Whilst TheJudge is often asked about the consequences of the potential changes to the recoverability of After the Event insurance (‘ATE insurance’) premiums, the Legal Aid, Sentencing and Punishment of Offenders Bill is also putting forward that Conditional Fee Agreement (‘CFA’) Success Fees are no longer recoverable. Inevitably, this has triggered many law firms to consider their business strategies with regard to retainers with their litigation clients.
Currently, firms have the ability to recover Success Fees of up to 100% of their base costs, making the risk to the law firm more worthwhile. However, pending legislation proposes to remove the recoverability of both ATE insurance premiums and CFA success fees, also limiting a success fee to 25% of base costs. Suddenly, offering CFAs to generate business is not so attractive.
Simultaneously to the proposed amendments to the recoverability of CFA Success Fees and ATE insurance premiums are questions regarding the restrictions and regulations on third party litigation financing. For example, the Civil Justice Council’s proposals on self-regulation of third party funders included comments on capital adequacy requirements.
The proposed amendments to CFA Success Fees, ATE insurance premiums and capital adequacy requirements of litigation funders will have an effect on the extent of a law firm’s unfunded Work in Progress (‘WIP’).
In the extreme, being overexposed under a CFA or similar can have disastrous consequences on a law firm’s cash flow.
First impressions would suggest that fee arrangements will simply revert to clients paying their lawyers on a private retainer basis. With regards to the legal market, this would level up the playing fields between law firms meaning no one firm had a competitive edge over another without this being simply down to the hourly rate being charged to the client. That is of course until you factor in the possible advantages to be spawned out of the ‘Supermarket Law’ Legal Services Bill which is due to be enacted later this year.
To re-gain their competitive edge in the marketplace, a number of law firms are now considering offering clients access to litigation financing through a third party funder or risk transfer broker, together with using ATE insurance to cover an element of own fees in the event of an unsuccessful outcome; effectively offering a hybrid of low risk and cost effective financing packages to their clients.
The third party funding aspect of the package improves the firm’s cash flow where the client is unable to fund the fees himself, and the ATE insurance will provide certainty of income in relation to base costs, even in the event of a loss situation.
At the same time, litigation financing and ATE insurance can be provided in respect of the client’s own disbursements (including counsel’s fees), allowing a case to be run with a far smaller financial contribution from the client. This contribution can usually be limited to the initial investigation fees which can often be insured retrospectively under an ATE insurance policy.
Risk transfer products such as ATE insurance and litigation financing are usually offered on the basis of the cost being deferred and contingent upon a successful outcome; the client would not be required to repay the litigation funder or finance the ATE premium in the event that the case is discontinued or lost at Trial.
Of course, a major consideration is the cost of litigation financing and ATE insurance in a ‘post-Jackson’ world.