Actually, let’s start with insurance generally.
All insurance companies need to make money (this comes as a surprise to some!). This means that they have to pay out less in claims than they get in in premiums and have enough left over to pay overheads, wages etc. In order to set annual premiums, insurers analyse risk very carefully and set premiums high enough to cover their calculated risk (and a bit on top just in case). If they get it wrong, there is always next year’s premiums which will have to go up to cover any losses from the year before and to cover the increased risk calculation this year.
After the Event Insurers operate in a similar way but with a few differences. First, they need to make money so they calculate premiums based on risk just as a domestic insurer. The problem is, premiums are normally only paid at the end and aren’t paid annually – the end means the end of the case and this can be 3, 4, 5 or more years away. This is a long time for the cash to come in and also a long time before the insurer knows whether or not it is getting it right or not. It is therefore only now, after many years of operating, that ATE Insurers are bedding down their risk profiles. Just when they get it right, things are about to change of course (see Jackson).
The other problem for After the Event Insurers is that the market (in insurance terms) is very small. Domestic insurers may have millions of policy holders whereas ATE insurers are lucky to have 10,000. This means the spread of risk is much lower. Lower risk spread means lower premium income, higher premiums and higher risk.
So you see, ATE Insurers get upset with solicitors who don’t play ball and insure all of their cases from day one. The problem with firms insuring later on is that, by doing this, the ‘easy’ cases which are settling early aren’t being insured. With no premiums coming in from these straight forward claims, the insurer’s spread of risk is further reduced. It is like a tightening net and a bit of a downward spiral. This is because, if a solicitor insures later, the premiums the insurer has to charge to maintain income for virtually the same risk means all premiums have to rise. The solicitor is then faced with higher premiums so is put off insuring early and in fact waits even later – perhaps until proceedings are issued. This means there is even less spread of risk so premiums rise again etc etc. You get the idea.
There is another problem though. Insuring late means that a lot of the claim isn’t going to be covered. Let’s do a comparison with health insurance. If you take this out when you are young, premiums are cheap – perhaps just a few pounds per month. Why? Well, the risk of you being ill when young is very low. If you wait to take it out until you are say 50, premiums are very high because people who are in their 50s tend to have more ailments. Let’s say though that you wait until you are 50 years old to take out a policy. Once on cover you then contact the insurer and say that you incurred some physio charges two years ago due to a bad back. Do you think the insurer will pay up? Of course not. The treatment occurred prior to the inception of the policy. This is exactly the same as an After the Event Insurance policy. If a solicitor takes it out late in a claim, any disbursements incurred prior to the policy start date won’t be covered AND MOST POLICIES WON’T COVER THE DEFENDANT’S ADVERSE COSTS UP UNTIL THIS POINT EITHER. This means, by insuring late, a solicitor has exposed their client to the risk of having to pay pre-policy disbursements, adverse costs and a very high ATE Premium to boot.
So the moral of this tale is, insure everything and insure early.