Lloyd’s Looks to Gov’t. Reforms to Reduce Skyrocketing Legal Costs

Lloyd’s leaders have long warned that the “compensation culture” is steadily increasing the costs of legal actions in the UK, as plaintiffs’ lawyers pursue more actions and seek larger recoveries for their clients. An article on the Lloyd’s web site notes that “legal costs have rocketed in the past decade and now account for a huge proportion of the value of a claim in dispute.”

“Since ‘no win no fee’ litigation (known as conditional fee arrangements [i.e. contingent fees in the U.S.]) was introduced in 2000, the cost of taking a dispute to court has risen to new highs. For insurers this means more expensive claims handling, making some uneconomic to defend even if they are perceived to have little merit.”

Lloyd’s sees a chance, however, to address the problem, as the UK’s “Coalition Government is showing a willingness to tackle the issue, proposing reform of both legal aid and civil litigation costs.”

Lloyd’s notes that legal costs typically “account for 40 percent of a disputed claim and can easily exceed the total value of smaller claims, according to industry statistics. For every pound (i.e. 100 pence] paid in compensation in a motor accident, 87 pence was paid in legal costs, rising to 93 pence for employers’ and public liability claims under £5,000 [$7,750].

Kees van der Klugt, Head of Legal and Compliance at the Lloyd’s Market Association (LMA), noted: “With conditional fee arrangements and ‘after the event’ insurance premiums being recoverable from defendant insurers, it was inevitable that claims costs would increase and, in turn, premiums. We are seeing this now, particularly in motor personal lines, where premium rises have been widely publicized.”

Lloyd’s explained that last November the government “proposed sweeping reform of the civil litigation system, including reducing access to legal aid and backing recommendations to reduce legal costs put forward by Lord Justice Jackson in his review of January. Lord Justice Jackson’s proposals, as taken up by the government in its recent consultation paper, would reform ‘no win no fee’ litigation in the UK.

“The Lloyd’s market has little exposure to disputes that are funded by legal aid, which was scaled back in the 1990s and largely limited to criminal cases and family disputes. However, the move sends out a positive signal that the government is serious about reducing the legal costs, which are a major burden to public sector organizations like the National Health Service and Local Authorities, says Mike Noonan, Head of Strategic Claims Management at insurer QBE.

“Reducing legal spend for the public sector is an important driver for the government to adopt the Jackson reforms. However, the reforms are an interlocking package and must be implemented as a whole,” Noonan added.

The Jackson proposals are generally welcomed by the insurance industry. According to Noonan, “liability and motor insurers will benefit from more predictable and containable legal costs. The proposals will simplify civil litigation and should mean that claims can be processed and closed more quickly.”

‘However, it is not clear whether the proposed reforms would reduce the total burden of legal costs because some measures proposed by Lord Justice Jackson’ work in favor of insurers’ interests whilst others work against them, he pointed out. As a result the reforms are likely to be neutral in terms of reducing legal costs overall.

The LMA is currently surveying its members concerning legal aid and civil litigation costs. “The consultation on civil litigation funding and costs has the most direct potential impact on our members. We agree strongly with Lord Justice Jackson’s view that the costs of civil litigation for personal injury claims are unreasonably high, and we welcome measures to reduce these costs,” explained David Powell, Manager, Underwriting at the LMA.

The LMA has set up a working group made up of motor and liability claims managers to review the MoJ’s consultation paper on Lord Justice Jackson’s proposals and will be submitting a full response in February, he added.

Powel pointed out that Lloyd’s insurers support Lord Justice Jackson’s key proposals that conditional fee arrangements and after the event premiums should be irrecoverable. They also accept that, as part of the interlocking package of reforms, general damages for pain and suffering should be increased by 10 percent to help successful claimants meet their liabilities for fees.

“These changes should bring a measure of responsibility to the prosecution of claims by claimants and their lawyers and should lead to better control of costs and disbursements through market forces,” Powell added.

Source: Lloyd’s of London