U.K.: Increased Costs of Personal Injury Claims

December 2001

(Sea Venture Volume 20)

Over the last 12 months, there have been two key developments in relation to U.K. personal injury law that mean that the cost of claims will, yet again, increase. These changes are as follows:

1. Legal aid (state funding) has been abolished for most types of personal injury claim. Claimants must now enter into conditional fee arrangements with lawyers and the increased costs of entering such arrangements can be recovered from defendants when a claim is successful.

2. The government has reduced the discount rate from 3% to 2.5%.

This article will deal with each development in turn.

 

Conditional Fee Arrangements

A conditional fee agreement ("CFA") is an arrangement whereby the legal advisor is only paid in specified circumstances. Usually, this will mean that the lawyer gets paid only if the claimant receives compensation. Accordingly, such arrangements are widely referred to as being on a ‘no win, no fee’ basis.

If a claim is successful, the lawyer will be paid his ‘normal’ or ‘basic’ costs together with a percentage uplift on his ordinary costs agreed when the CFA was entered into (usually in advance of litigation). So, where the lawyer’s basic costs are say £120 per hour and his uplift is 50%, the total to be paid will be £180 per hour if the case is successful. If, on the other hand, the claim is unsuccessful, the claimant lawyer gets nothing.

Conditional fees have been used to fund personal injury actions since 1995. Accordingly, CFAs are nothing new. However, it had always been the case that the claimant paid the success fee to his lawyer out of his damages. The big difference now is that the losing party can be liable to pay the success fee.

Conditional fees should be distinguished from ‘contingency fees’ as operated in Ireland and the US – the lawyer acting in accordance with a CFA does not take a percentage of the damages recovered.

The success fee (or uplift on basic costs) should always reflect the risk of losing and not the value or complexity of the action. How should the success fee be calculated? Simple: work out the prospects of succeeding, for instance by reference to past results, and apply the following calculation:

PF ÷ PS x 100 = SF

where

PF = prospects of failure
PS = prospects of succeeding
SF = success fee

So, for example, in a case where the prospect of succeeding is 80%, the success fee will be calculated as follows:

20% (prospects of failure) ÷ 80% (prospects of success) x 100 = 25%.

As the maximum success fee allowed is 100%, it is not economic to deal with a claim where the prospects of success are less than 50%.

Under the new rules an unsuccessful defendant will typically have to pay:

1. compensation;

2. ‘normal’ or ‘ordinary’ costs and disbursements;

3. the success fee or uplift (e.g. 50% of normal costs); and

4. the cost of any after the event insurance premium.

If the claimant funding his claim by way of a CFA loses, he will not have to pay his solicitors’ costs. However, he will be liable for the other side’s costs (if proceedings are actually issued). Insurance is typically taken out to cover the cost of losing. This is known as either after the event insurance ("ATE insurance") or legal expenses insurance. The attraction of a ‘no win, no fee’ agreement would be lost if an unsuccessful party still had to pay the defendant’s costs. It is therefore very common to find that insurance is taken out in conjunction with claims funded by way of a CFA. The cost of ATE insurance varies considerably.

In the U.K., trade unions have traditionally underwritten the cost of bringing personal injury claims on behalf of their members. The current government (which has traditionally been seen as sympathetic to unions) has not lost sight of this. Accordingly, the rules now allow for unions to recover an amount from the defendant, (when their member’s claim is successful) to cover the cost of underwriting members’ claims (i.e. the cost of paying for unsuccessful claims). Effectively, unions can now recover an equivalent to the cost of an ATE insurance policy from the unsuccessful defendant.

Defendants are concerned with two key issues. Firstly, what success fee or uplift is reasonable given the facts of the case? Secondly, what is a reasonable sum to pay in respect of any ATE insurance policy? These issues are currently the subject of great debate. This is no surprise given their potential impact on the cost of claims and the Court of Appeal has recently provided some guidance.

In the case of Callery v. Gray , a claimant was injured in a road traffic accident. The claimant was a passenger and commenced a claim against the negligent driver. Liability was never disputed and the claim settled quickly without the need for court proceedings. The claimant’s solicitors sought to recover a success fee of 40% as well as the cost of an ATE insurance policy. The defendant’s insurers refused to pay either, arguing that this was a case without risk where there was no justification for either a success fee or insurance. The Court of Appeal delivered a judgment that is widely seen as a compromise between the interests of claimants and defendants.

As regards the success fee, the court held that the amount claimed was excessive and should be reduced to 20%. The court considered that there was a risk with every claim but that the risks associated with this type of claim were slight. Such a success fee should generally be applied to all straight forward personal injury claims. (The court still over-estimated the risks in this case – 94% of personal injury claims in the U.K. are successful – a success fee of 5% would have more accurately reflected the true risk of this claim). The court did not offer guidance on what sort of success fee would be appropriate for more complex cases.

The Court held that the insurance premium was recoverable even though proceedings were never issued (i.e. before there was a risk for which the insurance was taken out). The Court was concerned to ensure that every claimant could obtain insurance (reflecting the fact that the introduction of these rules was designed to allow easy access to justice for all). The best way of achieving this was to enable claimants to take out insurance at the very start of the claim so that the cost of insurance was spread across all claims, not just the risky ones where the defendant was fighting the claim on liability (and more likely to win).

In Callery v. Gray, the Court of Appeal was also asked to consider what price was reasonable to pay for insurance. The matter is of particular importance as there are claims managements companies, most notably a company called Claims Direct, who currently charge approximately £1,500 for an insurance policy. If the costs of such policies were payable by the defendant in full, the cost of smaller claims could be dramatically increased – the claimant’s costs would often be two or three times his damages. Unfortunately the court has not provided comprehensive guidance about what sort of amount is reasonable in any given case. However, the message that has gone out is that £400 would be a reasonable amount for a modest claim.

What conclusions can we draw from the introduction of these new rules? Firstly, and most importantly, the cost of claims will increase. For a simple claim (e.g. where a passenger slips and suffers a simple fracture), the cost may increase by anything between 10% and 25%. The percentage increase in costs for higher value claims is likely to be less as costs form a smaller proportion of the overall cost of such claims. Second, there is now a greater need to settle claims where the defendant is liable as soon as possible in order to minimise costs. Third, there may be more incentive to fight weak claims. Under the old regime where the government underwrote the cost of many claims, the successful defendant was effectively barred from recovering its costs. Such a restriction has now gone. Fourth, and perhaps most importantly, there is now even more reason to ensure that claims are handled with skill and care in order to minimise the cost of those claims.

There will undoubtedly be many more developments concerning the detailed rules relating to CFAs. Those with a particular interest in U.K. litigation will have to keep a close watch on developments. The full impact (and cost) of these changes is not yet known.

 

The Discount Rate

The second key change only relates to the more costly claims where there is a permanent injury with long-term effects. As such, it is a change of lesser importance.

Where a claimant will suffer a loss in the future, e.g. a loss of earnings, the courts must attempt to compensate the claimant fairly for that future loss now. The courts have to take account of the fact that the claimant is getting compensation earlier than is required as the loss strictly occurs over time, i.e. the claimant has the benefit of the compensation before the actual loss has occurred – something which is referred to as accelerated receipt. The claimant is expected to invest that compensation so that its value increases year on year over and above the rate of inflation so that when he comes to need the money, there is sufficient. The question is this: how is the claimant supposed to invest that money? If he invests in equities, the long-term growth of that investment should be much higher than if the money was left in a bank or similar institution. However, with equities and the like, there is always a risk – invest in the wrong stocks and the claimant may loss everything.

This issue came to prominence with the case of Wells v. Wells ¹ where the courts were asked to consider how a claimant should invest compensation. The House of Lords² held that a claimant was only expected to invest prudently and at low-risk. The House of Lords held that the discount rate should be based on investments in Index-Linked Government Securities (ILGS), which are virtually risk free. Based upon the rate of return over a three-year period, it was held that an appropriate discount rate was 3% (as opposed to 4.5% as was then the case).

The rate of 3% has been criticised over the last couple of years. Organisations representing claimants have pointed out that the rates of return from IGLS have dropped to something like to 2%. Insurers, on the other hand, have argued that a 3% discount rate was appropriate because, notwithstanding Wells v. Wells, most claimants did invest their damages in mixed portfolios which were comprised, at least in part, of equities.

The government has now decided to reduce the discount rate to 2.5% to reflect what was supposedly seen as the approximate rate of return from ILGS. The government’s arithmetic has, however, come under challenge. At the end of the day, many people think that this is simply a compromise between what claimant lawyers wanted and what insurers wanted.

Given that the discount rate has been reduced, claimants will now be awarded greater compensation to reflect the smaller perceived growth in their damages over time. If, however, claimants continue to invest in mixed portfolios, the chances are that they will be the winners. Insurers will be the losers. This change, will however, only affect a small number of claims where damages were going to be substantial in any event.

 

With thanks to Andrew Baker of Eversheds for preparing this article.

1This case was also discussed in "Sea Venture" Vol. 18.
² [1998] 3 All E. R. 481