Posted by Paul Hurley, director and head of ATE at ARAG , a Litigation Futures sponsor
A recent survey  by Liverpool law firm O’Connors concluded that firms are taking on an unknown credit when agreeing to take on a personal injury claim risk-free.
According to the poll, 23% of respondent law firms are providing client indemnity for the adverse costs risk, stepping into the shoes of a regulated insurance product. Insurance companies, which are regulated by the Financial Conduct Authority (FCA), are required to abide by stringent solvency requirements that are closely monitored by the FCA.
Such a process is in place to protect clients, making sure that insurers have the required capital in reserves to pay for claims that can occur many years in the future. Providing unregulated insurance cannot guarantee the payment of claims that are lost or abandoned, potentially leaving clients with a liability should a firm cease to trade.
This poll will not have passed unnoticed by liability insurers and no doubt they will take heart from the findings. Firms who provide client indemnity for the adverse costs risk will encounter opponents who are financially strong and ready for a fight. There will be cases where the chances of winning are evenly balanced leaving firms in a precarious position. Although firms have a duty of care to the client, they will also have an eye on costs, making it difficult to provide a totally impartial view on the merits of the case. Potentially this could lead to undersettling cases.
Claim reserving is a technical process, requiring years of data and information together with knowledge and experience to accurately calculate reserves by case type. This is no easy task and if not approached in a methodical manner, it can lead to disastrous consequences.
Solicitors cannot safeguard themselves and their clients by simply looking back at a few years’ experience in the hope that this will provide an accurate assessment for future reserving. Claims can take years to settle, and the sting in the tail can prove fatal to a loss or profit. Accounting for reserving can also weigh heavily on the balance sheet and so firms need to consider the lost opportunity cost – that is, of course, assuming that firms are accounting for claim costs!
Also revealing is that just over 10% recommended a policy only when the client’s case had reached a point when the risk to adverse costs materially increased, meaning insurers are picking up only the riskier cases. Insurers rely on a spread of risk and so should this trend be correct, insurance premiums will substantially increase or firms will find they are unable to obtain insurance.
Couple this with 41% already believing that after-the-event insurance premiums do not fairly reflect the client’s risk exposures, and premiums will increase rather than reduce, meaning claimants awarded medium to low compensation could find their damages completely eroded.
The legal expenses insurance industry will provide solutions but firms need to understand that a process needs to be followed to ensure a long-term future, and that a spread of risk is the only way of providing insurance at a reasonable cost, whilst providing peace of mind that claims will be met.