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Juxtaposing BTE and ATE: the Role of the European Insurance Industry in Funding Civil Litigation(4) |
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IV. Conclusion
Two issues emerging from what has been said above are worthy of some further reflection. Firstly, the long-term sustainability of some ATE products appears problematic. Secondly, policymakers that would like to nudge consumers into voluntarily taking out BTE LEI are facing certain challenges.
As concerns the legal nature of ATE products we should be cautious in using the noun 'insurance'. It seems that the ATE in England and Wales, CFA+ATE arrangements bears more resemblance to insurance contracts64 than the ATE funding arrangements that have entered the German and Austrian markets. The continental version of ATE is in fact much more a contingency fee arrangement offered by capital investors willing to invest in the legal costs in return for a cut of the expected proceeds. In fact, it seems doubtful that this can truly be considered an insurance contract.
As regards the utility of the CFA+ATE arrangement for keeping a fair balance between promoting access to justice for impecunious claimants and giving defendants the appropriate incentive for settling valid claims at reasonable costs, I have strong reservations. My impression (as an outsider) is that the current legal framework in England and Wales does little to stimulate the development of a functioning ATE market. On balance, the English CFA+ATE practice is a far worse deal for defendants than the continental ATE practice. The English cost shifting rules in themselves may already incite a sunk cost auction: as the costs of loosing are unpredictable, litigants may be tempted into investing just a little more with every procedural step which the opposing party takes.65 Obviously, not only the disputed amount itself is at stake but also the costs of the opposing litigant. On the other hand, uncertainty on these costs may constitute a countervailing psychological force: unpredictability may enhance the willingness to settle at an early stage, even if contesting the claim in itself may seem reasonable.66 The question is whether an undiluted English rule, combined with the CFA+ATE leverage, sets the right level of willingness to issue or settle. High stakes and a certain level of unpredictability of outcome may in fact lead to an inefficient level of litigation by causing either too much settlement by risk averse and too little settlement by risk neutral litigants.67 I for one would expect English corporate defendants, faced with a claimant carrying CFA+ATE protection, to be far more willing to settle than under any other arrangement. One can only speculate if inefficiencies such as over deterrence are indeed involved. I personally would expect empirical evidence to show that the current English system enhances the nuisance value of relatively minor and straightforward claims, potentially causing overcompensation in that area.
Finally, we turn to the second point of reflection, the challenges policymakers face when thinking of nudging consumers into taking out BTE LEI voluntarily. From the outset it is clear that BTE is by no means a panacea for funding civil litigation. It can hardly be considered a complete substitute for legal aid. However, it can be a useful addition to the mix of funding instruments. If it is true that middle-class households are increasingly ineligible for legal aid and are increasingly facing financial obstacles on their paths to justice, nudging these households into taking out comprehensive BTE insurance seems a policy choice worth considering. Choices are never made in a sterile environment and usually, as in this case, with a default position from which the choice can deviate. Possibly this default position may prove to be 'sticky'.68 If policymakers would like to influence households into taking out BTE, they might want to consider persuading household insurers into offering policies with a comprehensive BTE covering all kinds of claims added on.69 Consumers would have to actively un-tick the BTE box to opt-out from the BTE module. Assuming that household insurance is bought by most house owners, as their mortgage conditions usually compel them to do so, this would lead to a large risk pool (provided the default is indeed sticky). This may even help policymakers to shift legal aid from the tax budget to private LEI without experiencing serious problems of adverse selection and need for risk differentiation, thus facilitating some level of welfare redistribution through private insurance contract.70
Endnotes
* Professor at the Rotterdam Institute of Private Law, Erasmus University Rotterdam, the Netherlands. Further details are available at www.professorvanboom.eu.
1 P Fenn, A Gray and N Rickman, The funding of personal injury litigation: comparisons over time and across jurisdictions (Department for Constitutional Affairs, London 2006) 1.
2 The LEI Directive (Directive 87/344/EEC of 22 June 1987 on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance, OJ L 1987/185, p. 77) excludes the LEI-aspect of liability insurance (i.e., the activity pursued by the insurer providing civil liability cover for the purpose of defending or representing the insured person in any inquiry or proceedings if that activity is at the same time pursued in the insurer's own interest under such cover, art. 2 (2) Dir.).
3 BTE LEI can be loosely defined as an undertaking, against the payment of a premium, to bear the costs of legal proceedings and to provide other services directly linked to insurance cover. See Art. 2 Directive 87/344/EEC of 22 June 1987 on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance, OJ L 1987/185, p. 77. See also Art. 196 of the Solvency II Proposal (recent Commission Proposal for the overhaul of insurance directives (Solvency II), COM(2008) 119 final; EP resolution 22 April 2009. Note that the BTE element seems missing in this definition.
4 See, eg, R Kirstein and N Rickman, 'Third Party Contingency contracts in settlement and litigation' (2002) German Working Papers in Law and Economics 1 ff.
5 Cf. T Schepens, 'Bridging the funding gap - The economics of cost shifting, fee arrangements and legal expenses insurance and their prospects for improving the access to civil justice' (2007) German Working Papers in Law and Economics 33.
6 J Veith and J Gräfe (eds), Der Versicherungsprozess (Beck, München 2005) 978; J Werner, Die Rechtsschutzversicherung in Europa - Eine Studie über die geschichtliche und wirtschaftliche Entwicklung sowie über die Versicherungsbedingungen der Rechtsschutzversicherungen in Europa (VVW, Karlsruhe 1985) 94-96; J Flood and A Whyte, 'What's Wrong With Legal Aid? Lessons From Outside The UK' (2006) 25 Civil Justice Quarterly 92; M Kilian, 'Alternatives to Public Provision: The Role of Legal Expenses Insurance in Broadening Access to Justice: The German Experience' (2003) 30 Journal of Law and Society 34; M Faure, T Hartlief and N Philipsen, Resultaatgerelateerde beloningssystemen voor advocaten - Een vergelijkende beschrijving van beloningssystemen voor advocaten in een aantal landen van de Europese Unie en Hong Kong (WODC rapport) (Wetenschappelijk Onderzoeks- en Documententatiecentrum Ministerie van Justitie, Den Haag 2006) 55; R Jackson, Review of Civil Litigation Costs - Preliminary Report (London 2009) 564.
7 In the Netherlands, BTE LEI consists of two distinct markets, one for businesses (mainly SMEs) and one for households and traffic accidents. The number of BTE LEI policies taken out by SMEs in the Netherlands has almost doubled between 2000 and 2005 (meanwhile halving claim frequency). Generally, penetration of BTE LEI has increased from 14% in 2000 to 19% in 2004. See GC Maas, 'Kosten en financiering van rechtsbijstand' in JGv Erp and others (eds), Geschilprocedures en rechtspraak in cijfers 2005 Cahiers 2007/8) (Wetenschappelijk Onderzoek- en Documentatiecentrum Ministerie van Justitie, Den Haag 2007) 127 ff.
8 In spite of the mid-1990s cut in expenditure (notably in civil cases) the overall legal aid bill for England and Wales remains one of the highest. See J Storer 'Legal aid bill "highest in world"' BBC News (London 24 September 2007) http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk_news/politics/7009686.stm accessed September 2009.
9 See, eg, statistics on LEI premiums at www.cea.eu/statistics. Cf. Flood and Whyte (n 7) 83 ff.; Kilian (n 7) 38 ff.
10 Kilian (n 7) 41; N Rickman and A Gray, 'The Role of Legal Expenses Insurance in Securing Access to the Market for Legal Services' in AAS Zuckerman and R Cranston (eds), The Reform of Civil Procedure: Essays on 'Access to Justice' (Oxford University Press, Oxford 1996) 312 ff.
11 Jackson (n 7) 151-153. For a sketch of the BTE market in England and Wales, see V Prais, 'Legal Expenses Insurance' in AAS Zuckerman and R Cranston (eds), The Reform of Civil Procedure: Essays on 'Access to Justice' (Oxford University Press, Oxford 1996) 433 ff.; Rickman and Gray (n 11) 312 ff.; N Rickman and P Fenn, 'Insuring Litigation Risk: Some Recent Developments in England and Wales' (1998) 23 Geneva Papers on Risk & Insurance - Issues & Practice 217 ff.; Jackson (n 7) 151 ff.
12 O McDonald, I Winters and M Harmer, The Market for 'BTE' Legal Expenses Insurance (FWD thinking communications, London 2007) 17.
13 Ibid. 53; Kilian (n 7) 39.
14 Jackson (n 7) 151 f.
15 G Dannemann, 'Access to Justice: an Anglo-German Comparison' (1996) 2 European Public Law 282 ff.; Prais (n 12) 440; Rickman and Gray (n 11) 320; A Walters and J Peysner, 'Event-triggered financing of civil claims: lawyers, insurers and the common law' (1999) 8 Nottingham L.J. 6; Flood and Whyte (n 7), 92; Kilian (n 7), 42; F Cabrillo and S Fitzpatrick, The economics of courts and litigation (New horizons in law and economics, Edward Elgar, Cheltenham 2008) 143; G Wagner, 'Litigation costs and their recovery: the German experience' (2009) 28 Civil Justice Quarterly 379 ff.
16 Rickman and Fenn (n 12) 210 ff. For German cost shifting rules, see in detail Wagner (n 16) 367 ff.
17 See fn. 16.
18 B Baarsma and F Felsö, Het proces als domein - Over de effecten van het procesmonopolie van de advocatuur (SEO Economisch Onderzoek, Amsterdam 2005) 20. Cf. G Marshall, 'The literature on the loser pays rule: an analysis of the alternatives within the ambit of the CFA with the effect on settlement strategies' (2008) 27 Civil Justice Quarterly 525, who briefly touches on the issue of litigation culture. For a more elaborate socio-legal analysis of litigation culture, see E Blankenburg, 'The Infrastructure for Avoiding Civil Litigation: Comparing Cultures of Legal Behavior in the Netherlands and West Germany' (1994) 28 Law & Society Review 789 ff.; E Blankenburg, 'Patterns of Legal Culture: The Netherlands Compared to Neighboring Germany' (1998) 46 Am. J. Comp. L. 1 ff.
19 Dannemann (n 16) 290.
20 For a historical background, see Werner (n 7) 249 ff.
21 Solvency II, COM(2008) 119 final, Recital 55.
22 Solvency II, COM(2008) 119 final Recital 56.
23 Art. 199 Solvency II Directive has similar wording.
24 In England and Wales, Art. 4 of the Directive was implemented with the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (England and Wales), regulation 6, which adds that these rights 'shall be expressly recognized in the policy'.
25 Kilian (n 7) 35.
26 Ibid., 44. See also A Heinsen, Kundesorientiertes Schadenmanagement am Beispiel der Rechtsschutzversicherung (VVW, Karlsruhe 1997) 31-32, who is particularly critical of the German BTE market in this respect. See generally on lawyer regulation and LEI, e.g., B Baarsma, F Felsö and K Janssen, Regulation of the legal profession and access to law - an economic perspective (SEO Economic Research, Amsterdam 2008).
27 Cf. Rickman and Gray (n 11) 311; Jackson (n 7) 580.
28 Under the German model this integration of services is far less easy to achieve because of the lawyers' monopoly on legal advice. Cf. M Kilian and F Regan, 'Legal expenses insurance and legal aid - two sides of the same coin? The experience from Germany and Sweden' (2004) 11 International Journal of the Legal Profession 252-253.
29 Maas (n 8) 127. On diversification of the BTE product, see Prais (n 12) 435.
30 The insurance industry is said to play a pivotal role across the board in keeping legal costs of settlement and litigation low (see, eg, HM Kritzer, 'The Commodification of Insurance Defence Practice' (2006) 59 Vanderbilt L.Rev. 2053 ff. on shopping around behaviour by insurers for cost-efficient defence lawyers.)
31 Note that Dutch LEI policyholders are quite content with the legal services offered by their insurance companies. See Rechtsverzekeringen in beeld (Verbond van Verzekeraars, Den Haag 2008). Cf. Baarsma and Felsö (n 19) 26.
32 Note that in its decision of January 3, 2005, the Dutch (formerly self-regulatory) supervisory council for the insurance industry (Raad van Toezicht Verzekeringen) declared this practice inconsistent with Art. 4 of the Directive (Raad van Toezicht Verzekeringen nr. 2005/006; see http://www.kifid.nl/uploads//jurisprudentie/2005-006%20Rbs.pdf accessed April 2009.
33 Cf. Rickman and Gray (n 11) 311-312.
34 Solvency II does little to force insurers to disclose this right in any other manner than in the general contract terms, leaving every opportunity for de-emphasizing this right.
35 The policy should stipulate that, in case of dispute over merit, recourse can be had to some kind of arbitration procedure; Art. 6 Directive 87/344 (= Art. 201 Solvency II).
36 Moreover, there is the issue of interpretation of Article 4. In England, this provision is strictly interpreted as merely giving a right to choose counsel from the moment proceedings are issued, leaving the claimant in the hands of his BTE LEI panel solicitor prior to proceedings. See G Wignall and S Green (eds), Conditional Fees - A Guide to CFAs and Litigation Funding (3d Ed. edn The Law Society, London 2008) 170; Prais (n 12) 435. A similar strict interpretation is to be found in the Netherlands; Baarsma and Felsö (n 19) 58.
37 For criticism of Art. 4, see Baarsma, Felsö and Janssen (n 27) 125.
38 Cf. Baarsma and Felsö (n 19) 33.
39 A case in point is Case C-1999/08 Eschig vs. Uniqua Sachversicherung (ECJ 10 September 2009), forbidding the LEI insurer to reserve the right in case of a mass damage event to select itself the legal representative of all insured consumers concerned.
40 Kilian, 'Alternatives to Public Provision: The Role of Legal Expenses Insurance in Broadening Access to Justice: The German Experience' 33; Jackson (n 7) 156.
41 A rough idea of how the markets are currently developing can be gleaned from Wignall and Green (n 37) 192 ff.; J Jaskolla, Prozessfinanzierung gegen Erfolgsbeteiligung (Verlag Versicherungswirtschaft, Karlsruhe 2004) 4 ff.; Jackson (n 7) 156 ff.
42 On these contracts, see, eg, M Coester and D Nitzsche, 'Alternative ways to finance a lawsuit in Germany' (2005) 24 Civil Justice Quarterly 49 ff; 83 ff.
43 See, eg, Veith and Gräfe (n 7) 973 ff. Allianz Litigation Funding, Claims Funding International, Foris and 80e are some of the providers active in Europe.
44 Jackson (n 7) 160 ff.
45 In England, percentages vary between 30 and 60; Ibid. 156-159.
46 Terms Allianz ProzessFinanz GmbH (Austria).
47 Veith and Gräfe (n 7) 975-976. Jackson (n 7) 161. In Germany, ATE is also provided for smaller claims. See Coester and Nitzsche (n 43) 51-52, 88. However, given that the German consumer insurance market is saturated by BTE, high penetration rates of this form of ATE seem unlikely.
48 Coester and Nitzsche (n 43) 87-88.
49 Cf. Jaskolla (n 42) 35 ff. In the definition of 'legal expenses insurance' of art. 2 Directive 87/344/EEC, premium is a precondition. Note, however, that the mere fact that the insured does not have to pay the premium in itself does not necessarily preclude the arrangement being an insurance contract. For instance, M Clarke, Policies and Perceptions of Insurance Law in the Twenty-First Century (Oxford University Press, Oxford 2007) 22 and 347 ff. is very cautious in formulating an all-encompassing definition for English law. Under German law, the definition of an insurance contract specifically includes the duty of the policyholder to pay a premium (§ 1 (2) Versicherungsvertragsgesetz), which would lead to a tension under German law at least between the legal and the economic reality of CFA+ATE arrangements. Finally, note that under German law it has been argued that ATE third party funding is in fact a contract of (silent) partnership; see B Grünewald, 'Prozessfinanzierungsvertrag mit gewerbsmäßigem Prozessfinanzierer - ein Gesellschaftsvertrag' (2000) 55 Betriebsberater 729 ff.; Jaskolla (n 42) 72 ff.; Coester and Nitzsche (n 43) 95. Others argue that it is a contract 'sui generis'; cf. Eversberg, in: Veith and Gräfe (n 7) 962-963; H Buschbell, 'Prozessfinanzierung als Instrument der Anspruchsverfolgung' (2006) AnwBl 829; F Frechen and ML Kochheim, 'Fremdfinanzierung von Prozessen gegen Erfolgsbeteiligung' (2004) Neue Juristische Wochenschrift 1214; N Dethloff, 'Verträge zur Prozessfinanzierung gegen Erfolgsbeteiligung' (2000) Neue Juristische Wochenschrift 2226-2227.
50 In England, this problem already reared its head. See § 307 (d) Bar Code of Conduct; Bar Council Guidance on Conditional Fee Agreements, Part 1, nr. 8.
51 Jackson (n 7) 163-164.
52 Ibid. 167.
53 Note that CFA and ATE are not universally available for all claim types. See generally Wignall and Green (n 37) 19 ff.
54 Cf. McDonald, Winters and Harmer (n 13) 13-14.
55 See below n. 60.
56 S Sime and D French (eds), Blackstone's Civil Practice 2009 (Oxford University Press, Oxford 2008) 89 (Ch. 6.2).
57 Jackson (n 7) 479 refers to this arrangement as the "magic bullet". I think "poisoned arrow" would be a more suitable name.
58 See Sime and French (n 57) 85-86 (Ch. 5.11).
59 S. 29 Access to Justice Act 1999, Rule 44.5 CPR, par. 11.10 CPD. See Sime and French (n 57) 85 (Ch. 5.10); Wignall and Green (n 37) 73 ff.
60 Cf. Jackson (n 7) 479-480.
61 Wignall and Green (n 37) 202. Although ATE insurers deny this, they do admit that there is little experience with premium setting. See Jackson (n 7) 159.
62 Wignall and Green (n 37) 79-81. Note that this problem slightly resembles the practice of charging alternative tariffs for car rentals: one for common rentals and one (markedly higher) for replacement cars in case of accidents for which a third party is liable. See Jackson (n 7) 28 for a description of the English 'credit hire industry'.
63 Wignall and Green (n 37) 190; Jackson (n 7) 16-17, 30, 478. Jackson (n 7 at 474) rightly notes that if cost shifting against claimants were to be abolished, the main purpose of ATE insurance premiums would disappear.
64 See the definition of ATE insurance premium in CPR 43.2 (m): "a sum of money paid or payable for insurance against the risk of incurring a costs liability in the proceedings, taken out after the event that is the subject matter of the claim".
65 See Cabrillo and Fitzpatrick (n 16) 163-164 ; R Bowles and N Rickman, 'Asymmetric Information, Moral Hazard and the Insurance of Legal Expenses' (1998) 23 Geneva Papers on Risk & Insurance - Issues & Practice 200. CF Beckner and A Katz, 'The Incentive Effects of Litigation Fee Shifting When Legal Standards Are Uncertain' (1995) 15 International Review of Law and Economics 206. Marshall (n 19) 526 seems to suggest that the auction-effect is exacerbated by the CFA+ATE arrangement. See also Cabrillo and Fitzpatrick 222-223, who argue that policymakers should consider introducing scales in order to reduce the cost of litigation.
66 A feature that German costs law seems to lack, according to Wagner (n 16) 382.
67 Cf. P Fenn and N Rickman, 'Asymmetric Information and the Settlement of Insurance Claims' (2001) 68 Journal of Risk and Insurance 627. Cf. Beckner and Katz (n 66) 215, who argue that cost-shifting rule is superior if care is irrelevant for liability and legal certainty is high.
68 On sticky defaults, RB Korobkin, 'The Status Quo Bias and Contract Default Rules' (1998) 83 Cornell Law Review 608 ff.
69 Alternatively, policymakers might want to consider nudging insurers that have already secured a large risk pool of BTE policies added on to household or car insurance into extending the BTE cover to fill gaps left by the retreat of legal aid.
70 On that issue WH van Boom, 'Insurance Law and Economics: an empirical perspective' in M Faure and F Stephen (eds), Essays in the Law and Economics of Regulation - in Honour of Anthony Ogus (Intersentia, Antwerp/Oxford/Portland 2008) 265.
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