So we are now 6 weeks into the new regime and how is it going?
From our point of view – not bad, although still slow compared with before the changes. We have been speaking with our 300+ firms and have managed to glean some interesting details.
First, many have yet to work out what they are going to do in order to get cases in from referrers. They can’t pay for them anymore – so other arrangements have to be put in place. Problem is, with the rush to beat the change, it was all hands on deck and so quite a number of practices decided to put off the decision making until afterwards. Of course – with floods of work in March – this also translates to lots of clients to service in April and May. It is only just settling down a little and so some minds are only now being turned to the future.
Second, of the firms who have made a decision about what to do – they all seem to have made the same choice: charge the client a percentage of their damages then pay for the After the Event Insurance out of that – and they say this is less than most other firms (which it isn’t). Why this structure? We have been looking into this decision and, in our opinion it is flawed. Now, we do have experience at the coal face in our earlier guise as PI solicitors so we are not talking total rubbish here. Why would you say to a client: we will charge you 25% + VAT of your damages and that’s it? Sounds greedy. Why not say – we will charge you 20% + VAT of your damages if you win plus you have to take out insurance costing £106 just in case you lose. It is an easier sell isn’t it? After all – all clients understand what insurance is. Also – this is actually cheaper for the client because Insurance Premium Tax is 6% but VAT is 20%. Why set up a structure which costs the client more money?
Third, we have discovered that some firms are giving clients the choice whether to insure or not – and guess what? Some choose not to. So what happens if those cases are lost? Who pays then? Some firms say they will go after the client for the money (assuming they can find the clients of course). Really? Isn’t that throwing good money after bad? Aren’t those clients going to run straight to the SRA and say you failed to advise them properly? How much time will be spent by a partner dealing with those complaints? At £200 per hour, will it be more than 30 minutes of the partner’s time per complaint? I think it might be considerably more than that. Why not insist on insurance on all cases?
There is another reason why this is important of course. Do you know why Electric cars are much more expensive than petrol ones to buy? It isn’t because the components are more complicated or more expensive to make. It is because of economies of scale – i.e. the fixed costs of production (the factory production line, workers’ salaries, marketing etc.) have to be split across the numbers of cars sold. Those fixed costs are the same pretty much no matter how many cars get sold so the fewer sold, the greater the share of the fixed costs each car has to contribute so the higher cost of the car. If many thousands get sold then the fixed cost per vehicle reduces – and therefore so can the sale price. It is the same with insurance. Fixed costs are the same no matter how many policies are shifted. If a large percentage of clients are allowed to move the burden of insurance onto the solicitor firms (i.e. it will be the firm who loses money if an uninsured client’s case is lost) then the cost of insurance will begin to rise as those fixed costs will need to be spread over fewer policies.
Why should you care?
Well, ATE Insurance is here to stay. How much it costs and whether it will be solicitors or clients footing the bill is largely up to the collective will of the legal community. Don’t blame us if a year from now premiums are costing 3 times as much. I recommend that you start telling your clients what to do for a change.