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The NHSLA is on a slippery slope by offering voluntary one-way costs shifting, writes Matthew Amey

When Sir Rupert Jackson’s recommendations were first published in January 2010, the suggestion that recoverability of premiums should be abolished was clearly of great concern to after the event (‘ATE’) insurers. However, insurers have told me the real threat to the viability of the ATE insurance market was posed by one-way costs shifting, which means unsuccessful claimants will not face exposure to opponents’ costs.

ATE insurance was born for, and grew on, the provision of indemnity for adverse costs. Whilst it has developed to include coverage for own costs, this is usually restricted to own disbursements for personal injury matters and most lower-value litigation. Moreover, the level of indemnity is usually three or four times lower than the adverse costs cover provided. Removing the need for adverse costs cover wipes away the vast majority of insurers’ premium revenues.

While expecting that the government would take forward the recommendations on premium recoverability – as indeed they were – I, ever the optimist, expected the Ministry of Justice (MoJ) to dismiss the proposals on qualified one-way costs shifting (QOCS) as unworkable and potentially damaging to access to justice. The problem is, QOCS cannot work in the absence of an ATE market to cover disbursements and any gaps left by the qualifications on one-way costs shifting.

I thought the ATE industry would be able to demonstrate that, with QOCS, there would not be an ATE market for personal injury and clinical negligence simply because there would be insufficient premium revenues to sustain a competitive market.
Whatever the market did manage to convey on this point, it did not leave an adequate impression on the MoJ, which must believe the market will subsist in parallel with a QOCS environment. The full package of measures Jackson has campaigned for are being put forward and now it is down to MPs and peers to decide whether QOCS is a good or bad thing.

ECONOMIC REALITY

If I were an MP, I would assume it was a good thing for claimants, who could bring their claims without fear of incurring adverse costs, but I would be worried about the fairness on the opponent.

Let’s take the most high profile opponent and the one that is at the heart of this whole debate, the NHS. I would worry that QOCS would lead to a surge in borderline claims, which will lead to greater losses for the NHS as it settles a much larger percentage of claims on a nuisance basis. At least now it can fight a poor-quality claim to trial and probably recover its costs from an ATE insurer.

As I understand it, the NHS still wins more than it loses at trial, so it is successfully defending unmeritorious claims – but with QOCS, the economic reality is that it will not be worth fighting bad claims to court if they can be settled more cheaply. If I were an MP, this would worry me. It would worry me even more that the NHS is already offering some claimants QOCS now, voluntarily.
We have started to see opponents to clinical negligence claims suggesting one-way costs shifting on a voluntary basis. At first blush, that seems to suggest that QOCS must be a good thing as the opponents are trying to bring the government’s own recommendations to life before it has even legislated. However, I do not think this is a good thing for claimants; in fact, I think it is very bad for claimants as a whole.

The problem is that the negatives will not be entirely obvious to MPs or the public. Over time, though, situations will start to arise on these voluntary arrangements which will hopefully shed some light on what will go wrong with the notion of mandatory QOCS before it is too late to save the vital ATE industry that QOCS will decimate.

CHERRY PICKING

So what does our hypothetical MP need to know about this development? Firstly, the NHSLA is cherry picking. This voluntary offer does not seem to be a policy being rolled out across the board. Presumably, it is choosing to offer QOCS where the case is a strong one and it can then avoid the ATE insurance premium. The NHSLA must feel it is likely to have to pay the damages claim in any event so is better off switching their approach towards settling the case as cheaply as possible. It is hard to see why would the NHSLA risk taxpayers’ money by offering one-way costs shifting in cases it feels compelled to defend on the merits. I don’t think it will.

This all sounds perfectly reasonable, but the problem is this contracting in and out of adverse costs tears a hole in the way ATE insurance works in clinical negligence. If this approach is adopted more frequently and was accepted, or even encouraged, by claimant solicitors in respect of individual clients, it could bring an end to delegated authority schemes which rely on insuring the full basket of clinical negligence risks in order to remain viable. If a big enough proportion of “good risks” contract out of the adverse costs cover, the schemes will not be able to generate the premium income the insurers need to support the borderline cases. Access to justice will diminish.

Secondly, how will the proposed qualifications on one-way costs shifting operate in a voluntary arrangement? The lawyers who have received these offers are still discussing with their opponents what they mean when they say that are willing to offer one-way costs shifting. At the time of writing, we are still waiting to hear from them. At this stage we do not know whether the claimant is being offered QOCS and if qualified, what restrictions will apply. When might the claimant still face the risk of adverse costs?

The solicitors will want to know what they intend to do about Part 36 offers. It will be of no surprise to anyone that, as yet, we have not seen one of these voluntary offers accepted – and that is principally because there has been no clarification over how the claimant’s potential adverse costs liability, after receipt of a Part 36 offer, is protected in the absence of an ATE insurance policy, which this arrangement is, of course, designed to circumvent.

I would assume that, unlike Sir Rupert, the NHSLA will not propose means testing claimants before deciding whether or not to offer voluntary one-way costs shifting. If this is right, it would underline the fact that the only driver for the NHSLA when making such an offer in a particular case is the perception of the chances of losing at the time. Does anyone expect it to offer one-way costs shifting to a well-resourced individual bringing what appears to be a spurious claim? I would guess not because throwing away the right to recoup the wasted costs in defending an unsubstantiated claim in such a scenario would upset taxpayers more than paying ATE premiums on successful cases.

TAKING A GAMBLE

I might, generally, be an optimist, but I am hugely cynical about these voluntary arrangements to drop adverse costs. The devil is in the details, which are yet to be disclosed, and claimant lawyers need to feel very comfortable that they have a water tight understanding on when – if at all – there could be an adverse costs risk, as well as fully explain the position vis-à-vis a normal ATE insurance policy, remembering that the claimant is still entitled to recover the premium at the moment.

Beyond this, I am concerned about the wider impact these voluntary agreements will have on the ATE market for clinical negligence cases. The real problem is, if the ATE market finds itself in intensive care, it could take years for the market to recover. Insurers cannot jump in and out of highly specialist portfolios like clinical negligence. This is especially true in respect of pre-investigation delegated authority schemes, which cover the investigative disbursements before they are incurred. The government decision to allow an exemption for recoverability of premiums for investigative expert reports demonstrates how vital this cover is for access to justice. These schemes only exist because some pioneering insurers (and brokers!) understood that, whilst they may lose money for a period on the abandoned cases, in the long run the basket of risks should be profitable. The model does work, but it took a long time to get to where we are and voluntary one-ways costs shifting threatens the viability of the model, even before parliament legislate on the MoJ’s proposals.

In terms of QOCS generally, the whole experiment still feels more like a gamble than a calculated risk. I have no doubt cleverer people than I at the NHSLA have done their sums based on the historical data, but can they predict what will happen to case volumes? I wonder whether the NHSLA, and any other opponents in clinical negligence claims tempted to start offering voluntary one-way costs shifting today, might find that they quickly lose appetite for the concept just as parliament legislates to bring it in.

The problem for them, then, is that they are no longer sampling the tester pot version on carefully selected cases – they will be spraying their entire portfolio in this new shade. If they don’t like the colour, I don’t think the ATE insurance market will be ready or able to reinstate their highly specialist clinical negligence products in a short space of time. We might even have to strip the wall back to the brickwork known as Legal Aid.