Many law firms that prosecute small claims on a volume basis are well run and operate efficient, cost-effective models that provide access to justice for thousands of consumer clients who have suffered loss.
Over the past few years, the market has seen a number of high-profile examples of successful group litigation, for example the claim by Alan Bates and over 500 sub-postmasters against the Post Office and the Merricks v Mastercard litigation.
If law firms are structured in such a way as to enable them to deal with the crucial aspects of these challenging cases such as onboarding multiple clients, arranging funding and appropriate after-the-event (ATE) insurance, and obtaining instructions and authority on key steps including issuing proceedings, then these group actions represent good business for law firms and their clients.
Unfortunately, we have seen numerous recent examples of the chaos that ensues when things go wrong. The lawyers' professional indemnity (PI) market is still counting the cost of the claims that followed the demise of firms like Pure Legal and SSB, two of a number of firms who operated in the volume claims space.
What are the potential exposures that law firms can create for their PI insurers?
Funding issues
Many firms that pursue volume litigation rely on ATE policies and third-party funding to pursue the claims. There is nothing wrong with this, in principle, as long as the cover is adequate to respond to any adverse costs orders if the claimant loses. In addition, when firms become overwhelmed with the work of running volume claims their staff overlook the need to keep ATE insurers informed of key developments with disastrous consequences if the ATE insurers later refuse cover.
If the claimant loses, the defendant will look to them to pay their costs of defending the claim. If the ATE policy does not respond because of a failure by the lawyer to adhere to the terms of the ATE policy, then the claimant will be exposed to the adverse costs. Inevitably, the claimant will look to the law firm to indemnify them for these losses, often creating significant exposures for their PI insurers.
As far as the problems that can arise with third-party funders are concerned, following the 2015 decision in Impact Funding Solutions Ltd v AIG Europe Insurance, PI insurers are understandably less worried about this issue. In Impact the Supreme Court held that, on the facts of that case, the loans by Impact that were intended to be used to fund disbursements in the litigation were excluded as a "trading debt" under the standard exclusion in solicitors' PI policies.
For law firms, however, the use of third-party funding has caused problems as it has sparked increased regulatory interest and has led the Solicitors Regulation Authority (SRA) to instigate a review of firms that do volume work. The SRA's review has focused, in part, on the deductions made from the claimants' damages and whether they are fair. These investigations can have an impact on PI insurers if the law firm has an extension of cover that responds to the costs of defending regulatory investigations or prosecutions. PI insurers will also be concerned about the stability of firms that are facing this kind of scrutiny and whether, as a result of any sanctions imposed by the SRA, they can continue to trade successfully.
Claims and wasted costs
The conduct of group litigation is, unfortunately, fertile territory for claims against law firms. Co-ordinating hundreds of claims requires a high level of organisation and errors such as missing key limitation or procedural deadlines can be costly, especially when the error affects multiple claims.
In addition to this, law firms must ensure that they have their client's instructions to issue proceedings and a failure to obtain authority from every client to take this key step can result in wasted costs orders being made against the firm. A good example of this issue is the case of Jalla v Shell International Trading & Shipping which involved a group claim issued by Rosenblatt on behalf of over 20,000 Nigerian nationals following alleged pollution of their land by the defendant. Shell successfully challenged Rosenblatt's authority to conduct the litigation, resulting in significant exposures to Shell's legal costs.
The future
Group litigation shows no signs of abating and social inflation means that we are likely to see more of these claims in the future.
Handled correctly these cases can be very successful and, within the last few days, we have seen judgment in favour of 600,000 claimants in their claim against mining company BHP, following the collapse of the Fundao Dam in Mariana, Brazil.
The critical issue for underwriters is to differentiate between firms that are equipped to deal with these cases and have appropriate staffing and systems in place from those that do not and for whom they could spell disaster.
This article was first published in Insurance Day.
