To Litigate Or Not? What Insurers Need To Consider Before Going To Court

It's official, the UK economy is now in a recession.

And inevitably, the insurance sector will see a rise in fraud, an

increase in the level of defaulters and a squeeze on profits. It

will also see a hike in the number of litigation cases, according

to Nichola Evans, partner at law firm Browne Jacobson.

To badly paraphrase Jane Austen, it is a truth universally

acknowledged that commercial litigation increases during a period

of recession. With commentators now suggesting that we are entering

the worse recession for 50 years what is likely to be the legal

fallout?

Statistics show that litigation is rising. Whilst the number of

cases being issued in the Commercial Court fell between 1999 and

2005, they rose again significantly in 2006. The Ministry of

Justice Judicial Statistics show that in 2005 49,442 cases were

issued whereas in 2006 this figure jumped to 61,691 cases. There

was a further increase in 2007 and most commentators expect that

trend to continue for the foreseeable future.

As companies face more and more financial pressure, they are

forced to look at their bottom line. This leads to debts being

chased more effectively, but one further consequence is that

companies will look to their advisers and analyse the quality of

the advice which has been given.

The recent financial crisis – which has hit global

markets and banks alike - has led to what one newspaper called a

"tsunami of lawsuits". There has also been judicial

comment upon the likely rise in litigation most notably in the case

brought by RAB Capital against PricewaterhouseCoopers, the

administrators of Lehman Brothers.

So far the bulk of the litigation has been brought in the United

States, much of it by way of class action – where many

individuals group together to bring a case against a third party

such as a company. Part of this is due to the fact that in the US

one has the ability to claim punitive damages and also the Claimant

is not responsible for the Defendant's costs.

"There have been various forms of claim and inter alia:

Investors v banks – this can relate to allegations of

negligent misstatement, the purchase of asset-backed securities

based on bad loans or for improper accounting.

Businesses v banks – in particular pension funds

companies who have assessed how much money has been lost on the

back of sub prime investments.

Banks v banks – for instance Barclays Bank who sued

Bear Stearns over its management of a hedge fund.

Businesses v lawyers and accountants and these types of claim

have taken various forms.

The common theme here is that in due course – some

taking months, some years - these claims will all arrive on the

desks of the insurers of the defendant companies.

Over the coming years it is anticipated that the legal fallout

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