what they are missing when they blinker themselves to one single source of insurance is if the alternative insurers accept their business (subject to due diligence) when they approach them.
The message to firms must be not to burn too many bridges whilst the message to insurers must be, however frustrating yesterday may have been, today you still have to be in it to win it.
Matthew Amey is a director of risk transfer broker TheJudge.