The 1st of April 2013 saw the coming into force of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 which introduced changes to the civil justice system, recommended by Lord Justice Jackson. The reforms to the funding of litigation included the abolition of the recoverability of conditional fee agreement (CFA) success fees and after the event (ATE) insurance premiums.
The application of these reforms was delayed in relation to insolvency proceedings but it is now clear that this exception is due to expire in April 2015. Currently, insolvency practitioners undertake litigation on behalf of creditors with the costs funded from CFAs or ATE insurance policies.
Success fees in CFAs will no longer be recoverable
CFAs are agreements between a lawyer and a client whereby a lawyer receives payment for his or her own fees if the action is successful. The agreement will usually also provide for the lawyer to benefit from a percentage uplift, known as a success fee, if the claim is successful.
Under the current exemption, insolvency practitioners can recover the success fee from a losing defendant, thus maximising the assets available for distribution to creditors. Since this practice will be abolished, such fees will have to be taken from the insolvent estate, reducing returns to creditors.
ATE insurance premiums will no longer be recoverable
An ATE insurance policy covers one party against the risk of having to pay the opposing party’s legal costs should the action fail. Insolvency practitioners need to take out ATE insurance to cover any adverse legal costs. If there is no ATE insurance, defendants may ask a court to dismiss proceedings on the basis that there is insufficient cover for adverse costs.
In essence, the inability to recover success fees and insurance premiums after April 2015 will reduce the funding options available to insolvency practitioners and, in some cases, remove the incentive to litigate.
ATE insurance and CFAs are often used together in order to minimise the risk from starting litigation proceedings against another party. Although it will still be possible to enter into a CFA and obtain ATE insurance, success fees and insurance premiums will no longer be recoverable from the losing defendant.
Therefore, it is likely that claimants will be more discerning when considering their funding options. In turn, it could be expected that insurance professionals will review their pricing structures and the cover they will provide, while looking for innovative ways to diversify their products.