UK: A Reinsurer's Eye on Litigation Trends

Last Updated: 21 April 2010
Article by Kiran Soar and Sophia Greaves

It is important for reinsurers to monitor litigation trends. Litigation costs are often ultimately picked up by reinsurers so it remains crucial for them to understand the changing landscape so as to accurately assess their risks and exposures.

The dispute resolution landscape has changed considerably in the last 10 years. The Woolf reforms in the late 1990s focussed on the process of litigation. They resulted in clearer procedures, active case management and heralded a new era of Alternative Dispute Resolution (ADR), pushing forward pre-action protocols and the use of mediation. Collectively, those reforms resulted in more cases being resolved and fewer trials.

But where lies the future? Ten years after Woolf, a much more far reaching review has recently been undertaken by Lord Justice Jackson. But that is not the only change.  There are a host of other "new" measures that will begin to have real effect in the next 10 years. These include litigation funding, class actions, a growing 'blame' culture in the UK and forum shopping. Collectively, these developments are designed to open up access to justice and will have an impact on claims for insurers and reinsurers. These 'costs' will in turn be passed to reinsurers.

Third Party Litigation Funding

Historically, English courts have not accepted third party funding arrangements on public policy grounds. However, the UK litigation landscape has changed dramatically in recent years. Whilst the rules on 'maintenance' and 'champerty' (third party funding in exchange for a share of damages) have not disappeared, funding agreements are no longer viewed as an offence to public policy.  

Already a thriving asset class in Australia, there has also been growing support for an established third party funding model here in the UK. The most recent endorsement arises out of Lord Jackson's highly publicised review of the civil litigation cost regime, which cites third party funding as a catalyst in promoting access to justice.

In the wake of the Jackson Report, UK based funds such as Alvaro Litigation and Juridica have announced ambitious strategies, aimed at attracting both domestic and international investors to the UK litigation market. In January 2010, Juridica reported that they would be investing Ł50 million in British civil cases, fuelled by the growing interest of domestic litigation as an investment strategy should Lord Jackson's proposals be implemented. 

With the tide turning in favour of third party litigation funding here in the UK, how should the reinsurance industry be best prepared to ride the wave? Essentially, the availability of funded actions is likely to cultivate a litigation environment where parties more readily pursue court action even though the costs involved in doing so may previously have thwarted any such action. Firms should, therefore, reassess their exposure in light of this potential shift in claims culture. Reinsurers considering the use of third party funding should evaluate the packages on offer as against any overarching case strategy and assess the impact of the arrangement on underlying policies. Finally, a careful balance will also have to be struck between the interests of the particular funder(s) and those of the insured. 

Class Actions

With Scottish ministers set to endorse recent recommendations by Lord Gill to provide for US-style class action suits, Scotland may soon join a host of countries including Italy, Austria, France, Germany, the Netherlands and Spain which allow collective action in their courts. In light of the uptake by our European neighbours, to what extent will collective action form a part of the UK litigation landscape and what are the potential risks for reinsurers?

Unlike the US, the UK legal system has, to date, rendered class action claims more difficult to arrange, primarily as a result of the "opt-in" system where every claimant has to elect to join the group on an individual basis. In effect, the administrative costs in recruiting claimants can often outweigh the value of the action itself. In its response to the Civil Justice Council's 2008 paper "Improving Access to Justice through Collective Actions", the UK Government has confirmed that it does not support a generic right of collective action. The Government has, however, endorsed a 'sector-based' approach to class action suits which would incorporate an "opt-out" feature where potential individual litigants in a defined class must elect not to take part in the proceedings or be bound by the outcome. The Financial Services Bill also proposes to widen and amend the scope for collective redress.

In addition to purely legislative discourse, current socio-economic factors may also provide the necessary impetus for a trend toward class action culture. In the midst of a waning National Pensions fund and a strained NHS, the UK courts have seen an upsurge in asbestos related litigation. This, coupled with developments in the third party funding sector and the potential for large investment in the UK litigation market, may fuel mass farming of class action claims. 

With trends pointing toward collective redress being transplanted (in some form or another) here in the UK, businesses must begin to carefully manage the potential for class action risk in terms of both financial and non-financial (such as reputational damage) cost implications. For reinsurers in particular, this means examining the impact of such risks on premiums and ensuring that policy wordings adequately respond to collective action.

Forum Shopping: An Evolving Feature of Modern Litigation

Forum shopping has emerged as the inevitable by-product of globalisation where companies now have established links across multiple jurisdictions. In effect, despite regulatory attempts at harmonisation in the EU, forum shopping continues to feature as an area of contention between parties. In 2009, a number of disputes including Allianz SpA v West Tankers Inc and, most recently, National Navigation Co v Endesa Generacion SA (The Wadi Sudr), were heard before the court where parties contested the forum in which proceedings were commenced or continued.

With forum shopping evolving as a feature of modern litigation, as most reinsurers have an international dimension to their businesses, the reality is that firms may sue or be sued in any one of their global locations. Reinsurers should therefore manage their exposure through building an awareness of the procedural rules of the legal systems where there are established links and assess the potential impact of such rules should litigation ensue. 

Where Next?

Reinsurers writing business in the US will be all too familiar with these themes. The readiness of the US courts to sanction class actions and award punitive damages has meant that reinsurers have often priced underlying US business differently to, say, European risks, as the claims experience tends to be worse. That same analysis may now have to be applied outside the US.

Reinsurers also need to remember the proposals for law reform in the UK, particularly the draft recommendations for consumer insurance and the recent proposals relating to a policyholder's entitlement to damages for late payment. These proposals, along with the Third Parties (Rights Against Insurers) Act 2010 (which received Royal Assent on 26 March 2010) have again the potential to increase the claims experience across a number of business classes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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