February 16, 2017

Legacy Quarterly Update

Domestic developments

Claimant market activity

Litigation funding

The litigation funding industry will continue to grow whilst equity provides a poor return on investment capital. We are also detecting an increasing tendency for funders to directly buy into appropriately skilled and organised claimant firms. For example, Burford Capital recently announced that it had entered into an agreement to acquire GKC Holdings LLC.  Both Burford and GKC are the two largest litigation finance players in the world. Burford itself, as we have predicted in previous briefings, now actively markets financing of particular portfolios to provide claimant lawyers with reduced capital costs, cross capitalisation (at risk) and significant accounting advantages (also discussed in previous briefings).

It remains to be seen whether Burford will choose to use this model to partner with claimant firms at the quality end of the market with appropriate expertise and governance structures. The structures for this type of operation are now already in place and this may appear to be a more attractive and less risky route to fund claimant law firms, given some well publicised failures of investee law firms over the last year.

Improved opposition

The temptation of higher capital returns is likely to lead to increased interest in investment in lower value claims, provided investees can demonstrate large claims volumes amenable to commoditisation. We are seeing litigation funders extending their attention from high value closely monitored commercial actions to clinical negligence and group/test litigation projects. Litigation funders do not just provide capital but improve risk assessment and triage of individual prospective cases and improved technical support and expertise and quality control of a potential investee firms. This could lead to a more formidable opponents and improved quality from claimant law firms. 

Asons

On the opposite side of the spectrum, the continued demise of Asons is illustrative of what can happen when a firm lacks appropriately robust regulatory structures and safeguards. The firm has been the subject of two recent cases concerning inflated bills of costs, which may result in SRA action.

The first case concerned grossly inflated bill of costs being submitted (Asons conceded 20% inflation of each bill) and the firm's partners signing only one template back cover (individual bills were therefore not being approved). Asons compromised the claim, resulting in repayment of a significant proportion of the costs claimed in these cases. It is also understood they have also entered into a file handler protocol to prevent this behaviour in future.

In the second case, Asons agreed to pay AXA £113,000 to settle a further costs dispute. Asons admitted that it falsely and systematically exaggerated its claim for costs in 65 personal injury cases after the firm had charged for a fee-earner with more than six years of litigation experience (Grade B) when the solicitor in question had only two (Grade C). Asons agreed to pay the insurer £70,000 plus interest and around £40,000 in legal costs.

Both cases resulted in the repayment of significant sums of costs by Asons, which will have proved particularly problematic for the firm. As they were repayments of profit costs, they would not have been covered under the firm's professional indemnity policy and accordingly will have to be met out of the firm’s own profits.

In response to the second case, the Solicitors Regulation Authority (SRA) has advised they are in the process of gathering all relevant information before deciding on appropriate action. The SRA has the power to take action against a firm, individuals or both, and it is clear from the SRA Handbook that firms are directly responsible for compliance.

In light of the admissions of exaggeration and supervision failures, it may be that partners will the focus of the investigation. Breach of duties under primary regulatory legislation such as the Solicitors Act 1974, Legal Services Act 2007 and Administration of Justice Act 1985 could be alleged, resulting from failures to comply with rules in relation to professional practice, conduct and accounts. In recent years, the SRA has begun to take a more proactive approach to investigations and is 'showing its teeth' to a greater extent in respect of enforcement action, with a number of firms being shut down.

Reinsurance market activity

Disposals

A soft re-insurance market with declining reserves has made risk transfers from composites to re-insurers more cost effective than in recent years. The run-off market has seen a surge of UK exposures totalling £6bn be offered to the market in the past 18 months, including the following deals:

  • RSA's disposal of its £900m+ EL book to Enstar
  • Catalina purchase of Allianz and The Hartford EL books
  • Swiss Re purchase of Aviva's EL book

As this domestic and international market activity and current intelligence indicates, almost all major composites have or are looking to release market capital by re-insuring or disposing of their legacy liabilities in the next 12 months. In the UK this includes Zurich's book of business, which represents approximately 30% of the UK legacy EL market.

Next steps

At this point it is too early to determine the impact on deterrent behaviours and the appetite of defendants for strategic litigation and the robust defence of claims for deterrent purposes. Reinsurers are currently integrating their purchased legacy books but struggling with logistics. There is an increased potential for a coordinated industry response (previously inhibited by Competition Act concerns).

This would facilitate the 'Big Tent' approach. This is a mechanism by which volume claims can be received by a central claims agency representing all insurers. That agency would front up and resolve a claimant's claim, leaving insurance and recovery issues as post settlement activities. This approach would require a more active recovery process, but possesses the advantage of reducing shelf life cycles and minimises the third party cost element of the overall transaction cost.

Clyde & Co intend to adopt a market leading approach in relation to this opportunity. We are building a potential model for presentation to both insurers and re-insurers as a means of delivering a more cost effective and coordinated claims handling service.

Litigation reform

The Government’s consultation on whiplash reform and increasing the small claims track closed on 6 January 2017. The proposals are predicted to halve the number of claimant firms operating in the motor market. Could this be a stalking horse for an extension to low value disease; namely NIHL claims?

We hope so. Last time the Government turned its attention to reforming the motor market, insurers witnessed an explosion of NIHL claims.  Indeed this has recently been backed up by an independent survey commissioned by the SRA. The key findings of the report confirm what insurers already knew; the flight of claimant lawyers from motor claims into other areas has led to an increase in prevalence of poor/non-existent triage with NIHL identified in particular as a problem area.

This report will of course increase the pressure for legal market reform. It may be that the increase of the small claims track (SCT) to £5,000 will take care of these issues, rendering it unprofitable for claimant firms to move further into the NIHL market. However, with the ABI recently declaring the SCT increase should be initially only increased in respect of motor claims, the position remains uncertain. Insurers will also wish to address outstanding de minimis issues with NIHL claims in order to ensure their future liabilities are more assured.

Alternatives to litigation

The civil court system for personal injury litigation in England and Wales is arguably no longer fit for purpose. Following the Jackson reforms, systemic delays and increases in unwanted and unnecessary procedural costs has resulted in a system that is unwieldy and unable to respond to users’ needs.

Procedural fees, in the vast majority of cases, are to be borne by insurers. Until there are cost orders against defendants, this also causes a real cash flow challenge for claimant solicitors. Even Court fees for basic applications now exceed £250 and it is clear from the historical record of increases in the last five years that these fees are likely to continue to rise. Indeed, costs will  increase further from March 2017, when it will no longer be possible to claim a refund of the trial listing fee if the matter settles or is discontinued. Going forward we can expect to see more examples of the Government using civil litigators as a convenient revenue system.

These developments provide an opportunity of contracting out of the court system for the resolution of personal injury claims. We are presently exploring two alternatives to litigation; namely PIcArbs (personal injury arbitration) and Consensus (a non-binding online system for parties to settle quantum personal injury cases consensually). We are hosting a roundtable discussion between key decision makers at insurers and claimant firms on 9 March 2017 to discuss the viability of these alternatives.  

Holiday illness claims

The Association of British Travel Agents (ABTA) has called for a crackdown on holiday illness claims after seeing a dramatic increase in the number of all-inclusive holiday illness claims. One hotel alone has already been hit by almost 200 cases this year.  ABTA is currently collating evidence to present to the Ministry of Justice (MoJ) and is set to meet with them in a bid to control the growing number of claims. It is understood that the MoJ has already set up a working group with the SRA to consider regulation of organisations and the appropriate costs environment for these claims.

The significant increase in gastric illness claims is largely due to Claims Management Companies (CMCs) targeting tourists while they are still on holiday. CMCs have expanded into the holiday market and are actively farming these claims since the Government's clamp down on whiplash claims in recent times. Indeed, these claims are typically of low value and capable of being industrialised in much the same way as motor or noise induced hearing loss claims. An attritional, oppositional model is likely to pay dividends for insurers and will hopefully result in the same levels of success seen in the noise market.

Whilst compensation awards can be significant, even for modest periods involving hospital attendance and with group litigation likely to expand in this area, courts are unlikely to accept accounts of symptoms beyond 48 hours without hospital attendance. This provides an objective threshold for injury authentication in the higher value cases. However it will not prevent spurious claims at the lower end where it will be difficult to challenge the veracity of the account in the absence of objective evidence of injury. Claims will be particularly hard to defend when the alleged symptoms occurred whist the claimant was still on holiday or began at that time. Credibility evidence will be central in defending such claims.

Child Sexual Abuse Inquiry Update - England & Wales

Peter Skelton QC, lead counsel for the Accountability and Reparations Investigation section of the Independent Inquiry into Child Sexual Abuse has provided further guidance on the scope of the investigations.

The Accountability and Reparations Investigation will consider the extent to which current legal frameworks and remedies open to victims of abuse effectively provides reparation for the harm suffered.  This area is unique as it is looking at the aftermath of abuse rather than prevention.  This strand of the Inquiry is in response to reports by victims / survivors of inadequate support, obstructive insurance companies and a civil justice system that fails to deliver adequate reparation.

Listening to victims

The investigation believes it is important to understand what victims and survivors consider constitutes adequate reparation and how they think it can be achieved. However, in the context of civil litigation, this will mean more than listening to the alleged victims and survivors.  It will include scrutinising the role of insurance companies and investigating how they conduct themselves in the claims process.

Conflicting interests between Insurers and Insureds

It is noted that insurers and insureds may have conflicting duties and are likely to have a different approach to allegations of child sexual abuse. Insureds (more specifically local authorities) have a duty to protect and promote the welfare of children, whereas insurers have a duty to scrutinise legal claims thoroughly.

Civil Justice Reform and Redress Schemes

The investigation is seeking to introduce reforms which would make civil litigation less adversarial. Suggestions have included using jointly instructed medical experts, greater emphasis on Alternative Dispute Resolution (ADR) and a meaningful apology which does not impact upon issues of liability.

Furthermore, the possibility of implementing more substantial legal and procedural reforms is to be explored, which may include changing the law on limitation and consent and more radical solutions, such as the creation of redress schemes similar to those in other jurisdictions.

It is important for insurers to consider what role they wish to play in this investigation to mould the future of the civil justice system, be that as a core participant, witness or observer.

The year ahead

The new Inquiry Chair, Professor Jay, recently confirmed the Inquiry will not be scaled back, despite criticism from some quarters that it is too large in its remit. The Inquiry will conduct public hearings into four areas in 2017; two on child migrants, one on abuse within the English Benedictine congregation of the Roman Catholic Church, and one on Knowl View school in Rochdale. However key hearings into Greville Janner, the Anglican Church and Westminster are not being held until 2018 at the earliest, calling into question whether the intended completion date of 2020 is achievable.

The Inquiry has also requested the Shirley Oaks Survivors Association, representing abuse victims from the former children's home group in Lambeth, to return to take part in the Inquiry after recently pulling out. Lambeth London Borough Council accepted liability for the harm suffered by hundreds of victims of abuse and has pledged to set up a £40 million fund to compensate victims, which it hopes to finalise in 2017. This reparations model will be monitored by local authorities and insurers with interest and could become a blueprint for other areas. 

Abuse – Scotland

The Scottish Government has published a Bill to abolish limitation for childhood abuse claims, covering any form of abuse suffered by victims aged under 18, provided it occurred after September 1964. The Bill is likely to be enacted by mid-2017.   

Insurers, the ABI and FOIL have all filed responses to the Bill, outlining their objections to the proposals. There is a need to strike an appropriate balance between those bringing claims and insurers not being exposed indefinitely to the threat of litigation.   

Indeed, claimants could raise actions which are already time-barred, thereby opening the floodgates for a great many new claims; it is understood the Police have recorded 5000 cases which could lead to potential claims. Operational issues, such as record retention, increased investigative costs and claims farming are all potential concerns for insurers if the Bill proceeds.  

The proposals would also allow Claimants to re-raise actions which have already been dismissed, although there may be a possibility of a res judicata defence as the matter will already have been adjudicated. 

Emerging risk – E-cigarettes

E-cigarette use in the UK has increased dramatically in recent years; 2.8 million adults now use e-cigarettes. Although they are marketed as a safer alternative to smoking, given the lack of regulation to date, the risks are largely unknown, raising the possibility of both short and long tail liabilities.

Public health experts have causation that e-cigarettes may increase nicotine addiction and tobacco use in young people, with the marketing of flavours explicitly targeting them. Retailers who fail to provide the appropriate warnings of addictiveness when selling this new nicotine delivery system may find themselves in breach of the Sale of Goods Act and other statutory obligations.

Recent studies have raised concerns about the safety of these products. Diacetyl, a flavouring chemical linked to cases of severe respiratory disease, bronchiolitis obliterans (colloquially known as “popcorn lung”) is found in more than 75% of e-liquids.  In another study, researchers found the chemicals present in e-cigarette vapour were equally as damaging, and in some cases more damaging to mouth cells, as tobacco smoke. These studies raise the serious possibility of a significant number of claims from both users and manufacturers of these products in the short and medium term. 

However, it is the long tail potential that is provides the greatest risk. E-liquids deliver nanoparticles to the user, which have already been linked to asthma and inflammatory conditions. These nano-particles have been hailed by some to be 'the next asbestos' due to the inherent inhalation dangers. Carbon nanotubes are a similar shape to asbestos fibres and are not limited to e-liquids. The risks could reach a far wider audience than asbestos given that nanotechnology could be used in a variety of industries, including food manufacture.

International developments

U.S. Talc litigation

In recent years the US has seen an upsurge in talc litigation. US civil juries have awarded record sums to plaintiffs whose talc usage over a lengthy period resulted in ovarian cancer. However, it has been the common interweaving of talc with asbestos at source, whose use has caused mesothelioma, which recently resulted in a Californian jury award of $18m and has rekindled the debate concerning the links between talc and mesothelioma. Indeed this has the potential to become a significant problem for manufacturers and their insurers.

The lawsuit accused the defendant as marketing talc as 'asbestos free' without adequately testing for the contaminant. The defendant was found to be 30% at fault by the jury after a six-week trial. A hydrous magnesium silicate, talc is a natural mineral that is part of cosmetics, food, gums, and tablets, raising significant product liability issues for producers who have not ensured their talc is completely asbestos free.

The predicted decline in mesothelioma cases has not yet occurred, and has been predicted by some to be increasing again. A new study by AM Best found that asbestos claims on historic policies “show no sign of abating”, with the total forecast bill for companies (including Berkshire Hathaway, Swiss Re and Munich Re) rising to approximately $100bn.

This is bad news indeed for the declining pool of defendants, already diminished from asbestos-induced bankruptcies. If these estimates are correct, claimants will be searching for solvent defendants to satisfy potential liabilities.  In the UK this could prove particularly problematic. Even with competing causation arguments, the Compensation Act will ensure that a single defendant will be liable for a claimant's entire compensation entitlement.    

Additionally, recent developments in international litigation have made it easier for overseas domiciled claimants employed by local subsidiaries to bring claims against parent companies domiciled in the UK. This allows claimants to sue parent companies in more favourable jurisdictions in respect of both damages and costs recovery. High levels of parental control will expose a UK domiciled parent company to liability, even if the subsidiary is overseas. When faced with this type of situation urgent action is required by insurers in assessing their own liabilities knowledge of historical activity and subsidiaries, even after they have been acquired.

Common law regimes

The regulatory legal system is commonly the principal driver for claims volumes within a jurisdiction. As can be seen from the map above, Great Britain and its former colonies and protectorates are countries with either current common-law or legacy common-law systems, which have proven to be the most fertile ground for claimant activity. Conversely, jurisdictions that operate under civil law or hybrid systems are less prone to this type of activity. This is largely because remedies for individuals are codified under civil statute or under schemes which provide a limited involvement for lawyers.

Jurisdictions that allow either contingency fees or recovery of costs see more claimant activity. If law firms can secure external investment rather than growing organically then we know that they can rapidly ramp up their activities; the recent UK hearing loss experience is a testament to this. This also been demonstrated further afield.

South Africa

South Africa is such a common-law system that has witnessed a proliferation of claims arising from the well-established mining industry. The regime has established historical dates of knowledge for liability purposes; compensation was first paid in 1912 for silicosis for example. However, despite the development of this statutory regime, there remains a culture of non-compliance with health and safety regulation, which has resulted in a jurisdiction with huge potential liabilities for asbestos, silica and tuberculosis claims.

This 'perfect storm' has resulted in a particularly active claimant community. One claimant firm reports securing 27,000 claimants, with class actions certified against 78 mines. Further, an estimated certified group for silicosis and tuberculosis of up to 500,000 miners and former miners has been approved.

Claimants are supported by a particularly pro-claimant establishment, seeking to redress the balance of the apartheid regime. This has allowed claims farming on an unprecedented scale and in light of recent international developments noted above, there is significant danger of forum shopping to bring these claims within the UK jurisdiction. Accordingly future claims growth in addition to what has already been seen is inevitable. Moreover the costs recovered from these large class actions will recapitalise these firms and prime pursuit of claims for all other industrial diseases.

India

Although being a relatively immature claims market, the world's fastest growing economy is beginning to pick up speed. In recent years accident insurers accounted for a drastic increase in the number of claims. For instance, the number of claims in ICICI Lombard General’s personal accident category increased from 578 in 2013 to 3,411 in 2015. This increased the paid claims value from INR0.8 billion (US$12.5 million) to INR2.1 billion (US$32.9 million) during the same period. This is perhaps indicative of the claims potential for this jurisdiction, which is particularly acute in the legacy market. 

India is the world’s biggest importer of asbestos; the use of asbestos is a growing $2billion industry with double-digit annual growth. India has at least 100 manufacturing plants employing some 300,000 workers, creating a growing pool of potential claimants. It is surprising that the local legal community has not identified claims opportunities given the sheer numbers of inevitably affected individuals.

This may be largely down to the current composition of the legal market; however, this may be set to change. The current government is pushing for reforms which will allow foreign lawyers to practice in India. This process is in the final stages of approval and may prompt claims farming activities as seen in South Africa and the 'passporting' of claims to the UK and other jurisdictions. Indeed Indian lawyers can and do work with US lawyers as has occurred with the Volkswagen diesel vehicles litigation. Whist this may be something of a current anomaly, it would be surprising if we don’t see the awakening of this potential legacy claims giant. Indeed, if deregulation of the legal market continues apace, what looks like a current low risk scenario may be anything but in the thirty years that it could take for exposures to manifest.

We will be exploring these and other key international legacy developments and emerging trends at the forthcoming annual Global Legacy Claims Conference on 4 May 2017 at our London office, St Botolph Building, 138 Houndsditch, London, EC3A 7AR. A Save the Date for this event will be sent out shortly.