The pitfalls of over-reliance on ATE cover
Claims arising from after-the-event insurers' cover declinatures are hardly a novelty within the professional indemnity industry, but we are seeing a mass resurgence. Typically, it goes a little something like this. A layperson suffers an injury and seeks a relatively low amount of compensation. Is it worth bringing a claim given that the costs will likely outweigh the potential recovery? ATE insurance seems an attractive solution. If all goes sour, the layperson loses his case and doesn't recover his costs (and worse still, faces an adverse costs order), what better reassurance than to know a third party will cover the costs exposure…
…However a last minute decision by the ATE provider to withdraw cover scuppers matters. These U-turns may be occasioned by policy breaches (more on that below) or barristers having a stroke of conscience questioning how a claim is so far advanced without settlement and necessitating more cautious advice (most ATE insurers will refuse to continue providing cover in cases which, according to Counsel, have less than a 50 per cent prospect of succeeding). Then panic mode sets in. Instead of delving deeper towards the nadir of a post-trial adverse costs order without any financial support, the layperson elects to discontinue proceedings. Courtesy of the Civil Procedure Rules of course, discontinuation compels claimants to pay defendants' costs, but at least then the potential loss is cut short. And the prime target for making good the discontinuation loss? The solicitor who is somehow culpable, either by breaching the terms of the ATE policy, failing to obtain Counsel's fully informed advice soon enough, or (perhaps most pertinently) having PI insurers' backing to make solicitors' pockets that much deeper and solicitors that much more enticing a target. It is as if, one PI insurer has noted, PI insurers are being asked to step into the shoes of ATE insurers.
A good deal of ATE providers' cover withdrawals are merited. One can see how an ATE provider might be put out by a client (or more aptly the client's solicitor) who has neglected to tell him/her that proceedings have been issued and/or to keep them appraised of developments over a protracted period. Discovering on a Monday morning that there is a trial due to take place at the end of the week is not always the most welcome news! However, in the present climate, solicitors undoubtedly need to be squeaky clean in complying with all ATE policy terms (which includes keeping them closely appraised of all developments) or face the distinct possibility that an ATE provider will decline cover. Solicitors are then left in the unenviable position of convincing their PI insurers that the ATE provider's declinature was unreasonable and that it should be pursued for a recovery, or that a complaint should be lodged with the Financial Ombudsman Service about the provider's conduct. This is a lottery. In our experience, although each case turns on its own facts, the FOS does not readily find against ATE providers and, in any event, insurers will quite often decide that the costs-benefit ratio makes the pursuit of such an exercise unappealing.
PI insurers will justifiably be thinking carefully before renewing cover for firms of solicitors who have a history of fall-outs with ATE providers. The solution for all involved in the PI industry (solicitors, brokers and insurers alike) however is (as with a lot of other hot topics) surely for solicitors to change the structure of the ATE process and/or for better understanding. I'm not for one minute saying ditch the ATE option. That is untenable as ATE insurance is an invaluable part of litigation, but as long as the risks associated with it are fully understood. Solicitors should of course treat upholding the terms of an ATE policy as a top priority. They should not become over-reliant on ATE insurance. ATE providers frequently agree to provide cover for a number of related claims on the assumption that these claims have more than a, say, 60 per cent prospect of succeeding. Risk appraisals should be conducted with on a case-by-case basis and by a neutral third party (preferably a barrister, at an early stage of proceedings and with all available evidence at his disposal). Solicitors should then be realistic with their clients to manage their expectations. If a client is alive to the prospects of a claim succeeding versus the reality that ATE option is fallible and that client still wishes to pursue a claim, then at least the solicitor has advised him or her of the full picture, the threat of a future claim by the client should be minimised and there may be a further twist in the time-old ATE-connected PI saga yet.