In almost every liberal democracy in the world except ours, the loser of a civil lawsuit must pay the winner's reasonable attorney fees. For those who hope to rein in our uniquely high rates of litigation, a "loser-pays rule" seems like a common-sense way to weed out nuisance lawsuits. But critics of loser pays worry that that the rule would bar the courthouse doors to middle class plaintiffs who can't afford to risk the family nest egg.
If it were true that a loser-pays rule would discourage legitimate plaintiffs with modest means from seeking justice, it would be a very serious objection to loser pays. But this concern is successfully addressed around the world by legal expenses insurance, which insures plaintiffs against the possibility of having to pay a defendant's legal fees. Because over 90 percent of cases settle before trial, insurance is surprisingly affordable in loser-pays countries, and in many cases no premium is charged unless the plaintiff wins or settles the insured case.
Legal expenses insurance takes two common forms in loser-pays jurisdictions. The first is traditional legal expenses insurance, for which a premium is charged every month, and which covers any legal expenses that might arise as the result of events (such as accidents) that occur after the policy is in place. The second is so-called "after-the-event" legal expenses insurance, which is purchased when an injured party files a lawsuit and will pay an adverse fee award if the suit is unsuccessful. Both types of litigation insurance protect the viability of strong cases while deterring weak claims through the underwriting process. Insurance can spread the risk of losing a good case across many such claims affordability, while poor case are uninsurable.
Traditional legal expense insurance is particularly common in Germany, where about 42 percent of all households have policies. It is a stand-alone product in Germany due to regulatory constraints, but it is often offered as an add-on to homeowner's insurance or auto insurance in England and elsewhere. Traditional policies cover the hourly fees of plaintiffs' attorneys (to be remitted by the defendant if the suit is successful), eliminating the need to hire attorneys on a contingent basis. If American jurisdictions adopted loser pays, traditional legal expense policies would attract middle-class purchasers, who have assets to protect and commonly carry other forms of insurance, such as life insurance and homeowner's insurance.
After-the-event insurance goes further to ensure access to justice by offering coverage to plaintiffs with good cases, even if they carried no insurance prior to their injuries. Insurers issue after-the-event policies for particular lawsuits when they are filed, which indemnify the purchaser for any award of attorney fees in that particular case. Frequently after-the-event coverage can be obtained at no upfront cost to the plaintiff: Premiums can be advanced by plaintiff's lawyers or can take the form of a percentage stake in any recovery. In some loser-pays jurisdictions, after-the-event premiums can be recovered from defendants if a lawsuit is successful. Insurance doesn't usually do this job alone, however. Loser-pays nations have historically promoted access to justice with a combination of public legal aid, union-funded legal aid and legal expenses insurance, all of which indemnify participating plaintiffs against the risk of owing attorney fees in the event of a courtroom loss. Because union membership is lower in the United States than elsewhere, and because state-funded legal aid has been historically unpopular, legal expenses insurance would play a central role in a loser-pays system here at home.
Therefore, American reformers must ask: Can legal expenses insurance do what must be done for poor and middle class plaintiffs here in the United States without the generous legal aid programs that typically supplement its effects overseas? The rapid rise of legal expenses insurance for personal injury suits following legal-aid reductions in England and Wales demonstrates that it can. The insurance industry there responded quickly and effectively to new demand for these important products.
England and Wales have historically prohibited contingent fee agreements of any kind. In 1990, however, the British parliament passed a measure legalizing "conditional fee agreements" for personal injury claims and certain other proceedings. A client with a conditional fee agreement need not pay legal fees for an unsuccessful case. In return, the client must agree to pay an extra "success fee" to the lawyer if the case is won.
In 1998 the government extended the measure to allow conditional fees in all civil cases except family law proceedings. At the same time, the British parliament cut most public legal aid for civil plaintiffs. Previously, most of the population had been eligible for legal aid—a subsidy sure to stunt the growth of the private market for legal expenses insurance. The 1998 reforms eliminated legal aid for personal injury claims and restricted aid for other kinds of cases to the truly needy.
These twin reforms—legalizing conditional fees and cutting legal aid—effectively privatized personal injury litigation in England and Wales. Lawyers and insurers, rather than taxpayers, are now underwriting litigation risk for plaintiffs. The insurance industry responded to these changed circumstances by introducing a variety of after-the-event policies in what has become a robust and competitive market. At least seven different British insurance companies now advertise after-the-event policies online. These policies generally require a very modest up-front application fee (advertised fees were 100- 250) that can be advanced by a plaintiff's lawyer, as well as a premium that may be collected only if the case is won or settled. At least two after-the-event insurers make their application forms available online. They are four to six pages in length and are usually filled out by a plaintiff's attorneys.
In a few short years, after-the-event insurance has gone from niche product to industry leader in England and Wales. Katy Dowell of TheLawyer.com, a British trade publication, recently estimated that formerly uncommon after-the-event insurance is now purchased for three out of four civil lawsuits filed by conditional fee lawyers. The rapid growth of the market for this important product in England and Wales should encourage American policymakers to believe that legal expenses insurance could effectively preserve access to justice here at home if loser-pays reforms are implemented.
Unfortunately, outdated ethics rules mean that legal expenses insurance is not unambiguously legal here in the United States. State and federal lawmakers should adopt loser pays to stem the tide of abusive litigation and to better compensate deserving plaintiffs. But at the same time, they must eliminate legal barriers to the development of a robust litigation insurance industry so that the courthouse doors remain open to the legitimate claims of all Americans. England and Wales have demonstrated that insurers can handle this important task.