Responsibilities to Private Third Party Funders

A. Private Funders

Third party funders may support an action for a variety of reasons. They might also decide to withdraw funding, leaving lawyers with clients but no less prospect of get­ting paid.

An example of how obligations may accrue, and not be honoured, arose when the Labour Party announced that it was supporting councillors accused of election fraud.¹³⁰ This involved the party retaining solicitors on the councillors’ behalf. The case became a political embarrassment and the party withdrew support for the coun­cillors one week before trial. The solicitors withdrew at the same time. Whether or not this was for funding or other reasons, it created a clear impression of the clients’ guilt.

When a funder withdraws financial support, a solicitor’s duty is still to the client. The solicitor is, however, able to withdraw from the case where it is clear that the client can no longer cover the fees and costs. Reasonable notice of withdrawal is a minimum requirement for discharging any responsibility to the client. In the event, the councillors had to rely on a barrister, acting pro bono, who had not done any preparation for the case. The judge found the conduct of the Labour Party and the solicitors ‘inexcusable’.

¹²⁸ J Flood, A Boon, A Whyte, E Skordaki, R Abbey and A Ash, Reconfiguring the Marketfor Advocacy Services: A Case Study of London and Four Fields of Practice (A Report for the Lord Chancellor’s Committee on Legal Education and Conduct, 1996) at 101.

¹²⁹ Taylor, The Guide to the Professional Conduct of Solicitors (n 49) guidance to r 20.04, para 2.

¹³⁰ Private Eye 15 April 2005.

B. Insurance Companies

Insurance companies are the largest private funders of litigation and other legal expenses.

In the modern legal services market there is a proliferation of potential third party funders of claimant litigation. Organisations providing ‘before the event insurance’ to help personal injury victims include insurance companies, trades unions or profes­sional bodies, associations like the AA or RAC, charities and pressure groups. It is not unusual, in the case of personal injury for example, for household or motor insurance to cover the prospective claimant’s legal costs.

i. The Operation of before the Event Legal Expenses Arrangements

The Financial Services Ombudsman states that legal expenses complaints are usually about one or more of three issues. These are whether proposed actions have reason­able prospects of success; choice of solicitor and maladministration of the policy or the claim.^[2131] These tend to involve the insurance company, but lawyers may also be implicated.

a. Deciding whether there is an Obligation to Cover Risks

An issue that sometimes arises is whether or not there was an ‘insured event’. Insured parties may be able to claim on a legal expenses insurance policy when the event occurred before the policy was taken out. An example is where they suffer loss, as a result of negligence by another party, of which they were not aware at the time. In such circumstances, the insurance company may decide not to cover legal expenses. Whether or not the court or the regulator requires cover to be provided depends on the terms of the insurance and the behaviour of the insured.

Another common issue in before the event insurance claims is legal merit. There is generally a contractual clause providing that there must be a ‘reasonable prospects of success’, before an insurance company has to cover legal expenses. In the insurance industry this generally means that there is a 51 per cent or more chance of winning. An even chance of success is not usually sufficient. Normal practice is for the insurer to consider whether there is a prima facie case and to then pass the file to an external firm of solicitors on the insurer’s panel. The opinion of this firm usually determines whether the insurer agrees to fund the claim or the defence.

When policyholders dispute the funding decision they usually have to produce evidence from a suitably qualified independent lawyer to support their view. This procedure creates a risk of opposing views. In such cases, it is usual practice for the insurer to obtain an opinion from a barrister specialising in the relevant area of law. Greater weight is usually placed on the barrister’s opinion than that of either solicitor.

The third common issue raised in consumer complaints is prejudicial behaviour by the insured. An insurance company may be able to avoid providing legal expenses where the insured party has prejudiced the claim in some way. The most common cause is delay. This may mean that it is no longer possible to preserve evidence or trace witnesses. There may be other difficulties in launching litigation such as time limits or the risk of paying large sums in costs. These risks may have increased where proceedings have been undefended for a period of time.

b. Proportionality of Cost

Insurers can often refuse funding if, in the opinion of their lawyers, the cost of pro­ceedings is likely to be disproportionate compared to the amount of any sums recov­ered. The test of whether an insurer can refuse to back a claim is whether a prudent uninsured person would probably fund an action in the absence of insurance.

c. Choice of Solicitor

Solicitors cannot generally enter into agreements with insurance companies giving them the right to act for a particular client. This would restrict the client’s freedom of choice of solicitor. Most insurance companies have a panel made up of solicitors’ firms that they trust and they prefer to use them when they can. Insured parties often want to use their own solicitors from the start of a matter. Legal expenses policies generally allow insurers a free choice of solicitor to provide advice and assistance up to the time where legal proceedings start.

Once proceedings are issued the Insurance Companies (Legal Expenses Insurance) Regulations 1990^[2132], which give effect to European Directive 87/344,^[2133] come into play. Regulation 5(4) provides that ‘The company shall... afford the insured the right to entrust the defence of his interests from the moment that he has the right to claim from the insurer under the policy, to a lawyer of his choice’.

Regulation 6 continues, rather unnecessarily, to state that the insured shall have freedom of choice of a lawyer ‘to defend, represent or serve the interests of the insured in any inquiry or proceedings’. Regulation 6(2) states that the insured has a free choice of lawyer where a conflict of interest arises. The Regulations cover legal proceedings pursued and defended in tribunals, for example, employment tribunals. This places solicitors handling claims in a potential conflict of interest situation. They have an interest in delaying the issue of proceedings. This is considered further below.

The time between the receipt of a claim for legal expenses and the start of pro­ceedings is something of a grey area.

The Financial Services Ombudsman takes the view that, with modern communica­tions, panel solicitors can be located anywhere without disadvantage to the insured. He tends not to regard disputes over freedom of choice of solicitor as a conflict of interest. The Ombudsman considers that a solicitor would only be professionally embarrassed if they continued to act where, for example, they had previously acted for the policyholder’s opponent, knew the policyholder personally or knew confidential information about the opponent or were guilty of an act of professional negligence.

Although the policyholder has a free choice of solicitor once proceedings begin, that solicitor has to accept the insurance company’s standard terms of appointment in a separate contract. The contract does not usually specify an hourly rate for the solici­tor and this is a matter usually negotiated separately. There are potential problems when insurers specify a particularly miserly hourly rate. Their panel solicitors may accept the rate because their economies of scale, handling bulk work for the insurer, make it viable. The policyholder’s chosen solicitors may find the rate unacceptable.

d. Maladministration

Insurance companies are not usually responsible for delay or other default by solici­tors they instruct on behalf of insured parties under their legal expenses insurance policies. This may not be the case where the insurance company intervenes in the claim. In Chapman v Christopher,^[2135] for example, the court found that the solicitor for the plaintiff was, in reality, being instructed by the insurance company.

Where solicitors are guilty of gross maladministration in relation to a claim, and the insurer was aware of this but failed to intervene, the regulator may also order that compensation be paid by the insurer to the insured party. There is also an option for the lay client to pursue a complaint with the Legal Ombudsman.

ii. General Ethical Problems

The usual rules apply when a solicitor is instructed by an insurer to act for an insured. Therefore, the solicitor is required to consider, and advise on, alternative funding sources. They must also consider whether there is a conflict of interest in the situation. It is not assumed that merely receiving third party funding is a conflict of interest, although it may create practical and ethical difficulties for the solicitor. Whoever pays solicitors’ costs, their prime duty is to advance the best interests of the lay client, not those of the funder.

There are obvious ethical problems for panel solicitors in the early stages of claims. They have a primary relationship with an insurance company but are investigating a claim for a client. The interests of insurance companies, put crudely, is not to risk their funds on pursuing claims if at all possible. Therefore, solicitors may be reluc­tant to certify to insurers that claims have more than a 50 per cent chance of success. If the case is lost, the insurer may decide not to risk instructing the solicitor again. Although some clients may challenge the panel solicitor’s opinion, there is a cost and risk attached. Balancing the interest of the lay client and the third party funder in this situation presents a classic conflict of interest.

A further ethical problem for the panel solicitor is that they have a personal inter­est in maximising their costs. In a matter where they are paid on an hourly basis, this means continuing to handle the claim for as long as possible. If they know that the client would prefer to instruct a solicitor they know, they have an incentive to delay issuing proceedings for as long as possible. This is because the issue of proceed­ings triggers the operation of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 and the insured’s right to their own choice of solicitor. The solici­tor’s interest in continuing with the claim provides an incentive not to issue proceed­ings, even though this may be in the lay client’s interest.

Once proceedings have started there are other ethical risks posed by third party funding. The risk of conflict of interest potentially impinges on the duty to preserve the client’s confidentiality. Many legal expenses funding arrangements require solici­tors to inform the funder of the progress of the case. The insurance agreement nor­mally imposes express contractual responsibility on the client to do this. This however, is essentially a matter between the insurance company and their insured.

Solicitors should not breach confidentiality by providing client information direct to the insurer, even where the client has agreed with the insurer to provide infor­mation. It is not clear where the boundary between information that the insurer is entitled to, for example, about the progress of the case, and client confidential infor­mation, actually lies.

C. Regulatory Responsibilities to Private Third Party Funders

The Solicitors Act 1974, section 71 provides that third parties can apply for assess­ment of costs. Beyond the general prohibition on taking unfair advantage, the Codes of Conduct have not provided any specific duties towards third party funders. They may benefit from other general requirements, such as the requirement that solicitors allow sufficient time and information for their costs to be agreed or assessed.¹³⁶ ‘Information’ includes the basis on which fees are calculated.

D. Regulatory Responsibilities of Private Third Party Funders

In the wake of the Jackson Report on the cost of civil litigation, the Civil Justice Council set up a committee led by Michael Napier, an eminent solicitor, to consider practical ways of implementing the reforms. This led to the publication of a code of conduct for third party funders of litigation and the formation of the Association of Litigation Funders. Members of the Association agree to abide by the code. Lord Justice Jackson said that he expected solicitors to advise their clients to only enter agreements with litigation funders who signed up to the code.¹³⁷ This falls some way short of regulation of funders, but offers a way forward on improving standards in the industry.

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