1 No win no fee: our proposition after Jackson February 2013 Cathy Hawkins Partner, BLM t: e: Offices Birmingham Bristol Cardiff Dublin Leeds Liverpool London Manchester Southampton blm-law.com
2 BLM spearheaded the use of conditional fee arrangements (CFAs) to assist insurers in recovering outlays in 1999 when it became legally possible. Since then, the regulatory regime has changed more than once and we are now ready to welcome the post-jackson era. We have designed a product which will continue to assist insurers in pursuing losses on a no win no fee basis and which is Jackson compliant. It is simply a question of tailoring a scheme to suit our client. Principal Jackson Reforms of relevance to recovery work Abolition of right to recover a success fee Abolition of right to recover an After The Event insurance premium Creation of Damages Based Agreements (DBAs), a sort of contingency fee Raising the small claims track from 5,000 to 10,000, so that costs cannot be recovered in a greater number of claims Some procedural rules directed towards increasing efficiency and penalizing slack litigation practices How CFAs work currently No win no fee is a simple premise. The solicitor investigates and pursues the case free of charge, and is only paid costs if the recovery claim is successful. The idea is that costs are paid by third parties so that a recovery scheme is self-financing. The solicitor receives an enhanced fee in a successful case (paid by the third party) which helps to pay the cost of investigating and pursuing other cases. From April 2013, the Jackson reforms will be implemented. It will no longer be possible to recover a success fee. Success fees can still be paid by clients, but they will have to be paid out of the proceeds of the money recovered in damages. It will also not be possible to recover any after the event insurance premium, should such insurance be arranged. Our response to the Jackson Reforms CFAs on an hourly rates basis It is not a problem that the success fee element of the costs cannot be recovered. Our response would be to agree with clients a generous hourly rate and seek to recover it from the third party. The courts typically award hourly rates to successful claimants which are somewhat in excess of typical insurance rates, so it should still be possible for us to operate a successful recovery scheme on this basis, without any success fee element. Increase in Small Claims Track The Jackson reforms will create a complication in relation to lower value claims. It is already impossible to recover costs other than very nominal sums where the sum claimed is less than 5,000. In April 2013, costs will no longer be recoverable for claims below 10,000 in value. The limit may rise to 15,000 later. The solution for small claims is to devise a very streamlined system for handling them following discussion about how you can manage information when claims are notified coupled with an understanding of the sort of claim you receive. A streamlined approach could also involve delegated authority to us to settle lower value claims. For example, vehicle impact recoveries can be managed in a straightforward, peremptory manner. We can still pursue these claims on a no win no fee basis by either agreeing a fixed fee (which is only paid when we are successful) or an hourly rate that can be capped at a certain percentage of the damages, say 25%. We also believe DBAs will be very useful for lower value recovery claims.
3 Damages based awards (DBAs) The Jackson reforms have introduced the concept of a Damages Based Award (DBA) which is broadly the same as a contingency fee arrangement i.e. the solicitor is paid a percentage of the sums recovered. The contingency payment must cover the solicitor s fee, advocacy and probably any payable VAT. BLM are willing to explore this option but would issue a health warning that the arrangement could operate to insurer s disadvantage in that a share of the damages could mean that insurers have to pay solicitors a significantly higher figure than the costs they recover. The indemnity principle will also apply to costs so if the solicitor s costs exceed the contingency fee, it will not be possible to recover any more than the contingency fee. Appendix 1 contains our worked examples of how different approaches can work. Examples 7 and 8 show extreme scenarios where a DBA may not work in insurer s or solicitor s interests. Costs will still be awardable for claims over 10,000 and we believe that for these claims operating a no win no fee scheme based on hourly rates will be a better solution and will be a better way of financing claims than providing solicitors with a share of the winnings. DBA s should however be useful for claims below 10,000 in value. Costs cannot be recovered in any event and a fixed percentage fee provides a simple approach to paying for the recovery which will be equitable where the solicitor is doing a range of work for that client as it will not matter if sometimes the solicitor is under-rewarded and sometimes over-rewarded. It will just be swings and roundabouts. Cathy Hawkins, partner Mark Benson, partner t: t: e: e:
4 Appendix 1 How the Jackson Reforms apply to recovery work Current arrangements for claims over 5,000 pursued on a no win no fee basis with success fee Currently, costs can be recovered for non-injury claims over 5,000. A success fee can also be recovered. It is therefore possible to work on a no win no fee basis securing relatively generous costs from the third party and financing other claims with the success fees recovered. Example 1 Insurer pursues 50,000 and recovers it. The solicitor s retainer is 150 per hour plus a success fee of 50%. If 100 hours are worked, the costs recovered will be 15,000 plus success fee of 7,500 equals 22,500. The costs recovered are paid by the third party and do not reduce the insurer s recovery. Current arrangements for claims below 5,000 pursued on a no win no fee basis Under the small claims track it is not possible to recover costs using either hourly rates or a fixed fee which becomes payable if the recovery is successful. As costs cannot be recovered, the costs element is borne by the insurer from its damages. Example 2 The insurer pursues 4,000 successfully. It agrees a fixed fee rate of 500 on a no win no fee basis or an hourly rate of 125 per hour. The solicitor does four hours work. The costs cannot be recovered on either basis. The insurer must pay the solicitor 500, but recoups 3,500 out of a recovery of 4,000. Post Jackson for CFAs with a success fee It is still possible for insurer and solicitor to agree a success fee but it cannot be recovered so any success fee paid will reduce the sum recovered. The following example is as per example 1, but without recovering the success fee. Example 3 The insurer pursues and recovers 50,000. It agrees a no win no fee arrangement whereby it pays its solicitor 150 per hour plus success fee of 50%. The solicitor works 100 hours and recovers 15,000 but the insurer cannot recover the 7,500 success fee from the third party. The insurer must pay the solicitor 7,500 on top of the base cost of 15,000 so it ultimately retains 42,500 of the 50,000 recovery. Post Jackson CFA hourly rates but no success fee This illustrates an alternative way of approaching no win no fee without a success fee. It is our recommendation on many occasions. There is no need to reach an agreement whereby a success fee is paid. The insurer and solicitor simply agree a no win no fee arrangement on relatively generous hourly rates which can nonetheless be recovered. There is a small snag in that in very low value cases the costs may not be wholly recoverable as the rates may not be wholly recoverable. Nonetheless, it is probably still a better position than the previous example. Example 4 The insurer successfully recovers 50,000 having agreed to pay its solicitor 225 per hour. The solicitor carries out 100 hours of work and recovers the full cost of 22,500. The insurer will retain its recovery of 50,000.
5 Note that if the court only allowed 200 per hour, there would be 25 x 100 shortfall i.e. 2,500. This is still better for the insurer than in example 3 where the shortfall is 7,500. Damages based awards (DBAs) Post Jackson From April 2013, the insurer and solicitor can agree that the solicitor is paid up to 50% of the damages if the claim is successful. Success is still a condition of payment so it is a no win no fee agreement. Payments to the solicitor probably cover its costs, counsel s fees and disbursements but not other expenses. Any costs recovered can be credited against insurer s liability to pay the contingency fee. The indemnity principle applies. Example 5 The insurer successfully pursues a claim for 50,000. It agrees to pay its solicitor a contingency fee of 25%. On success, it is liable to the solicitor for a contingency fee of 12,500. If the solicitor does 100 hours work at 150 per hour, the costs are 15,000 but the indemnity principal applies, so only 12,500 can be recovered. The figure recovered is enough to pay the contingency fee so the insurer is happy. The solicitor is somewhat unhappy because it has cost more to run the case than it will be paid. DBA example in a more extreme situation A DBA arrangement effectively fixes the solicitor s fees at a percentage of the recovery. This would be very attractive to the solicitor if the recovery is attained quickly, before it has done work that reflects the contingency fee. Take the following example: Example 6 The solicitor and insurer agree a 25% contingency and a 50,000 recovery is successfully pursued. If the solicitor has recovered the money very early on in the process and has, for example, only spent 1,000 in costs, the insurer is nonetheless liable for 12,500 and only gets a credit from the third party of 1,000 as only that sum is recoverable. The insurer has a liability to pay the sum of 11,500 more than the costs it can recover and only retains 39,000 of its recovery. DBA high value recovery The situations can be more extreme in high value cases. Example 7 The insurer and solicitor agree to pursue a claim for 1 million on a 25% contingency fee. The solicitor is successful at a very early stage. The costs recoverable are 20,000 but the insurer s liability to its solicitor is 250,000. The insurer bears a shortfall of 230,000. This is not great business for the insurer. A normal hourly rate arrangement without a success fee, as in example 4, would have been far better. Post Jackson extreme example in a high value claim This example illustrates the same point, if the case takes a long time to recover and perhaps goes to trial. Example 8 The solicitor and insurer agree to pursue a claim for 1m on a 25% contingency fee. The matter is complex and goes to the court door. The recoverable costs are 500,000 but
6 the insurer is only liable to its solicitor for 250,000 on the contingency basis. The full costs cannot be recovered because of the indemnity principle. The solicitor therefore suffers a substantial loss because it has had to fund a very high value case but will only be paid 250,000. The solicitor is pretty unhappy as he has run a successful case at a substantial loss. The insurer does not mind but wonders if its solicitors will go the extra mile next time to push for a really good recovery. The defendant breathes a sigh of relief. It has unjustifiably got away with half of its costs liability i.e. 250,000. It makes a mental note to be really difficult next time these insurers/solicitors pursue it and make an unrealistically low offer early on, knowing that the insurer s solicitors will have no incentive to fight for more, and might settle low. DBA small claims track In cases below 10,000 from April 2013, and later in the year below 15,000, costs cannot be recovered as these cases will be allocated to the small claims track. Insurers have a lot of these claims and might decide with the solicitor that they will all be run on a contingency fee, for example 25%. Example 9 The insurer and solicitor pursue a 10,000 claim successfully. The solicitors and insurers agree a 25% contingency fee. The solicitor is therefore paid 2,500. The insurer only gets 7,500 because it cannot recover costs. The solicitor may have done more or less work than the fee represents but if it is handling a lot of claims, the payments made should reach an equitable level and neither insurer nor solicitor will be put in the extreme situations of the previous examples. Conclusion 1. No win no fee without a success fee as in example 4 is probably the best arrangement both for insurer and solicitor as most of the costs are likely to be recovered and the solicitor s fees will not be at the expense of his clients recovery. 2. DBAs are a good option for lower value recoveries (below 15,000) where costs are not recoverable. While a contingency fee of 25% may not always be reflective of the work done, it will not provide an unreasonable result overall when the solicitor handles a range of recovery work, and will provide an element of certainty. 3. It is hard to judge the right contingency fee for higher value DBAs and there is room for either insurer and solicitors coming unstuck with the defendant able to take advantage of the situation. 4. The reforms increase the small claims track limit will make it impossible to recover costs for many more (attritional) claims. It will be ever more important that claims are managed between insurers and solicitors in an efficient and skilled manner.