Insurance Market Conditions & Trends 2015/16: Procedure

Published 1 September 2015

In a world of breathtaking change, keeping abreast of legislative, judicial and regulatory developments is essential for managing risk and business planning. Our guide will ensure you have a concise summary of the key legal events from the last 12 months at your fingertips.

Further simplification of the Civil Procedure Rules is required according to the Master of the Rolls, Lord Dyson, and more needs to be done to change our way of conducting litigation to make it more effective and reduce cost and delay. Yet litigation practitioners, and their clients, are still adjusting to the radical shake-up of the civil procedural regime brought about by the Jackson reforms two years ago. While some of the effects were quickly felt (for example, relief from sanction applications and costs budgets), others are only now coming to the fore (for example, what happens when budgeting meets detailed assessment).

The past year has seen many further changes but there is still a long way to go in improving the efficiency of the court system. The underlying theme to the changes remains that cases must be dealt with proportionately – both at a proportionate cost to the parties and with a proportionate amount of court time and resources expended on an individual claim.

We have selected the following key areas where developments have arisen over the past year that will be of interest to insurers.

Litigation funding

Funding continues to be a hot topic. The Jackson reforms introduced damages-based agreements (DBAs), a form of ‘no win, no fee’ agreement where recoverable fees are calculated as a percentage of any damages recovered by the client, but these have been unpopular due to a lack of detail in the DBA Regulations and uncertainty about their operation in practice. The possibility of a hybrid DBA, which would have allowed solicitors to charge a ‘no win, low fee’ in the event the client was unsuccessful, was ruled out by the Ministry of Justice at the end of 2014. The Civil Justice Council is currently carrying out a detailed review of some technical aspects of the DBA Regulations. We welcome changes which will allow greater flexibility in funding arrangements and creative billing solutions.

News came in April 2015 for insolvency practitioners when the insolvency exemption, which allowed insolvency proceedings to operate on the pre-LASPO Act 2012 basis and permitted recovery of conditional fee agreement success fees and after-the-event insurance premiums from unsuccessful parties, was extended indefinitely. The U-turn by the government followed a sustained campaign from business groups. There remains some uncertainty over whether the exemption will be permanent, but for now the ability for insolvency practitioners to pursue rogue directors and third parties for creditors’ money is set to continue.

The keenly-awaited Supreme Court decision in Coventry and others v Lawrence and another came in July and held that the liability to pay CFA success fees and ATE premium (permitted under the pre-Jackson costs regime) was not incompatible with the European Convention of Human Rights, but was justified by the need to enhance access to justice following the withdrawal of legal aid.

Litigation finance, whereby funds are advanced by third party funders, has gained pace in 2015 and we are seeing an increase in the number of funders coming to the market ready to invest in commercial litigation, group litigation (particularly shareholder claims) and arbitration. Commercial clients see merit in not having to tie up their own funds in the litigation and avoiding the litigation risk on their balance sheet. Whether the availability of funding will fuel an increase in litigation remains to be seen, but what is clear is that this is a growing area and, with new entrants competing over the best claims, some may be willing to run less meritorious claims.

Court fees

Concerns over access to justice escalated in March 2015, when court issue fees for claims above £10,000 rose to 5% of the claim value (capped at £10,000), despite strong opposition from the Law Society, the Bar Council and senior judiciary. The enhanced fees have a particular impact on claims with a value of about £200,000 and apply to claims issued after 9 March 2015. Further increases appear likely. The Ministry of Justice issued another consultation on court fees in July 2015 which includes proposals to increase the maximum fee for money claims from £10,000 to at least £20,000 (but with personal injury and clinical negligence claims excluded from this higher cap) and a general uplift of 10% to a wide range of fees in civil proceedings.

For insurers picking up costs bills, there will be a delay before the consequences of the rise in issue fees are felt. However, an immediate impact may be a reduction in the number of mid-value claims being litigated generally and an increased willingness by claimants to engage in early, pre-action settlement discussions in appropriate cases to avoid incurring the court fees altogether.

Pre-action conduct and protocols

The status of pre-action protocols is often misunderstood. While they don’t amount to rules, where a civil dispute proceeds to litigation, the courts do expect the parties to have followed them and may impose sanctions where they have not.

Amendments to a number of existing protocols were introduced on 6 April 2015, including to those for Personal Injury Claims, Resolution of Clinical Disputes and Professional Negligence. There is also a new overarching Practice Direction that applies to pre-action conduct generally. Where no other specific protocol applies to a claim, practitioners must ensure they follow the general objectives of pre-action conduct and protocols at paragraph 3 of the practice direction. This stipulates that before proceeding to litigation the parties must first: understand each other’s position; make decisions about how to proceed; try to settle the issues without proceedings; consider a form of Alternative Dispute Resolution to assist with settlement; support the efficient management of those proceedings; and reduce the costs of resolving the dispute.

Insurers who fail to follow the spirit of the pre-action protocol in each and every claim may find themselves facing costs sanctions should a claim subsequently litigate.

Costs budgeting

The amendments to the Civil Procedure Rules in April 2013 saw the extension of costs budgeting into multi-track litigation, including personal injury claims, requiring parties to file and serve costs budgets (documents spelling out the costs they expect to incur in a claim) which should then be scrutinised by the court if not agreed. The costs management process enables litigants to know the sum they may be required to pay to their opponents if they lose, and gives the courts the power to control costs before they are incurred rather than on conclusion of the claim. The penalty for failing to file a budget in accordance with the courts’ orders, limiting future costs to court fees only, was widely publicised by the Mitchell decision. Although the requirement is now well known, mistakes are still made.

Lord Justice Jackson, reviewing the costs budgeting process two years after its introduction, has concluded that, when done properly, costs management works. However, he accepts that it is being implemented in different ways in different courts, resulting in judicial inconsistency.

Delays are a cause for concern, particularly for clinical negligence cases in London where the waiting time for a first case management conference is about nine months. In order to clear the backlog, Queen’s Bench Masters started in July 2015 to exercise their discretion to disapply the costs budgeting provisions for certain clinical negligence cases. This is likely to be a temporary measure.

Another problem that has emerged is that there is no effective mechanism for controlling costs incurred before the first case management conference. Although further work is required to solve problems presented by the costs budgeting process, Lord Justice Jackson remains of the view that the regime is in the public interest and is here to stay.

The overhaul of Part 36

The rules set out in Part 36, which deals with formal offers, have been the subject of significant amendment effective from 6 April 2015. The rules enable offers to be made to which sanctions attach if not accepted, including uplifts to damages and costs if made by the claimant, and costs orders (and exemption from qualified one-way costs shifting in personal injury cases) if made by the defendant.

The amendments enable time-limited Part 36 offers to be made, spell out specific rules in relation to offers made in the personal injury low value protocols, clarify the position where more advantageous offers are made, and provide that the court’s permission is required to accept an offer while a trial is in progress, which includes the period up to the time when judgment is handed down. Where a split trial is ordered, the rules make it clear which offers may be reported to the court and provide that a global offer of settlement cannot be accepted earlier than seven clear days after judgment is handed down in the split trial, allowing time for an offeror to withdraw/change a quantum offer following a liability trial. Further, where a party has failed to file its costs budget, the amended rules provide that it may still recover 50% of its costs if it beats its own offer, to ensure that Part 36 offers still have some teeth.

Relief from sanctions

The changes to the Civil Procedure Rules in April 2013 included an amendment to the rules in relation to relief from sanction, making it more important for litigants to comply with the rules and timetables set by the courts. Failure to comply with orders would be more likely to result in parties being refused permission to rely on the evidence of witnesses or experts, recover costs and defend or pursue claims at all. The Court of Appeal judgment in Mitchell confirmed that the court, when considering an application for relief from sanction, was obliged to consider the need for litigation to be conducted efficiently and at proportionate cost and to enforce compliance with rules, practice directions and court orders. Absent a good reason, any breach other than a trivial breach would be unlikely to attract relief from sanction.

While the Court of Appeal’s more recent judgment in Denton, Decadent and Utilise has resulted in a more just test as to whether relief should be granted (a three-stage test whereby relief should be granted for breaches that are neither serious nor significant), it remains of importance for parties to seek to comply with the courts’ timetables.

Many breaches will, when considered by the court in an application for relief from sanction, result in the defaulting party being allowed to continue to pursue or defend the claim; the uncertainty while the application is awaited may give an opportunity for opponents to secure a favourable settlement reflecting the risk.

Costs and hourly rates

Proportionality has become key in the assessment of costs since April 2013 both during the case in respect of costs management and also at the end of the case when costs are assessed. In addition to considering whether the costs are reasonable and necessary, the court must now also consider if the level of costs is proportionate to the size of the claim and other matters (including the complexity of the litigation, any additional work generated by the conduct of the paying party and other factors including reputation or public importance of the claim).

No guidance was provided as to how the proportionality test should be applied, leaving the law to be developed on a case-by-case basis. There have now been some decisions but uncertainties remain and a particular court or judge’s approach can be difficult to predict.

The new rules on proportionality can nevertheless be used to assist insurers, both at the costs budgeting stage and the assessment stage, to make robust arguments on the amount of costs that can be recovered by the receiving party.

The Guideline Hourly Rates (GHR) for solicitors set in 2010 remain unchanged following a formal announcement in April 2015 by Lord Dyson MR that the Civil Justice Council’s review of GHR was not going to proceed further. Concerns have been raised as to the hourly rates the judiciary will consider appropriate when dealing with costs assessments and recoverability where a successful party has been charged rates in excess of the outdated GHR. The likelihood is that less reliance will be placed on the GHR going forward, and instead the focus will be on a greater use of fixed costs (where appropriate), costs budgets and the principle of proportionality.

Online dispute resolution

A working group of the Civil Justice Council issued a report in February 2015, Online Dispute Resolution for Low Value Civil Claims, which concluded that the current court system was too costly, slow and complex for low-value claims and recommended establishing a new three-tier internet-based court service. The first tier would provide ‘online evaluation’, which would help users with a grievance to classify and categorise their problem, to be aware of their rights and obligations, and to understand the options and remedies available to them. Tier two would provide ‘online facilitation’, which would aim to bring a dispute to a speedy, fair conclusion without the involvement of judges. Finally, tier three would provide online judges who would decide suitable cases or parts of cases on an online basis. The intention is a pilot as soon as practicable with full roll-out in 2017. As ever, the hope is that this online service will reduce costs and delays.