Jackson report stokes controversy

"Muddled" and "contradictory" were the words that Paul Asplin, chief executive officer at DAS Group, used to describe Lord Jackson's report - Review of Civil Litigation Costs - when it was published in January. He also warned that the recommendations move the UK toward the worst parts of the US legal system, "opening the floodgates to the sort of trivial and vexatious claims that are all too familiar to American courts and insurers".

Alexandra Anderson, partner at City law firm Reynolds Porter Chamberlain, described it as "hugely controversial" and pointed out that it contains "very serious implications for defendants generally and for the insurance sector in particular". Yet which among the 557 pages, 109 recommendations and 45 subject areas are the ones most likely to affect brokers?

The most likely are after-the-event insurance and before-the-event insurance. Meanwhile, banning referral fees is a headline grabber: the fees for referring on personal injury litigation received the full wrath of Jackson, who described them as "offensive", "wrong in principle" and "abhorrent". He recommended ending their existence, though not for commercial disputes.

Better the devil you know

Richard Finan, director at Arc Legal Assistance, pointed out: "The ban would send them underground, as they were before 2004; referral fees are commonplace in the market." In 2011, third parties will be able to buy into or buy up law firms and Finan believes that this is a route some brokers might take: "Large motor brokers generate significant income from a large volume of claims: they would look at alternative legal structures to protect revenue streams legitimately, though small and medium-sized brokers would not be able to do that." There would also be the added impact for brokers using legal expenses insurance products, which are funded through referral fees. "It would have a significant impact and that model would disappear," Finan concluded.

ATE insurance protects a claimant from having to cover the defendant's costs when the claimant loses the case; the premium is recoverable in the event of a win. If the recommendations became law, premiums would no longer be recoverable and, as Nichola Evans, a partner in the insurance and public risk team at Browne Jacobson, highlighted: "That means, certainly on commercial disputes, if you want to insure against the other side's costs then you will have to pay that for yourself." Just how many would do so is open to debate.

For individuals, 'one-way cost shifting' further complicates matters. Under the proposal for personal injury litigation, if a claimant loses then they will no longer have to pay their opponent's costs: who buys a policy that they do not need? Evans continued: "Though it sounds unfair that, even if the defendants win, they can't recover their costs, a lot of insurers said to Jackson 'we actually would prefer that because it is our cheaper option.'"

One product the report is quick to praise is BTE insurance. In his preliminary findings, Jackson recommended making it compulsory in certain circumstances, though later changed his mind. Jason Smart, group chief executive officer at LitComp, a national provider of ATE insurance stated that there would be no chance of BTE insurance being the answer. He said: "Standalone BTE is totally unaffordable to most socio-economic categories and, as seen by recent reports based on current premium levels, it is often a loss-making business. It is not a viable alternative to conditional fee agreements and ATE insurance, which are fit for purpose."

Missing mandate

Tony Buss, managing director at Arag, also criticised the report but pointed out that it is far from certain that the proposed changes will become legislation. He said: "Without a government mandate, is it ever going to happen? On the face of it this is not advantageous to the customer, so you have to wonder what appetite there is to do it."

Justice Secretary Jack Straw MP left plenty of room for manoeuvre in his response ("I look forward to considering these proposals in detail") but, either way, brokers should watch with interest to see how the market moves in the year ahead.