Jackson report: good or bad for insurers?

Lord Justice Jackson produced the final report into his review of civil litigation costs on the 14 January 2010.  This contains a broad range of proposals for reform. 

The main recommendations of the report focus on personal injury cases but much of what is proposed will apply to, and could affect, all insurers.

Costs shifting

The proposal is to replace the current system on costs in a number of areas (and in particular personal injury claims) with one-way costs shifting.  This means that a claimant will not be required to pay the defendant’s costs if it loses its claim but a defendant will be obliged to pay the claimant’s costs if the claim is successful.

There is a suggestion that there could be an increase in spurious claims but we do not believe that this will be the case.  Claimants will still be obliged to pay their own costs if their claim is unsuccessful.

The effect of one-way costs shifting on insurers may be significant, however, as they will be unable to recover their costs even if they are successful in defending a claim.  It seems likely that the result of this proposal will be more cases settling at an earlier stage.

Litigation funding

LJJ hopes to counter-balance the effect of one-way costs shifting on defendant insurers and other defendants by making after the event insurance (ATE) premiums and the success fee under conditional fee agreements (CFAs) irrecoverable for a claimant. 
 
CFAs have been identified as “the major contributor to disproportionate costs in civil litigation”.  At present, claimants are entitled to recover the success fee payable under the CFA from their opponent in the event that they are successful.  In addition, after the event insurance premiums which have been or are to be paid are also recoverable from the losing side. 

Under the proposals, success fees under CFAs and ATE premiums will not be paid by the losing defendant in addition to costs but will instead be deducted from the claimant’s damages.  By way of compensation, general damages will be increased by 10% in a number of areas.

LJJ anticipates that the result of making ATE premiums and CFA uplifts irrecoverable will be that the level of both will be reduced in the future.  Whether this is the case remains to be seen.  An alternative outcome may be that there is a lower take up by claimants in both these areas of funding, or that fewer insurers/solicitors are willing to enter into these arrangements.

Fixed costs

LJJ identified that personal injury fast track cases (claims worth more than £5,000 but less than £25,000) are often disproportionate, so fixed costs are proposed at all stages. He has set out the recommended costs allowable.

For non-personal injury cases, there should be fixed costs for specific categories of cases (road traffic accident and housing cases) in the fast track, and in all fast track cases there should be a financial limit on costs recoverable. An upper limit of £12,000 for pre-trial costs is suggested.  There is no intention at present to consider a fixed costs scheme to cover multi-track (claims worth more than £15,000) cases.

Fixed costs will clearly provide a larger degree of certainty for all parties and will assist in ensuring that costs incurred are proportionate to the amount being claimed.

Alternative dispute resolution

There is strong support for the use of alternative dispute resolution (ADR) methods, particularly mediation, in the report as a way of reducing costs.  Although there is no support for making mediation compulsory, a culture change is recommended.  Greater use of ADR should help to resolve more claims at an earlier stage and thereby reduce the costs incurred for all parties.

Settlement offers

The report proposes an additional incentive for defendants to accept claimant's offers to settle.  Where a defendant fails to beat a claimant's offer to settle made under part 36 of the Civil Procedure Rules, the claimant's damages should be enhanced by an additional 10% recovery.  At the moment, whereas a defendant who fails to beat an offer is penalised by having to pay a greater proportion of the claimant's costs, the level of damages payable is not affected.  However, this proposed change would place defendants under greater pressure to settle as a 10% increase in damages could be substantial.

On the whole, the proposals are likely to be good news for liability insurers.  They are, however, geared towards encouraging early settlement of claims.  On the other hand, ATE and before the event insurers face uncertainty and it is difficult at this stage to predict exactly how the proposals will affect those businesses.