David Marshall, Partner
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Obtaining value for money
The value to be delivered by claimants’ solicitors in personal injury cases is in the efficient processing of compensation claims to establish liability and to ensure the best achievable compensatory damages settlement as quickly as reasonably possible for the client, the claimant. But, as a result of the ‘English Rule’ that ‘costs follow the event’, the money paid to achieve this value (the costs) is to be paid by the losing defendant’s insurer. This creates an inevitable tension.
Insurance companies today are commercial organisations accountable to their shareholders, not charitable institutions. Whilst they are under a duty to their own policyholders to settle claims promptly and fairly, they are also accountable to shareholders for delivering profits. There is a very murky relationship between underwriting costs and premium income (historically, there appears to have been little relationship between the two, with underwriting losses accepted perhaps to obtain market share)[1]. Express or implied claims by insurers that costs savings will in effect be redistributed to policyholders in reduced premiums should be treated with caution. Far greater savings in insurance company pay-outs will be obtained by insurers in reducing the number of claims brought, or in reducing the amounts paid in settlement of damages. This, rather than the stated concern about ‘disproportionate’ costs, presumably really lies behind the insurance companies’ desire to see an increase in the small claims limit.
A MORI poll conducted between 3-7 February 2005[2 ]found:
- 64% of respondents said that they would be unlikely to pursue a personal injury claim in person in the small claims court
- 73% of respondents said that they would be unlikely to be able to value a personal injury claim without a solicitor
- 80% of respondents said that they would not be confident an insurer would offer the correct compensation if they had no solicitor representing them.
An APIL membership survey in March 2005[3] found:
- In half the cases (all of which resulted in payment of compensation) there was an initial denial of liability
- There was an average 53% increase between first insurer offer to settlement/judgement.
It is estimated that perhaps one-third of all personal injury claims currently brought would fall below the £2,500 small claims limit.
There is therefore a significant risk that if the small claims court level for general damages were raised from £1,000 to £5,000[4]or £2,500[5]then large numbers of people who would today receive compensation would not claim at all, or would not be paid fair compensation, or would turn to unqualified, possibly unregulated or ineffectually regulated[6], claims management companies who would take a slice of the compensation whereas currently insurance companies pay for the independent advice of a solicitor.
Damages in smaller value claims
‘Value’ is not an objective concept in this context. £3,000 represents one week’s wage for a High Court Judge[7], but represents one year’s Jobseekers allowance (not at the lowest rate). £3,000 is of far less value to the High Court Judge (who is, of course, capable of representing himself) than to the benefits claimant (who may not speak English as a first language and may be of low educational attainment). Proportionality is not just about money, according to the CPR[8], but in all debates about costs, the money value of the settlement is unfairly used as a proxy for value to the client. This problem is made worse because a claim is likely to be made up of general damages (broadly equal for rich and poor) and financial losses. The rich are more likely to be able to add the cost of the damaged motor car, the medical and ancillary treatment paid for by them privately or through their private healthcare and the loss of substantial earnings. In reality, the cost of establishing liability is likely to be identical. The rich are apparently to remain entitled to litigate with a solicitor because it is ‘proportionate’ to do so; it is seemingly argued that the poor should not.
Owen Tudor, former Senior TUC Policy Officer, expressed this well in a letter to the Law Society’s Gazette[9]when he asked ‘If costs are [to be] proportionate to damages, as so many people keep saying, where does that leave fairness?’ He illustrated his point with the example of two people forced to give up their jobs as a result of occupational asthma. One is a relatively well paid 30-year-old and the other a 55-year-old cleaner. He continued “Do ‘proportionate’ costs mean that their lawyers are allowed to spend more money fighting the cases of rich, young men than poor, old women?”.
However, smaller claims do appear more disproportionate with costs sometimes equalling or exceeding the damages. One problem in the smaller cases is that damages have significantly reduced in value over the years. Law Commission Report No. 257 in 1999, after extensive research and an opinion poll to determine public attitudes to levels of compensation, recommended that cases where general damages exceeded £3,000 they should increase between 50% and 100% (with an appropriate tapering rise for cases where general damages were between £2,001 and £3,000).
The issue reached the Court in Heil v Rankin[10]. The Court of Appeal did not fully accept the recommendations of the Law Commission and in particular did not do so for cases of lower general damages. The Court held that in cases where the general damages exceeded £10,000 they should thereafter increase by 33%. There was to be no increase for cases where general damages were under £10,000. Since then general damages should have been increased by RPI each year (but, as happened in the past as found by the Law Commission, they have probably failed to achieve this). Costs of solicitors which are largely dominated by salaries will presumably have continued to increase by approximately the Average Earnings Index. So, as a result of the Court of Appeal decision in Heil v Rankin and subsequent uprating of general damages at price inflation, apparent disproportionality between cost and damages in smaller value cases, particularly those with few financial losses, will have increased.
However, other government policies which have led to an increase in the ‘value’ side of the value/cost equation (e.g. the state/taxpayer benefits from personal injury litigation from the recoupment of benefits paid to the claimant and repayment of a proportion of hospital costs by the wrongdoer’s insurers) are not brought into account as they are not conventionally added to damages in assessing ‘proportionality’.
Costs drivers
A fault based system is a control mechanism on payment of compensation for injuries. To obtain tort compensation, in the overwhelming majority of cases fault has to be proved. This eliminates a large proportion of potential claimants at the outset. Even when brought, although most cases succeed, this is not achieved without argument. The APIL membership survey referred to above and separate research byPannone & Partners reported in the Law Society’s Gazette[11]suggests that about half of all claims made to insurers result in an initial denial of liability.
The recent TUC Report on “The Compensation Culture Myth” 2005 suggests that fewer than 10% of employees injured at work receive tort damages. The tort system means fewer claims for insurers, but an inevitably higher cost per claim. A fault based system requires additional work to establish facts, to prove liability and to deal with contributory fault as well as the costs associated with quantum assessment and administrative costs in a ‘no fault’ system.
More radical solutions would involve changes to substantive law (e.g. no fault or reversing the burden of proof) rather than to procedure, and would significantly cut claims processing costs, but obviously would also significantly increase the number of claims brought as the control mechanism of the fault based system would be removed or reduced.
To this is added the issue of frontloading of cost, which has been widely accepted as the effect of the CPR[12]. Preliminary unpublished findings from an analysis of a leading insurer's claims database by Paul Fenn and others[13]suggest that between 2000 and 2003 the base costs (i.e. disregarding recoverable additional liabilities introduced by the Access to Justice Act 1999) of Employers’ Liability Accident claims have increased by approximately 25% after controlling fro case value and duration. They find that much of the increase is concentrated at the pre-issue stage.
In addition, Government policy has significantly added to cost, particularly through the Access to Justice Act 1999 which, as the Court of Appeal in Callery v Gray[14]recognised, transferred the costs of funding litigation from the taxpayer (legal aid) to wrongdoers (CFAs) by way of recoverable ‘additional liabilities’ (success fees and ATE insurance premiums). Government policy in requiring Courts to become self-funding has led to extraordinary increases in court fees, way above inflation and proportionately far higher than increases in solicitors base costs. Fenn et al[15]in their preliminary findings believe that costs of CFA/ATE funded employers liability accident cases have increased by a further 32% ( again after controling for case value and duration) representing the cost of recoverable additional liabilities. This element of increased cost is a direct result of government policy introducing conditional fee arrangements. It remains to be seen whether this amount is now stable or will reduce (or indeed increase) following the success fee negotiations leading to fixed success fees[16].
Limits on costs recovery as ‘costs transfers’ to victims
Tort damages in England are compensatory, not punitive. The ‘English Rule’ on costs recovery has therefore historically provided that ‘costs follow the event’. Fixed recoverable costs are fixed between the parties. Solicitor and own client costs are established by contract.
The effect of an increased small claims limit with no costs recovery (subject to clients not bringing such claims at all), or inadequate fixed fees, will effect a costs transfer from the wrongdoer to the victim. The solicitor will be entitled by contract to recover full costs from his client. But whereas now these are entirely paid for by the wrongdoer, there is a serious risk that the claimant’s compensatory damages will be eroded. If this potential costs transfer is in fact government policy, this should be made transparent and public. It was certainly not anticipated by the Labour MPs in 1999 who backed abolition of legal aid for personal injury cases, many with misgivings. There will also be a considerable impact on the services Trade Unions provide to their members if costs are not fully recovered in most cases.
Attempts by the state to fix solicitor and client costs as well are impractical, bad economics and will reduce access to justice. Solicitors will after a period of time move into adequately paid work - compare what has happened with public funding where many competent providers have withdrawn due to remuneration levels, leaving ‘advice deserts’. Furthermore, the ‘swings and roundabouts’ concept is a dangerous analogy because in personal injury work each victim has only one swing or one roundabout (compare this with deals for commercial litigation with a single client with many cases where the analogy may apply).
Much of the agenda for reform is judge-driven. There is a danger of reform being driven by the view from the wrong end of a telescope. The Compensation Recovery Unit records 755,000 claims for personal injury compensation as a result of accident or disease last year. According to the statistics gathered by Fenn & Rickman for the Civil Justice Council success fee research[17]only about 15% of cases are issued in court (so perhaps 115,000 proceedings each year), many of which settle quickly after issue, and with according to Judicial Statistics only about 10,000 personal injury trials each year.
Although probably the Woolf reforms with their frontloading approach has reduced the number of cases issued and tried[18], the cost of this was an increase in legal costs for the vast majority of cases which never had been issued in court[19]. Now only the hardest fought cases are issued or tried and therefore will have incurred considerably more costs. This trade-off in the CPR may have been acceptable to achieve a sea-change in views on litigation[20], but does not seems to have been properly costed in advance. It is important that any further changes do not deal just with the tiny minority of cases in the court system rather than take a holistic view of the whole continuum from claim to trial.
The most significant recent developments in claim costs were the CJC brokered industry agreements for pre-issue small RTA base costs and for fixed RTA and employers liability success fees. These have delivered much greater predictability for more than half of all compensation claims in the UK, a very significant advance.
“A quicker, slicker system"[21]
That is not to say that there is nothing more that can be done. Although, as noted above, there are good reasons why costs have risen as a proportion of damages since 2000, the fact remains that they now appear disproportionate for lower value claims. Fenn and Rickman found that average total costs and disbursements in employers liability accident and disease case cases where damages were under £15,000 increased from £2,000 to £2,800 from 2000 to 2002 in a period where average damages remained relatively constant at just over £3,000[22].
Although it would be unfair to penalise claimants for the consequence of deliberate government policy (the introduction of the CPR and recoverable additional liabilities under the Access to Justice Act 1999) by knee-jerk changes to the costs regime, there is a serious risk that the rational debate will be lost in the ‘compensation culture’ clamour. There is no likelihood of a return to legal aid. Abolishing recoverability of additional liabilities without a corresponding increase in damages would be to penalise victims in direct contradiction of assurances given by ministers in 1999.
Damages could be increased to levels recommended by the Law Commission who in their report[23]recommended legislation if their recommendations were not implemented. However, they were of course partially implemented and bearing in mind the DCA having ignored pretty much all of the recommendations made by the Law Commission on damages in the 1990s[24], legislation in this respect appears unlikely.
The Woolf reforms were not piloted and so their impact on cost was unknown at implementation. Lord Woolf had recommended fixing costs for all stages of Fast Track cases, but this element was not implemented in the CPR, presumably because the government took the view that it was unrealistic to fix the costs of a completely new system, before anyone could realistically assess the work that would be required under it[25]. However, 6 years on from implementation and now that some detailed research on post-CPR procedure and cost is being published, it is appropriate to look again at the Woolf reforms to see how they might be improved. This includes looking at what needs to be done by whom and when, particularly in the pre-issue stage where most costs are incurred, as well as considering whether the predictable costs regime should be extended. Increasing the small claims limit or imposition of arbitrary fixed fees are blunt instruments that will compound the problems rather than solving them justly.
Personal injury litigation is slowly recovering from the damaging so-called ‘costs war’. More quick fixes and fresh starts are not appropriate. A period of consolidation with a rebuilding of trust is essential for both sides, but more importantly for the accident victims who have been caught in the cross-fire (e.g. the victims of claims management company schemes which are belatedly to be regulated by the government in the Compensation Bill 2005).
If the effect of change is to be significant the ‘80/20 principle’ should be applied to get results where they are most likely to affect a significant majority of cases, which means concentrating on the pre-issue stage (where most costs are incurred in most cases) rather than the headline horror stories of those few cases which get to trial with disproportionate costs.
The intention should be to build a more collaborative approach to resolving those claims where a settlement is likely more quickly and cheaply. Reducing duplication between solicitor and insurer is clearly possible, but, as indicated by the MORI poll and APIL membership survey referred to above, the claimant’s solicitor is an essential consumer safeguard. Reasonably enough, consumers do not trust their opponent’s insurers to deliver fair compensation. Any such scheme must also quickly identify the significant minority of claims where breach of duty, contributory fault, causation or quantum are likely to be in issue so that these can disputes can be efficiently resolved by the courts. Whilst negotiation and other forms of dispute resolution (including Part 36 offers) must be part of the solution, there needs to be a realism about the ways in which either party could try to use a system for tactical advantage, so the system must avoid perverse incentives.
Building on the successes of the CPR to deliver a quicker, slicker system might include:
- a simple, immediate pre-protocol notification to insurers
- tight time limits for acceptance of claims or denials
- limit on early liability investigation by claimant
- full standardised liability disclosure by insurers in denied cases
- truly binding pre-action admissions
- rounding up of allegations of contributory fault to a fixed 0%, 25% or 50%
- medical records only as necessary
- streamlined medical evidence
- early rehabilitation
- interim payments without need to issue
- agreed normal care rates and periods for common injuries
- agreed required documentation for proof of loss of earnings
- trouble-shooting provisions for possible resolution without court proceedings
- clear time periods for payment of agreed damages and costs
- feedback to employers for improved workplace health and safety
All of these were features of the abandoned Department of Work and Pensions Employers’ Liability Compulsory Insurance Pilot scheme. Following their review of the insurance market, the DWP encouraged stakeholders to try to develop new ways of working that produce a faster, more cost effective system to deal with lower value employers liability accident claims. Considerable work was put into developing a scheme which built on the success of the pre-action protocol.
Regrettably the pilot could not gather sufficient industry-wide acceptance. However, it would be unfortunate to abandon the many sensible ideas contained in it, simply because more controversial elements[26]could not gain consensus. It would, of course, be important to learn from past mistakes and pilot the process both before general implementation and to gather evidence on appropriate levels of costs before proceeding to fix them.
[1]DWP ELCI Review 2003
[2]A nationally representative sample of British adults aged 15+ (2,283) with data weighted to the known population profile. 201 sample points across Britain. Interviews conducted face-to-face in respondents’ homes.
[3]782 APIL member responses to a membership survey
[4]Better Regulation Taskforce ‘Better Routes to Redress’ May 2004.
[5]DCA Select Committee Recommendation December 2005
[6]The effect of the proposed regulatory regime proposed in the Compensation Bill 2005 remains to be seen, particularly with regard to unissued claims
[7]A High Court Judge earns £155,404 per annum, which equates to approximately £2,988 a week before tax (see http://www.dca.gov.uk/judicial/2004salfr.htmfor further details of judicial salaries).
[8]CPR 44.5
[9]LSG 10 January 2002
[10][2000] EWCA Civ 84
[11]LSG 6 January 2005
[12]Peysner and Seniveratne “The management of Civil Cases” 2005
[13]Fenn, Vencappa, O’Brien & Diacon “Is there a compensation culture in the UK? Trends in employer’s liability claim frequency and severity”: paper presented at the ‘Costs of litigation conference’, Centre for Socio-Legal Studies, Oxford University 9th December 2005.
[14][2001] EWCA civ 1117
[15]Fenn, Vencappa, O’Brien & Diacon ibid.
[16]CPR 45.21
[17]Fenn & Rickman ‘Calculating Reasonable Success Fees in RTA cases’ 2003
[18] Peysner and Seniveratne “The management of Civil Cases” 2005
[19]Fenn, Vencappa, O’Brien & Diacon ibid
[20]Peysner and Seniveratne ibid.
[21]Allan Gore: president’s speech to APIL Conference 28 April 2005
[22]Fenn & Rickman 2003 ‘Costs of Low Value Employers’ Liability Claims 1997 -2002’. Their conclusion is drawn from a single insurer dataset. Their pooled insurer data set suggested somewhat lower average total costs and somewhat higher average damages, but their conclusion of increasing costs and stable damages remains the same.
[23]Law Commission Report No. 257 1999
[24]Little or no action has been taken by the government in respect of the Law Commission’s 1997 report on aggravated, exemplary and restitutionary damages, their 1998 report on liability for psychiatric illness or their 1999 reports on damages for medical, nursing and other expenses; collateral benefits and claims for wrongful death.
[25]The government did commission research conducted by Goriely, Butt and Sherr ‘Costing Fast Track Procedures through Hypothetical Studies’ 1998.
[26]Particularly possible ‘first contact’ by insurers to potential claimants derived from RIDDOR or accident book reports.
For further information email David Marshall or call 020 7940 4000.
