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
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.
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.
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.
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
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.
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.
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