IB Talk

Paul Lucas 00:00:06 

Welcome to IB talk, the leading podcast for the insurance industry across the UK and Ireland brought to you by Insurance Business. 

Narrator 00:00:15  

This episode is presented in partnership with Travelers. In the latest episode of IB talk to industry experts from tribalists, Europe. Join us to address the new and emerging risks that brokers need to be aware of as class action lawsuits based around anti-competitive behavior experienced explosive growth in the UK. 

Mia Wallace 00:00:42   

Hello, and welcome to the latest edition of IB Talk, the insurance industry podcast brought to you by Insurance Business. My name is Mia Wallace, Senior Editor of Insurance at Insurance Business. On today's episode of IB talk, we'll be discussing the rise of group litigation funds and uncovering the risks that are resulting from this unprecedented growth. With that in mind, I'm delighted to be joined by Donna Hurst, Director of Professional Indemnity at Travelers Europe, and James Graham, Managing Director of Professional Indemnity at Travelers Europe. Huge thanks to you both for joining me here today. 

Donna Hurst 00:01:18   

Thank you for speaking to us.  

James Graham 00:01:20   

 Great to be here. 

Mia Wallace 00:01:21   

 And just to get us started, it'd be lovely to hear a little bit about you and the remits of your respective roles at Travelers, Europe, maybe starting with you there, Donna? 

Donna Hurst 00:01:30 

Yes, I'm a Director of Professional Indemnity and I've worked in the PII underwriting team at Travelers for 22 years in total and have previous experience in claims and broking. I underwrite various professions but have increasingly been focused on our growing book of solicitors PII. In my current role, I work alongside James on our underwriting strategy for the solicitor's account. This involves using information and data from our claim team, our risk managers and our brokers to ensure that our underwriters can make informed decisions and that we have a leading proposition for the solicitors PII market. 

Mia Wallace 00:02:08   

Wonderful and how about yourself, James? 

James Graham 00:02:11   

I am a Managing Director at Travelers Europe and I've been in the team for just over 18 months. Previously, I was a broker to small and global broking house for 13 years. In my current role, I manage the team and liaise with the SRA Law Society and law firm ambition, and work alongside Donna on underwriting strategy for our solicitors portfolio. We can consider these startups right up to the Magic Circle and international firms. 

Mia Wallace 00:02:40 

That's interesting. James, I can imagine that your world gives you a real horizon view into their professional indemnity market as it stands today. It'd be lovely to get an overview of what's actually happening in the group litigation space. 

James Graham 00:02:53   

Yeah, no problem. So, Climate Group litigation is primarily the means through which consumers can seek redress against large corporate defendants. Coming together using several procedural mechanisms available to bring claims which would be uneconomic to pursue on an individual basis is becoming more widespread in the UK and more professionalized. This is largely due to three factors, the increase in actionable defendant behaviour, the availability of litigation funding to support these claims, and the rise of specialists law firms, that are bringing these claims. Traditionally, only opt in style group litigation has been available in the UK. Group Litigation Orders or GLOs were formalized in 2000 under Part 19 of the civil procedure rules. And since then, there have been 109 Group litigation orders initiated as of April last year. The relatively low number of these type of actions is a factor of the cost benefit analysis in funding and back in this litigation. Only those class participants who actively join the litigation will be a member of the GLO and that adds to the total value of the litigation and given the typically low value of individual claims, only if a sufficient number of claimants join will the action be financially worthwhile to law firms and indeed their funders. As a consequence, any law firm wishing to represent such a group will need to seek out as many participants as possible at the outset. However, there has been a change the consumer rights act 2015 expanded the role of the competition Appeals Tribunal, and in 2021, they set clear precedent to allow us style opt out class action litigation, which we hadn't seen before will be only in the area of competition law. As is similar in the process in the US. If such class status is granted then the judgement is binding on all individuals or entities who fall within the defined scope of that class unless they specifically choose to opt out in advance of litigation. So, this development has led to an explosion of investment into these types of cases. And recent research by Thomson Reuters shows that the value of class action lawsuits filed in the UK over claims around anti-competitive behaviour search six folds from 4 billion in 2021 to 26 billion in 2022. The first wave of these matters have focused on large financial companies and technology platforms, such as Google, Apple and Sony, but are expected to increase in frequency. This result means that the UK is now one of the most attractive jurisdictions in which to commence group litigation. An example is that Sony are currently facing a 5 billion lawsuit over claims that abused its market position to overcharge customers who purchase digital games or in game content by the PlayStation Store. While Apple are facing a 1.4 billion claim over allegations that abused its monopoly power by over choosing overcharging customers through the App Store. 

Mia Wallace 00:06:06 

And it's incredible to see some of those statistics that you mentioned that James and Donna from your perspective, what have been some of the key factors behind the rise of group litigation firms? 

Donna Hurst 00:06:16 

Claimant group litigation is inevitably tied to the litigation funding market. These cases are all funded by firm’s investors or dedicated litigation funders and not the claimants themselves. Unlike more traditional commercial litigation, where clients pay their lawyer’s fees as the case progresses and are liable for the other side's costs if the court so orders. In claimant group litigation, it is the firm's funders and after the event insurers, which bear the risk in the event that cases are unsuccessful. Claimant law firms in this area must necessarily develop expertise in innovative funding solutions to support the claims they run. Third-party funding after the event insurance and bespoke fee arrangements are the tools necessary to get claimant group actions off the ground, as well as litigating the merits of the often complex underlying cases. Claimed that law firms must also understand these commercial elements and the detailed regulatory rules and case law which govern them. The litigation funding agreement or LFA, between the funders and claimants and counsel will establish the basic framework of the relationship between the parties. The essence of most stellar phase is the funders promise to pay the claimant’s legal costs in exchange for a share in the proceeds, should the claimant win. Conditions to the funding will be set out in the LFA, including obtaining an insurance policy to cover adverse costs, and obtaining the necessary corporate authorizations from the claimant. An LFA will set out the order of payments, which is also known as the waterfall, on a successful outcome between the funder claimant, and depending on the circumstances of the case, the after-event insurer and lawyers instructed on a contingent fee agreement. 

Mia Wallace 00:08:13   

And you can see how the rapid growth of these banks is evidently creating changes in the market. But from your perspective, Donna, what are some of the key risks associated with this growth? 

Donna Hurst 00:08:23   

So, both opt-in and opt-out litigation styles share one key exposure in common. The fact that these classes are comprised of 1000s to even millions of claimants. While each individual claim will typically be very nominal in some, the potential for a significant volume of claims looms in the background should there be a catastrophic failure on the merits of the litigation. There are some differences in exposure between the two. By its nature, claimant identification and its pitfalls is critical at the front end of opt-in litigation. Firms must endeavour to identify and correctly register as many potential claimants during a limited window of time. Failure to do so correctly can mean the claimant loses their chance to seek legal redress, leading to lost opportunity claims. Conversely, this exposure is more apparent at the back end of opt-out litigation. After a settlement or judgement is reached, the firm will need to arrange payment of the proceeds which will require correct identification of each claimant, ensuring they appropriately meet the scope of the defined class. Opt-out litigation is less common in the US and the UK. There are also aggregation risks related to group litigation. First of all, as there are multiple claimants, the nature of this litigation gives rise to an aggregation risk should there be a critical error on the merits of the underlying matter. Secondly, under the minimum terms wording, insurers cannot aggregate claims across years, given the large number of claimants, in the event of a catastrophic failure, there is the potential that not all claims will be received by the firm in year one. Finally, there is the sideways exposure of potentially having more than one firm in a portfolio working on the same matter. Therefore, insurers need to consider the possibility that if there is a catastrophic failure on the merits, it is very likely to impact all group members represented by all of the applicable firms in the portfolio, as opposed to Client Onboarding issues, which is more likely to be firm by firm. 

Mia Wallace 00:10:36   

And as underwriters, I know your views always towards nurturing the sustainability of the marketplace. So, James, how can these risks be accurately assessed and underwritten?  

James Graham 00:10:48 

So I guess typically, underwriters will need to understand what collective matters are going to be worked on how many claimants there will be in each, the estimated range of values of the individual claims, and in the aggregate, will need a detailed breakdown of the fees, including working process, anticipated success fees, and over what time scale, how much capital is being invested, and where from and also a detailed business plan. We will also need to understand whether the firm is a lead or partner or CO counsel, we need to understand what experience and expertise the partners have in collective actions, how many support staff they will have and what the supervision ratios will be, and importantly, what systems and infrastructure is in place to support the volume of the work. And again, and the previous claims experience of the individuals involved. As Donna mentioned, you know, Client Onboarding is very important, we need to really understand this process. We need to understand how the clients will find the firm. Is it via online questionnaires? Is it through websites, printed media, social media? and whether they're using a lead generation model and is that in-house or via third parties? Who is responsible for the development of the onboarding criteria? And our prospective clients made aware of the potential negative outcomes of the litigation? And importantly, how a client retainers and the scope within them managed? With respect to prospective clients that do not qualify via the client onboarding process, we will need to understand you know how this is communicated to those individuals. Are there written disengagement letters issued? Are referrals sent to other law firms? And are such individuals made aware of issues around periods of limitation for bringing their claims? And finally, case management will need to understand the systems and processes in place to monitor the ongoing developments of litigation matters, ensuring that you know limitation periods are not missed. And finally, you know how data is collected and kept safe given the large number of potential claimants and potentially personally identifiable information. It's important for us to understand how the firm will comply with GDPR. 

Mia Wallace 00:13:17  

Thank you very much for that James and Donna for brokers operating in the market. What are some of the key ways in which the Travelers Europe team is equipped to support them? 

Donna Hurst 00:13:27   

So, Travelers has a history of expertise in underwriting and ensuring these types of firms. We can also offer double A-rated security. We have an in-house claims team made up of qualified solicitors with experience in handling these types of claims. And we also have an in-house risk management team who can provide advice and support 

Mia Wallace 00:13:49   

Fantastic. And for brokers looking to find out a little bit more what's the best way to get in touch 

James Graham 00:13:55  

Probably to go to our website travelers.co.uk/legal. And there's also additional information found on the law firm ambition website as well. 

Mia Wallace 00:14:07    

Fantastic. Well, thank you both very much, Donna and James, for taking the time to speak with me today and to share your insights into this fast-evolving marketplace. 

James Graham 00:14:17    

Thank you very much Mia.  

Donna Hurst 00:14:18 

Thank you. 

Mia Wallace 00:14:19   

And thank you also to everybody for tuning in. And I look forward to welcoming you next time here on IB talk. 

Narrator 00:14:27 

Thank you for listening to this episode of IB talk. For more from the team at Travelers. Visit them at travelers.co.uk Thank you for listening to IB talk. For the latest episodes Be sure to follow us on all major listening channels.