Introduction

The Productivity Commission has finally released its Report into Access to Justice Arrangements in Australia (the Report). The Commission was tasked with examining Australia's system of civil dispute resolution, with a focus on constraining costs and promoting access to justice and equality before the law.

A number of recommendations are likely to leave insurers with mixed feelings.

As expected, results of the inquiry reveal that Australia's justice system is too slow and too expensive, with more resources required to meet the needs of disadvantaged Australians to close the gap in access to legal services. However, some recommendations, such as increasing court fees, may be counter-productive.

On the other hand, affirming the tax deductibility of legal expenses, limiting (or delaying) the discovery process, promoting technology to reduce paper and court time, and fixing costs recoveries in lower courts, are recommendations that may help to cut litigation costs for insurers.

Contingency Fees/Advertising

The recommendations in relation to contingency fees (referred to as “damages-based billing”) are of particular concern for insurers.  Such billing, where a lawyer receives a percentage of the amount recovered in a successful case, has historically been prohibited, based on fears that it promotes unmeritorious claims and creates conflicts between the lawyer and client.

However, the Commission considered these fears to be largely unproven in countries permitting damages-based fees and ultimately recommended that restrictions on such fees be removed (whilst introducing further protection mechanisms for consumers). This finding is at odds with our experience, particularly in the US, and there is little doubt speculative litigation will increase if contingency fees are permitted.  That said, litigation funders are already able to take a percentage of any verdict or settlement.

The Commission’s recommendation that restrictions on lawyers’ advertising be abolished may further exacerbate the trend toward increased claims.

Fortunately, any changes regarding contingency fees are unlikely to be made under the current Commonwealth government so it may be some time before insurers’ fears are realised.

Litigation Funding

On a more positive note for insurers the Commission also scrutinised the established system of third-party litigation funding, recommending that this area be more carefully regulated. Recommendations include the implementation of a licence system (administered by ASIC or another regulator)  to ensure the third party holds sufficient capital to meet their financial obligations, and that clients be adequately informed of their obligations, ways to manage risk, and potential conflicts of interest.

The Commission also recommends that courts be given extended discretionary powers to award costs against non-parties, such as lawyers charging damages-based fees, and litigation funders.

In light of the recent rise in both the number and level of involvement of litigation funders in Australia, further regulation is welcome. However, it is clear that litigation funders are here to stay and if past experience is a guide any future regulation of funders is likely to be light touch.

Insurance

The Commission also discusses whether legal expenses insurance has a future role in the Australian legal system and, in particular, the challenges such insurance business may face, including adverse selection (those with a higher risk of having a legal problem are more likely to take out insurance) and moral hazard (insurance protection may alter the behaviour of policyholders to be less vigilant in preventing disputes). The experience in France and Germany, where such insurance is more common, suggests that these difficulties are not insurmountable.  

Such insurance is not entirely unknown in Australia, but the Commission suggests that Australians are unlikely to adopt legal expenses insurance as a standalone product and that such a scheme may not be suitable for those on very low incomes.

What's Next?

The Report merely contains recommendations to be adopted at either a federal or state government level.  As many recommended changes will need to be made at a state government level, potentially requiring interstate co-operation and co-ordination, it may be some time before any changes are realised.  Future developments, particularly in relation to contingency fees and litigation funding, will be closely monitored.