General market overview
Disease claims have come to represent an attractive alternative to RTA claims for claims management companies and claimant law practices. In successful claims, claimant solicitors recover their costs on an hourly rate basis often at a multiple many times the actual sum awarded for damages, rather than on a Fixed Recoverable Costs (FRC) basis, as with RTA, EL and PL claims valued under £25,000. Until April 2013 and LASPO, claimant solicitors also recovered from insurers a success fee of 62.5% of base costs plus ATE Premiums paid.
The past seven years then have been characterised by high volumes of low value claims (in terms of individual damages awards). For the most part the claims have been "farmed" and are largely without merit, usually failing e.g. because they are time barred under the Limitation Acts or because causation is not established.
The calibre of some of the claimant law firms operating in the market has sometimes been low and a significant number of litigated claims have been struck out following failures to follow the rules in relation to procedure or the restoration of companies. It is a feature of the market that established Union practices such as Thompsons have not featured prominently in the recent surge.
Repudiation rates have been high across the market. In consequence, a number of the law firms with a business model built around NIHL claims for example, have failed. Roberts Jackson, probably the claimant market leader in volume NIHL claims turned over £10m in 2017 but went into administration in September 2018; the business was sold to Manchester firm AWH Legal in a pre-pack, and it later emerged that a dispute with its former after-the-event insurer was the key factor in the firm becoming insolvent. AWH made an advance payment on account of £500,000 and the latest update from the administrators in May said the recoveries made by AWH to date meant a further £360,000 was payable. The book value of the WIP bought by AWH was £13.4m, plus debtors, disbursements and accrued revenue totalling just over £6m. AWH is paying 10% of all profit costs and success fees from settled cases, 50% of the recoverable value of disbursements, 90% of debtors and 60% of accrued income.
Roberts Jackson's private equity backer which initially invested £15m in 2014 will not receive any of the £22.5m it is owed, and unsecured creditors were estimated at £13.7m, with two medico-legal agencies prominent among them: Medical Legal Appointments (£3.2m) and Premier Medical (£2.2m). Counsel and other legal advisers were owed £2.4m.
Nor have firms who have exited the disease arena and looked to other areas such as holiday claims fared any better; Seth Lovis & Co Solicitors ceased trading in March. The closure resulted in all 45 fee-earning staff being made redundant. The firm’s working capital requirements increased during 2017/18, largely due to many cavity wall insulation claims not settling, and the firm was unable to recover any fees quickly enough. In order to meet the increasing budget shortfall, Seth Lovis & Co borrowed around £3.7m in unsecured loans on top of secured facilities.
Set against this experience it is difficult to see private equity or indeed any other funding being committed to large scale projects without great caution. Additionally medical agencies, counsel and others in the general supply chain will be necessarily wary in future.
Whilst there are clearly business models in the market willing to operate within such a risky and taxing environment (AWH is just one of a number of specialist firms actively looking to acquire claimant solicitor practices and WIP) previous levels of unsuccessful claims are not sustainable by claimant practices.
As we would expect, this has also led to a downward trend in claims and notifications. Portal data is not always reflective of behaviours in the disease market as so many disease claims do not enter the Portal in the first place, but April's data may be instructive.
New claims intakes in April were down across the board. The reductions were 10.3% for RTA, 14.1% for PL, 8.2% with EL and 10.9% in the case of EL disease. This may be linked to some extent to a reduction in working time around the Easter Bank Holidays and other holidays taken at that time of year. Longer term trends seem though to be pointing downwards across the board too. Assuming the reforms are 12 months away then it would be logical that a further impact would be being felt. RTA and PL are both down for the fifth consecutive month, EL for the fourth consecutive month, while EL disease has been pointing down for over three years.
On a 12 month cumulative basis, the number of EL disease claims now stands at 5,323 which is a reduction of 2.6% over the month from the previous level of 5,466. This remains a constant pattern of decreasing numbers for over three years. The rate of decline has increased. It was 12.6% between April 2017 and April 2018 whereas it rose to 36.7% over the last 12 months.
Market conditions and costs reform such as that effected under LASPO (and see below) would suggest the volume of claims notified will continue to fall, albeit one would expect the quality and prospects of new claims to improve to something like 2012 levels as the claimant market consolidates and becomes more specialist and efficient. We would however caveat that with an anticipated mini revival or surge in light of what appears below.
Anticipated process and costs reform
The MOJ asked the CJC to begin looking at the rise in NIHL claims in October 2015; it eventually published its report in September 2017 (see DWF update).
The MOJ is broadly supportive of both the CJC and Lord Justice Jackson’s recommendations from his Fixed Recoverable Costs report of July 2017, but will be considering whether there is sufficient support for the proposals before deciding whether to implement. The government has no appetite to take forward proposals which do not have a body of support, and therefore held a further consultation which closed on 6 June. The MOJ will aim to publish a response to the consultation and, one hopes, a roadmap for the future within three months.
As well as FRC in NIHL claims, two key case management issues were raised: accreditation of audiologists and the use of preliminary issue trials.
It is understood that the new regime (whatever that looks like) will come into effect at the same time as the new Civil Liability Act regime for whiplash claims in April 2020. Informed debate on social media and elsewhere has suggested this may be too ambitious and that October 2020 is more realistic.
The key issues for disease claims handling arising from the proposals are basically:
Trials on preliminary issues: a fundamental issue for defendants. Claimants are strongly opposed but for defendants, preliminary issue trials are an important part of the process where they limit costs and the amount of court time consumed by unmeritorious statute barred claims. Lord Justice Jackson has indicated that they should not be used, his concern was that having preliminary trials often resulted in there being two trials, wasteful of costs and court time. In fact, most practitioners report that instances of two trials in the same claim are very few and far between if ever occurring at all. The usual scenario is that if a limitation trial is won the case will be discontinued; if the limitation trial is lost the defendant will throw its hand in because limitation will have been run to a separate trial only if that was the strongest part of the defence. If there are other issues as well that can be defended a preliminary issues trial will not be sought.
There are advantages to legacy business in a preliminary trial; it reduces the life cycle of the case from 12 to 18 months if there is a full trial to about six months with a preliminary issue trial.
Audiologists: the legacy market generally will agree with the CJC that a MedCo style accreditation regime should be put into place to accredit and audit. This is a key issue for defendants – the regime cannot be agreed without it. At present there is no trust in the quality of the audiologists’ reports.
There are obvious advantages to a MedCo-type accreditation system for audiologists; there will be no need for retesting, life cycles will again be capable in theory of shortening.
Proposed letters of claim and response: these should improve early decision-making and theoretically improve life cycles. A major problem at present is that medical records are not seen at an early stage to assist decision-making. The draft letters represent improvements. With regard to the employment schedule to be supplied with the letter of claim, it should indicate whether the claimant had a hearing test with the employers listed.
Exclusions from the regime: all military claims should be excluded along with de minimis and test cases on the grounds of complexity.
Level of FRC: on the figures proposed DWF supports the costs put forward for NIHL. On disease claims generally on the fast track under Band 4, there are concerns that the number of defendants will be increased to exit the FRC process. Even with more defendants claims ought to remain within the regime.
When a defendant settles at any stage and there are still defendants left in, the first defendant to settle will be responsible for 100% of FRC. In these circumstances the FSCS will not pay a contribution. There is no solution to this under the rules as it represents the legal position. An industry led agreement may assist – the ABI/IRLA may be able to exert influence to resolve this issue. It needs to be addressed.
In relation to claims for mesothelioma or other asbestos related lung disease, the MOJ last looked at the handling of claims in its 2013 consultation "Reforming mesothelioma claims". In responding to that consultation we were supportive of both the introduction of a dedicated Mesothelioma Pre-Action Protocol and a fixed recoverable costs regime for these claims. The government decided not to proceed with either at that stage, and although the MOJ held a Big Tent meeting the following year to explore potential reforms, there have been no further developments in relation to the handling of asbestos related claims since then, and none are proposed currently. With that in mind and whilst the focus is on lateral extension of the current FRC, we would suggest that a review of case management and fixed costs in asbestos claims generally is long overdue.
Whilst even some Masters in the RCJ have suggested that costs budgeting of the type routinely seen in most other high value and complex claims is the way forward in asbestos, there is tension between a desire to manage and control costs through cost budgeting and the Practice Directions which aim for a trial within 16 weeks of service in the case of living mesothelioma claimants, as well as the Costs Management PD which provides that where the claimant has a limited life expectancy (five years or less remaining) the court will normally disapply costs management, and budgets will ordinarily be dispensed with.
In broad terms then by the end of 2020 we hope to be working under a process which ought to preserve current rights to challenge cases on causation (and Limitation Act) grounds at reasonable fixed costs exposure. The proposals certainly will not elongate life cycles and will probably improve them enabling earlier release of reserves etc. Expect perhaps a further mini-surge of notifications ahead of publication of any clear commitment to FRC.
General issues to be faced in the market
The anticipated introduction of FRC in disease claims generally may precipitate conflict in the market between run-off and live insurers; strategy to date in terms of the live market has been to treat claims on a merits based approach to each individual claim, and that has proved to be very successful in limiting the number of paid claims if not the quantity of notifications, and hence the failure of Roberts Jackson and others.
The advent of FRC may create a tipping point at which run-off insurers prefer to settle and close down claims, we stress the actual figures are yet to be settled; will IRLA be any more effective at holding the market together than the ABI has been?
One anticipates the quality of entrants to the market will improve if only because the present position is not sustainable. Equally we anticipate in common with all disease claims that the claimant market will look to push at the boundaries of accepted claims, de minimis arguments will be challenged e.g. in NIHL, the actionable nature of losses in the higher frequencies, and there will be focus on new sectors – such as musicians, bar and hospitality workers.
For further information please contact Ian Macalister, Partner on 0161 603 5082 or at firstname.lastname@example.org