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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Callery v. Gray [2001] EWCA Civ 1246 (31st July, 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/1246.html Cite as: [2001] 2 Costs LR 205, [2002] RTR 11, [2001] 4 All ER 1, [2001] CPLR 501, [2001] 1 WLR 2142, [2001] Lloyd's Rep IR 765, [2001] EWCA Civ 1246 |
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Case No: B3/2000/0540
Neutral Citation Number: [2001] EWCA Civ 1246
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHESTER COUNTY COURT
His Honour Judge Edwards
District Judge Wallace
Royal Courts of Justice
Strand, London, WC2A 2LL
Tuesday 31st July 2001
Stephen Callery |
| |
- and - |
||
Charles Gray |
Defendant/Appellant |
"Recovery of insurance premiums by way of costs
Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy."
7. The phrase `a liability in those proceedings' is imprecise. It
does not define the nature of the liability. That the liability is restricted
to liability in respect of legal costs is not, however, in issue or in doubt.
That restriction can be clearly identified from Parliamentary material
admissible under the principle in Pepper v Hart [1993] AC 593. It is
also apparent from the rules of Court, subject to which section 29 expressly
takes effect.
8. CPR 43.2, which sets out definitions, provides:
"(k) `funding arrangement' means an arrangement where a person has -
(ii) taken out an insurance policy to which section 29 of the Access to Justice Act 1999 (recovery of insurance premiums by way of costs) applies;
(m) `insurance premium' means a sum of money paid or payable for insurance against the risk of incurring a costs liability in the proceedings, taken out after the event that is the subject matter of the claim;"
It is thus necessary, when considering whether, or to what extent, a premium
is recoverable by way of costs to ask the question whether it is consideration
paid or payable for insurance against the risk of incurring a costs liability
in the proceedings.
9. The following rule is also relevant to the issues arising on this appeal:
"44.5 Factors to be taken into account in deciding the amount of costs
(1) The court is to have regard to all the circumstances in deciding whether costs were-
(a) if it is assessing costs on the standard basis-
(i) proportionately and reasonably incurred; or
(ii) were proportionate and reasonable in amount,"
10. The following provisions of the Costs Practice Direction are also of relevance:
"Section 11 Factors to be taken into account in deciding the amount of costs: rule 44.5
11.7 Subject to paragraph 17.8(2), when the court is considering the factors to be taken into account in assessing an additional liability, it will have regard to the facts and circumstances as they reasonably appeared to the solicitor or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement.
11.10 In deciding whether the costs of insurance cover is reasonable, relevant factors to be taken into account include:
(1) where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its cost compares with the likely cost of funding the case with a conditional fee agreement with a success fee and supporting insurance cover;
(2) the level and extent of the cover provided;
(3) the availability of any pre-existing insurance cover;
(4) whether any part of the premium would be rebated in the event of early settlement;
(5) the amount of commission payable to the receiving party or his legal representatives or other agents."
The test of what is reasonable
11. It was common ground, and rightly so, that the Court, when considering
whether to award an insurance premium by way of costs, has to consider whether
the premium is reasonable. It was also common ground that, insofar as the
Court finds that the premium is not reasonable, it can and should reduce it.
There was debate as to the appropriate approach to the application of the test
of what is reasonable.
12. It is important in this context to draw a distinction between two separate
matters. The first is the nature of the benefits to which the litigant is
contractually entitled in exchange for the payment of the premium. This falls
to be determined from the terms of the contract under which the premium is
paid. Section 29 permits the recovery of a premium where this is payment for
insurance against the risk of liability for costs. If payment of a so-called
premium buys a contractual entitlement to other benefits it is, to say the
least, arguable that the premium cannot, to that extent, be recovered under
section 29. Thus the Court has to consider the terms of the contract under
which the premium is paid to see whether it is simply a contract of insurance
against liability for costs or whether it is something other than, or
additional to, that.
13. The contractual benefits purchased by the premium must be distinguished
from the use made by the insurer of the premium. An insurer will necessarily
look to premium income to meet the costs of the business. The primary costs
are likely to be those of meeting claims, but the costs will also include
matters such as commissions, advertising and, indeed, refurbishing the
insurer's premises. The Court will not be directly concerned with how, or on
what, the insurer spends the premium income. The Court will, however, be
concerned with the question of whether the premium is a reasonable price to pay
for the benefits that it purchases. Ultimately, this should be a question to
be considered having regard to experience, or evidence, of the market. If an
insurer is conducting his business in a manner which incurs extravagant,
extraneous or otherwise unnecessary expenditure, which has to be covered by the
premiums, those premiums are likely to be uncompetitive. To pay such a premium
where other more reasonable premiums are available may disentitle the litigant
from making a full recovery of the costs of the premium.
14. Unfortunately Master O'Hare concluded that the market in ATE insurance was
not yet sufficiently developed to enable him to identify standard or average
rates of premium for different categories of ATE insurance. He expressed doubt
as to whether market forces were yet sufficiently compelling. He received a
considerable body of evidence of the costs of individual insurers, proffered in
confidence, in an endeavour to form a view of the level of premium that was
reasonably needed to cover costs. We shall revert to his conclusions in due
course. At this point we will confine ourselves to some general observations.
15. It is highly desirable in the interests of justice that an effective and
transparent market should develop in ATE insurance. If the litigant is not at
risk as to the premium, which is a matter that we shall consider in due course,
it is less easy for a competitive market to develop. Nonetheless, we consider
that the solicitor advising the client should be in a position to assist him in
selecting ATE insurance cover that caters for his needs on reasonable terms.
Master O'Hare informed us that there are at present two sources of information
as to availability of ATE cover: the magazine "Litigation Funding", published
by the Law Society and the web site www.thejudge.co.uk. We would
encourage solicitors to take advantage of such sources of information and hope
that before long the exercise of choice will result in competition for ATE
business which establishes transparent market rates.
16. In the meantime, where an insurance premium is challenged it must be open
to the insurer, whose position is akin to a subrogated underwriter, to place
evidence before the Court in an attempt to demonstrate that the premium is
reasonable having regard to the costs that have to be covered. Satellite
litigation involving such an exercise is, however, unsatisfactory. The Judge
can only be expected to give broad consideration to such evidence, for it is
not part of the function of a judge assessing costs to carry out an audit of an
insurer's business.
17. Master O'Hare remarked in his report that he expected that fairly quickly
courts conducting detailed costs assessments would be able to develop benchmark
figures. The sooner that market rates for ATE insurance become recognised the
better.
The terms of the ATE cover
18. In order to identify the issues of principle which arise in this case it is
necessary to identify the material terms of the policy of insurance to which
the disputed premium relates.
19. The policy is issued on behalf of Lloyd's underwriters on whose behalf this
business is managed by Temple Legal Protection Limited. The cover was issued,
under the authority of the underwriters, by Legal Protect Assurance Services
Ltd, as Coverholder. The terms of the cover were set out in a Certificate of
Insurance. This provided by a schedule that the cover was in relation to a
personal injury action against Charles Gray, that the period of insurance was
from 04/05/00 to the conclusion of the legal action and that the limit of
indemnity was £100,000. The Certificate went on to provide as follows:
"THE RISKS THAT YOU ARE INSURED AGAINST
Insurers agree to indemnify the Insured up to the Limit of Indemnity;
for Opponent's Costs in the event that the Insured becomes liable to pay such
costs whether by order of the Court or because the Legal Action has been
withdrawn or discontinued or settled with the prior approval of the Insurers,
and,
for the Insured's Disbursements in the event that
(a) the Insured become liable to pay Opponent's Costs whether by order of the
Court or because the Legal Action has, with the prior approval of Insurers been
withdrawn or discontinued or,
(b) following commencement of proceedings and with the prior approval of the
Insurers, the Legal Action is settled without the Insured's Disbursements being
payable by the Opponent."
"THE MEANING OF WORDS USED IN THIS INSURANCE
....
Disbursements
Fees and expenses including the premium and mediators fees, which are not the subject of any contingent or conditional fee agreement, paid by the Appointed Legal Representative on behalf of the Insured to any third party, other than to counsel, in connection with the Legal Action but not including (1) any VAT to the extent that the Insured can recover such VAT from H.M. Customs and Excise and (2) any Disbursements which the Court orders the Opponent to pay to the Insured.
....
Opponent's Costs
All costs, expenses and disbursements ordered by the Court to be paid by the Insured to the Opponent in the Legal Action during the Period of Insurance. Where in the Legal Action orders are made both that costs be paid by the Insured to the Opponent and that costs be paid by the Opponent to the Insured, Opponent's Costs shall then be limited to the net sum (if any) payable by the Insured to the Opponent after all costs payable by the Opponent to the Insured have been set off.
....
EXCLUSIONS
Insurers shall not be liable under this Certificate in respect of:
6. any Disbursements where an order is made by the Court for the Disbursements to be paid by the Opponent, irrespective of whether or not payment is actually made. If the Insured recovers any monies from the Opponent in the Legal Action, whether described as damages, costs or howsoever described and whether recovered by judgment or settlement, such recovery shall be deemed to include a recovery of Disbursements insofar as the monies payable by the Opponent (whether or not actually paid) are sufficient to do so.
....
6. Assessment of the Premium
If, in any process of assessment, the Opponent is successful in any challenge to the cost of the premium then it is agreed that the premium which was payable at the conclusion of the Legal Action shall be reduced to the amount which was approved or allowed on assessment. It is agreed by the Insured that the Insurer shall have the right to make any representation to the Court or the Opponent as may be necessary in this matter. Any such challenge must be immediately notified by the Insured to the Insurer."
Issues identified by Master O'Hare
20. Master O'Hare considered the elements that are responsible for the size of
the insurance premium, distinguishing between (i) costs and expenses of the
insurer funded by the premium and (ii) benefits covered by the premium. He
considered whether, and to what extent, a premium covered by section 29 should
reflect each of these. We shall do likewise.
Costs and expenses
21. Master O'Hare identified four elements of these: the burning cost, the
risk/profit cost, administrative costs and distribution commission.
The burning cost
22. This term describes the cost of meeting claims made under policies issued.
Overall premium income must suffice to cover claims made, or the insurer's
business will not be viable. Master O'Hare learned that, in respect of claims
for personal injury, ATE insurers set out to cover this cost on two different
bases:
i) An individual premium is assessed for each risk, or each category of risk
(`individual assessment').
ii) A uniform premium is charged in respect of any claim which carries a
prospect of success of more than 50% (`block rating').
23. Master O'Hare set out in his report the information supplied by Temple as
to the basis upon which the premiums for their policies are determined. Temple
has two insurance schemes, one under which a premium is quoted having regard to
the facts of the particular case and one under which authority to issue cover
is delegated. Under the latter a solicitor is authorised to issue certificates
in respect of any case undertaken, rating the case and applying the appropriate
premium according to a premium table supplied by Temple. It was on this basis,
as we understand it, that Mr Callery's premium was fixed at £350 plus
£7.50 insurance premium tax (`IPT'). Thus on this appeal we are concerned
with a premium fixed on an individual assessment basis. Master O'Hare was
informed by Accident Group Limited, which claims to be the market leader in
issuing insurance cover in conjunction with CFA's, that, on a block rating
basis, Mr Callery would have been charged £997.50 including IPT. The
issue of whether it would have been reasonable for Mr Callery to take out
insurance for his claim at a much higher premium than £350, costed on a
block rating basis, does not arise for determination on this appeal. On the
face of it, adoption of such an option would seem hard to justify.
Risk/Profit cost
24. This item will include the cost of laying off risk by way of reinsurance,
where this course is adopted. Master O'Hare received widely differing
submissions as to the proportion of the premium which should reflect this item.
In the longer term market forces ought to constrain it to reasonable
proportions. Plainly no objection can be taken to a premium reflecting a
reasonable risk/profit cost.
Administrative costs
25. These must cover items such as personnel, premises, policy issue and
processing and claims administration. No objection could be taken to a premium
reflecting costs such as these.
Distribution commission
26. Before Master O'Hare objection was taken in principle in some submissions
to premiums being increased to cover advertising and other marketing and
commissions. We are not aware of the extent to which these are relevant
factors in the case of Temple, but we agree with Master O'Hare that no
objection can be taken to these in principle. As he has pointed out, PD 11.10
provides that `the amount of commission payable' is one of the factors that
should be taken into account when deciding whether the cost of insurance cover
is reasonable. In the longer term, market forces should prevent premiums being
unreasonably inflated to reflect extravagant commission payments.
Benefits
27. We now turn to consider the different types of benefit that Master O'Hare
identified may be provided in exchange for the `premium' paid.
Costs awarded by the Court to the opposing party
28. The primary liability covered by Mr Callery's policy was that for
opponent's costs as a result of order of the Court or withdrawal,
discontinuance or settlement of the Action with the prior approval of the
insurers. Such liability can arise in a number of circumstances, which
include:
i) An order of the Court to pay the defendant's costs as a result of judgment
on liability being given in favour of the defendant, on the normal principle
that costs follow the event.
ii) An order of the Court to pay the defendant's costs as a consequence of a
failure to beat a Part 36 offer.
iii) An order of the Court to pay the defendant's costs as a result of losing
an issue, whether at an interim hearing or at the final hearing.
iv) Any other costs order in favour of the defendant made in the exercise of
discretion.
29. All parties were agreed that it is legitimate for ATE insurance to provide
cover that falls within the first category set out above. They were right to
do so. Such insurance falls fairly and squarely within the meaning of
insurance against the risk of incurring a costs liability in the proceedings -
see paragraph 8 above.
30. For the defendant, Mr Peter Birts, QC, objected to the defendant being held
liable for that part of the premium which reflects the risk of being ordered to
pay costs falling within the second category set out above, and we believe that
his argument would naturally extend to the third and fourth categories. In
essence this argument was simply that it was unfair to defendants that
claimants should be able to pass on to them liability for insuring against
costs liabilities of such a type in that those liabilities are likely to have
been incurred as a result of failure on the part of claimants to conduct the
litigation in a reasonable manner.
31. It seems to us that such an argument would frequently be open in relation
to costs which follow the event after a claim fails. All four categories of
risk aptly fall within the words `risk of incurring a costs liability in the
proceedings'. In our judgment insurance against such risks falls within the
ambit of section 29.
Collateral benefits
32. The benefits purchased by Mr Callery for his £350 premium were
restricted to insurance against the risk of paying legal costs of one kind or
another. The contract did not entitle him to any collateral benefits. This
position contrasts with that of a litigant who engages the services of an
organisation such as Claims Direct. Master O'Hare received evidence of:
"work done handling and negotiating the claim (whether or not it duplicates what the solicitors may do) and work done to comfort and reassure the insured and/or his family, e.g: practical help in the home, counselling, helping in the arrangement of business matters and accompanying the insured on hospital appointments and other appointments."
33. If a payment described as a `premium' entitles the insured to benefits
such as these it is, as we have already observed, at least arguable that - to
that extent - the `premium' does not fall within the ambit of section 29. Mr
Norris, QC, who appeared with our permission to protect the interests of Claims
Direct, was concerned that we might, in this judgment, purport to determine
this issue. We do not do so, but express the hope that it will rapidly be
brought before this Court in a case where it is raised on the facts.
Own costs cover
34. The insurance granted by Temple to Mr Callery entitled him to an indemnity
in respect of his own disbursements, as defined in the cover note, in the event
of the contingencies identified in the cover note. Those contingencies
amounted, in effect, to the failure of Mr Callery's claim.
35. Mr Birts contended that an insurance premium that purchases a benefit of
this nature does not fall within the scope of section 29. Section 29 insures
against `the risk of incurring a liability'. The cover provided in relation to
Mr Callery's disbursements was not against the risk of incurring those
liabilities. It was against the risk of being unable to recover an indemnity
in respect of them consequent upon the failure of the claim. The liabilities
themselves were incurred voluntarily, not in consequence of a fortuity
such as an order of the Court.
36. Mr Nice, QC, on behalf of Mr Callery, and those who support his case,
argued that it was necessary to bring own costs insurance within the ambit of
section 29 if effect was to be given to the scheme of the legislation, which
was to enable litigants to bring meritorious claims without incurring any
significant risk as to either their own or their opponents' legal costs. They
did not, however, attempt to explain the precise route of statutory
interpretation which would enable own costs insurance to fall within the
definition of `insurance against the risk of incurring a liability'.
37. The issue is not one of great significance in the context of this appeal.
Insurance in respect of certain of his own costs constituted a relatively minor
element of Mr Callery's cover, for most of his own costs were covered by his
CFA. But the issue is one of general importance. Some types of legal costs
insurance, including that offered by Claims Direct, are not designed to be used
in conjunction with a CFA, but provide the litigant with insurance against the
risk of having to pay both sides' costs if the claim fails. This is sometimes
referred to as BSI (both sides insurance), as opposed to CFI (conditional fee
insurance). Does the part of a BSI premium that reflects the risk that the
insured will be left to bear his own costs falls within the ambit of section
29? The answer to this question turns on the answer to the issue that arises
in respect of Mr Callery's disbursements.
38. Insurance is the purchase of an indemnity against the risk of loss caused
by a fortuity. A contract that provides for the payment of a sum of money upon
the occurrence of a fortuitous event will not be insurance unless the sum in
question is intended to indemnify against a consequence of that event. When
considering the nature of `own costs insurance', it is necessary to identify
the fortuity that triggers liability and to consider the extent to which this
fortuity exposes the insured to the loss against which cover is provided.
39. A litigant may be left to bear his own costs in a number of different
circumstances. The costs incurred may be excessive or otherwise unreasonable,
so that they will in no circumstances be recoverable from the litigant's
opponent. Reasonable costs will be recoverable only under a settlement
agreement or an order of the Court. A litigant may fail to obtain a Court
order for payment of costs for a number of reasons. His claim may fail, so
that costs are ordered against him, rather than in his favour. He may fail on
a particular issue at an interlocutory stage or at the final hearing and, in
consequence, fail to obtain a costs order in relation to that issue. If he is
successful the costs order made in his favour will not necessarily cover his
solicitor and client costs.
40. If section 29 is to be interpreted so as to cover insurance against the
risk of the litigant being left to bear his own costs, it is necessary to
identify the scope of the cover that is permissible. At the end of the day an
interpretation must be given to section 29 that can be applied in practice to
different varieties of cover. There are a number of possibilities.
41. Cover may provide a litigant with an indemnity against his own costs in the
event that the claim fails. In such a situation the fortuity of the claim
failing is likely, in large measure, to be the reason why the insured fails to
obtain an order that his opponent indemnify him in respect of his costs. This
will, however, only be true to the extent that he would have obtained an order
for those costs had the claim succeeded. To what extent can one say, even
speaking broadly, that he has `incurred a liability' for his costs as a result
of the failure of his claim? Mr Callery's cover does not make it a condition
of the recoverability of his disbursements in the event of the failure of his
claim that these would have been recoverable had his claim succeeded. In the
case of BSI this question is likely to be much more significant.
42. Even where a litigant's claim succeeds he may not obtain an order requiring
the unsuccessful defendant to pay all his costs. Under CPR 44.3 there are many
circumstances which may lead a Court to exercise its discretion not to award a
successful claimant all his costs. We are not aware of the extent to which
insurance cover can be obtained which protects a litigant from the risk of
failing to obtain an order for the recovery of all his costs when his claim
succeeds. It appears, however, that such cover does exist.
43. Master O'Hare refers in his report to a practice of granting a benefit
which consists of 'ring-fencing' the damages; that is providing that
unrecovered costs will not reduce the amount of damages below a specified
minimum figure. More specifically, some policies provide an indemnity against
failing to recover, in whole or in part, the premium paid for the insurance
itself. Such an indemnity will apply to the extent that recovery of premium is
disallowed because it is excessive, or outside the ambit of section 29.
44. Mr O'Hare was informed that, when Claims Direct decided to 'ring fence'
the first £1,000 of damages recoverable, they added £200 to the
premium to cover the cost of assuming this risk. Can the cost of insuring
against the risk of having costs disallowed when the claim succeeds be brought
within the ambit of 'insurance against the risk of incurring a costs liability'
in section 29?
45. There is a small element of such cover in the policy issued on behalf of
Temple to Mr Callery. Condition 6 provides for a reduction of the premium to
the extent that this is disallowed on assessment of costs. This is, on
analysis, protection against the failure to recover an element of own legal
costs, notwithstanding the success of the claim. On the facts of the present
case the extent to which this feature is reflected in the amount of premium
must be minimal or non-existent.
46. The considerations set out above have to be borne in mind when considering
what appeared at one time to be the simple submission that the proportion of
the premium paid for 'own costs insurance' is recoverable under section 29.
47. In support of this submission Mr Nice and his supporters made the following
points: (1) It was Parliament's intention that the cost of own costs insurance
should be recoverable. (2) The overall scheme for funding litigation requires
that the cost of own costs insurance should be recoverable. (3) The Civil
Procedure Rules and Practice Directions envisage that the cost of own costs
insurance will be recoverable.
Parliamentary material
48. The provisions of the Access to Justice Act 1999 that deal with the funding
of litigation were preceded and followed by a lengthy and thorough consultation
exercise. Counsel referred us to a passage from the Lord Chancellor's
Department's explanation of policy published in February 2000, following
consultation. It sets out the matters that the court might wish to consider
before awarding an insurance premium by way of costs:
"where the insurance cover is purchased in support of a conditional fee agreement with a success fee, the percentage of the premium compared to the level of cover;
where the insurance cover is not purchased in support of a conditional fee agreement with a success fee how its cost compares with the likely costs of a similar case running under a success fee and supporting insurance cover;
the level of cover provided;
the extent of the cover provided, for example against the other side's costs or both sides' costs;
the availability and accessibility of alternative products to the one chosen;"
This indicates that it was the Government's intention that it would be
possible to recover the cost of own costs insurance.
49. In June 2000 the Government published a consultation paper on collective
conditional fees. This included the following statement:
"Section 29 of the Act allows the court to include in any costs order, any premium paid for an insurance policy against the risk of incurring a liability in those proceedings. The recovery of the insurance premium is not limited to policies backing conditional fee agreements, but covers all after the event policies. The way in which recovery operates is subject to rule of court."
This indicates that the Government believed that it had achieved the
intention set out in the previous paragraph.
50. Counsel have not been able to refer us to any authority which supports the
use of materials such as those referred to in the previous two paragraphs as an
aid to statutory interpretation and we do not consider that they are admissible
for this purpose.
51. Of more significance are explanatory notes to the Access to Justice Bill
that were provided when this was brought from the House of Lords to the House
of Commons on 17 March 1999. The notes explain that they were 'prepared by the
Lord Chancellor's Department in order to assist the reader of the Bill and to
help inform debate on it. They do not form part of the Bill and have not been
endorsed by Parliament'. The notes included the following passage:
"There are also available insurance policies which can be taken out when someone is contemplating litigation to cover the costs of the other party and the client's own costs (including, if not a conditional fee case, the client's solicitor's fees) if the case is lost. Some of them were developed to support the use of conditional fee agreements but others are used to meet lawyers' fees charged in the more traditional way. For the same reason that the success fee under a conditional fee is being made recoverable, it is also proposed to make any premium paid for protective insurance recoverable too."
52. Counsel were no more successful in referring us to authority on the use of material such as this as an aid to statutory interpretation. They were agreed, however, that it followed logically from Pepper v Hart [1993] AC 593 that this material was admissible as an aid to interpretation where the wording of a statute was ambiguous. We were referred to the following passage of the speech of Lord Bingham of Cornhill in R v Environment Secretary, ex p. Spath Holme Ltd [2001] 2 WLR 15 at p.31:
"In Pepper v Hart the House (Lord Mackay of Clashfern LC dissenting) relaxed the general rule which had been understood to preclude reference in the courts of this country to statements made in Parliament for the purpose of construing a statutory provision. In his leading speech, with which all in the majority concurred, Lord Browne-Wilkinson made plain that such reference was permissible only where (a) legislation was ambiguous or obscure, or led to an absurdity; (b) the material relied on consisted of one or more statements by a minister or other promoter of the Bill together, if necessary, with such other parliamentary material as might be necessary to understand such statements and their effect; and (c) the effect of such statements was clear (see pp 640B, 631D, 634D). In my opinion, each of these conditions is critical to the majority decision."
53. Mr Birts accepted that explanatory notes provided by the sponsoring
Department constituted 'parliamentary material' to which reference could be
made, although he questioned how much, if any, weight could be attached to it.
It seems to us that this concession follows logically from the principle in
Pepper v. Hart. We have commented on the enigmatic nature of section 29.
In interpreting the section we have derived considerable assistance from this
Parliamentary material.
54. The passage in the explanatory notes suggests that it was the intention of
the Lord Chancellor that own costs insurance should be available as an
alternative to a CFA as a method of protecting the litigant against the risk,
consequent upon the failure of a claim, of having to bear his own legal costs.
We have seen nothing to suggest that it was the intention that claimants should
be entitled to pass on to defendants the cost of insuring against failure to be
awarded costs on the ground that the costs had been unreasonably incurred or
were otherwise objectionable.
The overall scheme
55. Those interests supporting Mr Callery argue that the overall scheme of
funding litigation under CFAs and ATE insurance is designed to make it possible
for a solicitor to provide the client with a package that will remove any risk
as to costs, whether his own or his opponents. This, they argue, cannot be
achieved unless the litigant is able to insure against the risk of having to
pay his own disbursements. Furthermore, so it is argued, the availability of
BSI will increase flexibility and enable the litigant to select the most
advantageous means of covering his liability to pay costs.
56. Mr Birts contended that it is not part of the legislative scheme that
litigants should be provided with the opportunity to litigate free of all cost
risk. He drew attention to the fact that the consultation paper issued by the
Lord Chancellor's Department in September 1999, which sought views on the
detailed implementation of the Access to Justice Act 1999 provisions for
funding litigation, was entitled Conditional Fees: Sharing the Risks of
Litigation. He pointed out that under the previous legal aid regime a
litigant in receipt of legal aid was not shielded from all liability as to
costs. There was no warrant for seeking to provide such protection under the
new regime. The Court should proceed with caution in order to avoid
unjustifiable increases in legal costs.
57. There is some force in Mr Birts' submissions. We observe that the
combination of the CFA and the ATE cover available to Mr Callery does not
afford him complete protection against the risk of liability to pay costs. At
the same time we are in no doubt that it is a primary objective of the present
scheme that a litigant with an apparently meritorious claim should not be
precluded from advancing it by the obligation to pay costs, or the risk of
having to do so. If a litigant is precluded from insuring against having to
meet his own disbursements, there will be occasions when the cost of these will
discourage or preclude him from bringing his claim. Furthermore, it does seem
clear that it has always been the intention of the Lord Chancellor, as promoter
of the legislation, that own cost insurance should be available as an
alternative to the CFA.
The Civil Procedure Rules and the Practice Direction
58. As we pointed out at the outset, the provisions of section 29 are
imprecise. The September 1999 consultation paper stated:
"...the Act only provides the legislative framework. The detail of the changes to conditional fees will be provided through secondary legislation, while the operation of the recoverability of the success fee and insurance premium will be informed by Rule of Court and Practice Directions."
The provisions of the Rules and Practice Directions are of particular
importance in clarifying and delimiting the circumstances in which an insurance
premium can be claimed under section 29.
59. The provisions of Practice Direction 11.10 clearly anticipates that
insurance cover that falls within the ambit of section 29 may provide
alternative protection to that provided by a CFA coupled with insurance. Such
cover will necessarily include own cost insurance. The Practice Direction
cannot, of course, confer on the court a jurisdiction that falls outside that
conferred by section 29. The question is whether section 29 can and should be
interpreted so as to treat the words 'insurance against the risk of incurring a
costs liability' as meaning 'insurance against the risk of incurring a costs
liability that cannot be passed on to the opposing party'.
60. We have concluded that section 29 can and should be interpreted in this
way. We believe that such an interpretation will do no more than give the
words the meaning that would be attributed to them by the reasonable litigant.
It will also give the words a meaning that accords with the legislative
intention and with the overall scheme for the funding of legal costs.
61. The circumstances in which and the terms on which own costs insurance will
be reasonable, so that the whole premium can be recovered as costs, will have
to be determined by the courts, when dealing with individual cases, assisted,
if appropriate, by the Rules Committee.
62. In the case of Mr Callery's policy, the right to recover the costs of
disbursements is tied to the situations where the protection afforded by the
CFA would come into play. It is arguable that the disbursements that are
covered are disbursements of a kind that would be recoverable as costs. We
cannot see that there is any objection in principle to this cover forming part
of that afforded to Mr Callery by his legal costs insurance and consider that
the whole of the cover can be considered as falling within the description
'insurance against the risk of liability' within section 29. In this context
our only reservation arises in relation to the premium rebate provision in
condition 6. As we have indicated, however, this is of no practical
significance in the present case and we consider that it is better that the
issue of whether the cost of such cover is recoverable under section 29 should
be dealt with in a case where this matters.
The cost of the premium
63. The cover provided by the Temple policy, as is usual, includes cover
against the risk of being unable to recover the premium as a consequence of
losing the action. This item of own cost cover received special consideration
by Master O'Hare. We can see no reason, in principle, why this should not form
part of the cover provided under insurance that falls within section 29,
provided always that any part of the premium attributable to it is reasonable
in amount.
Deferred payment of the premium
64. No challenge to the amount of the premium was made by Mr Birts on the
ground that it must include an element to reflect delay in paying it. Indeed,
it is not clear to us from the documents precisely what was agreed as to the
payment of Mr Callary's premium. Condition 6 of the cover note suggests that
the premium was 'payable at the conclusion of the legal action'. If so, this
would be typical of ATE insurance and necessarily so if litigants are not going
to be discouraged by the obligation of making a substantial payment 'up
front'.
65. CPR 44.3B(1) precludes a solicitor from recovering any proportion of uplift
that relates to deferred receipt of fees and expenses. Amelans had added 20% to
their uplift to reflect delayed payment and, rightly, did not seek to recover
this in these proceedings. Solicitors have always had to wait for payment of
legal aid work to a greater or lesser degree, and their fee structure has, no
doubt, reflected this. We understand that, in most cases, solicitors do not
make any specific addition to uplift to compensate for deferred payment. Nor,
so far as we are aware, do they do so in the case of ATE insurance premiums. If
and when objection is taken to an insurance premium on the ground that it has
been increased to compensate for deferred payment, this issue will have to be
addressed. It does not arise in the present case.
The effect of BTE insurance
66. In the case of Sarwar v Alam a claimant passenger took out ATE
insurance but was subsequently found to be covered by a policy of BTE insurance
that the defendant driver had taken out. In these circumstances His Honour
Judge Halbert disallowed the cost of the ATE premium. Permission to appeal
against his decision has been given, and the Court will expedite the hearing so
that the issue can be determined before the end of the vacation. It is not an
issue which arises in the present case.
Is £350 too much?
67. We have concluded that there is no reason of principle for refusing to
award under section 29 any part of the premium payable for Mr Callery's ATE
insurance cover. We have, however, to deal with a challenge made by Mr Birts
to the amount of £350 on the ground that it was excessive in the case of a
simple passenger claim. His submission was that the maximum premium that would
have been reasonable would have been in the region of £160. In support of
this figure, he placed before the court a sheet of calculations. Some of the
data upon which these were based was not before this Court at the substantive
hearing of the appeal. None of it had been placed before the Judge below. The
respondent had been given no advance notice of these calculations. Critically,
the calculations depended upon an assumed loss rate of 2.1%, which was not
supported by any evidence placed before us. In the circumstances, we did not
find it possible to base any conclusions on these calculations.
68. Master O'Hare did his best to investigate premium rates in the market. He
found that it was not possible to state standard or average premiums for
different classes of business. He also found that results over several years
had been uniformly poor, leading to several major increases in premium rates
over those years. This led him to conclude that it was reasonable to presume
as a starting point that a premium was reasonable unless the contrary was
shown.
69. We do not consider it correct to start with Master O'Hare's presumption.
When considering whether a premium is reasonable, the Court must have regard to
such evidence as there is, or knowledge that experience has provided, of the
relationship between the premium and the risk and also of the cost of
alternative cover available. As time progresses this task should become
easier. In the present case it is not easy as both data and experience are
sparse. When considering CFA uplift, we proceeded on the basis that the
success rate of claims was at least 90%. Claims that do not succeed will not
inevitably be pursued to judgment. Sometimes they will be withdrawn in
circumstances that do not involve any liability for defendant's costs. As
against this, Mr Callery's cover extended to adverse costs orders after a Part
36 offer, or an interlocutory defeat. The amount insured was £100,000,
but this, of course, was the limit of underwriters' liability and no guide to
the much smaller indemnity that is likely to be involved when such a claim
fails.
70. In the circumstances, the amount of the premium does not strike us as
manifestly disproportionate to the risk. We do not find it possible to be more
precise than this. So far as alternatives are concerned, Mr Callery was able
to choose, with the assistance of his solicitors, cover at a premium near the
bottom of the range of what was available. The premium was one tailored to the
risk and the cover was suitable for Mr Callery's needs. The policy terms also
had the attractive feature that they gave his solicitors control over the
conduct of the proceedings on his behalf, without any involvement by a claims
manager until a settlement offer was made. We have concluded that the Court
below was right to find that the premium was reasonable.
71. Just as in the case of our decision on the CFA uplift, we should emphasise
that this judgment should not be treated as determining once and for all that a
premium of £350 is reasonable in a case such as this. As further
information and experience about the market becomes available it will be
possible to found conclusions as to whether premiums are reasonable on a
sounder basis.
72. We see no reason in principle why the £7.50 IPT should not also be
recoverable, and none was suggested.
73. For these reasons the appeal against the inclusion of the whole of Mr
Callery's insurance premium as an item of his costs will be dismissed.
COURT OF APPEAL Case No. 2001/0540/33
MC002977
ON APPEAL FROM THE CHESTER COUNTY COURT
B E T W E E N
35. Several ATE providers identify four main elements in the calculation of the premium: the burning cost, the risk/profit cost, the administrative costs and the distribution commission.
36. The burning cost is the frequency of loss (ie. the percentage of policies
in which a claim is made) multiplied by the average cost of each claim. If
the frequency of loss is 10% and the average cost of each claim is £3,000,
the burning cost in each policy is £300. These figures are given for
illustration only. They are not intended to represent real figures. Their
inclusion in my draft report caused one interested party to describe them as
overly optimistic and another interested party to say that, in its opinion, the
real figures are 20% and £2,000 (ie a burning cost of £400).
£400 exceeds the cost of several total premiums quoted to me.
37. The risk/profit cost is the sum to represent the profit looked for by the
underwriter and also a safety margin for the underwriter should the cost of
claims become higher than the burning cost predicted. There is much dispute
about how this should be calculated. Abbey suggests that it is usually
calculated as 25% of the burning cost. Litigation Protection Ltd suggests
that this approach massively under-estimates the underwriter's costs and
ignores altogether reinsurance costs. They suggest a figure nearer 40%.
The Appellants submit that it should be calculated as a percentage of the
premium income. They then give various worked examples in which the largest
underwriting profit shown is 10% of the gross premium. X L Brockbank and NIG
give it as their opinion that a 10% profit margin is, in all the circumstances,
ludicrous.
38. The administrative costs cover items such as personnel, premises, policy
issue and processing and claims administration. What if any advertising cost
should be included as administrative costs? I shall deal with this question
in paragraphs 59 to 63.
39. The distribution commission is a sum payable to brokers and other
intermediaries. As with the first two ingredients there is much dispute as
to the amount of commissions normally found. I shall give further details
when reporting on the answers to Question 6 (see para 52, below).
40. FOIL and the Appellants argue that the distribution commission, although
properly regarded as a constituent element in premium calculation, is not
something that can be legitimately claimed from an opposing party ordered to
pay costs.
" ... as it is purely a commercial arrangement between the contracting
parties." (FOIL)
"The court ... is respectfully reminded of paragraph 11.10 of the Costs
Practice Direction. Costs Judges assessing the recoverable premium should
obtain details of any commission paid or payable and exclude this from the
premium to be paid by the losing party." (Appellants)
In my view the arguments raised by FOIL and the Appellants on this point are
not correct. I do not think the Practice Direction provision referred to
should normally lead the Costs Judge to disallow the whole of any commission
included in a premium. The paragraph lists "the amount of commission
payable" as one of the factors to be taken into account in deciding whether the
cost of insurance cover is reasonable. This factor like the first two
mentioned in the paragraph (a comparison with other funding arrangements and
the level and extent of cover provided) describes matters of degree not items
for deletion. Thus, if distribution commissions amounting to, say, 10% of the
overall premium were the insurance industry's standard, the Practice Direction
enables the Costs Judge to require a receiving party to justify a commission
payment exceeding 10%.
41. In the next ten paragraphs I will comment upon each of the additional
benefits listed in para 31, above.
(a) Own counsel's fees
(b) Other disbursements (such as court fees and own experts' fees)
42. There can be little doubt that these are ordinary items of legal expenses
insurance and therefore a discount in respect of them will be appropriate only
if it is ruled that the own cost element of CFI policies is irrecoverable (see
further, para 8, above). In my view, in a claim which fails, the reasonable
costs incurred by the claimant on counsel's fees and other disbursements are
unlikely to exceed one half of the total costs payable to the opponent.
Accordingly, they comprise less than one third of the burning cost of a policy
covering both of them. Bearing in mind the other ingredients in gross
premiums, the discount should not exceed 20% of the total. If, as is more
usual, the policy does not cover counsel's fees but does cover other
disbursements, the discount would be nominal, a few pounds.
(c) Cover for appeals
(d) Liability for costs following an offer to settle or Part 36 payment
43. As with the first two, these two are pre-eminently ordinary items of legal
expenses insurance. I do not have sufficient information to make any
attempt to value these benefits. I suspect that the reasonable cost of (c)
would be negligible but the reasonable costs of (d) would be substantial.
It should be noted that these two items, unlike the first two items, may not be
limited to own cost protection: they may include protection in respect of the
other sides' costs.
(e) Option to buy top up cover later at the same premium rate
44. This item, like the first four listed, seems to me plainly a standard
ingredient of legal expenses insurance or at least is plainly of and incidental
to such insurance. Like the last two listed it may well comprise protection
not only for own costs but also in respect of the other sides costs. Top up
cover is the subject matter of Question 8. Such cover is not normally needed
in standard insurance policies (see further, para 30, above). I have
received no information upon which I could base any attempt to put a value on
this benefit. Presumably one would have to start by trying to identify as at
the time the policy was taken out, what premium rate would the insured
anticipate as payable had he not had such an option and then try to identify
what was then the reasonable likelihood of his needing to exercise the option.
(f) Interest foregone on deferred premiums
(g) Full indemnity in respect of the premium if the claim is lost
45. These benefits are to be found in virtually all off the peg insurance
policies. Several ATE providers submit that their inclusion in the policy
makes the policies cheaper. In their submission many litigants would be
strongly discouraged from litigating and from buying insurance if they had to
pay the insurance premiums at the outset or if they had to risk paying them (or
part of them) later. Of those who do proceed to litigation the litigants
least likely to buy insurance would be those who have the strongest cases.
From this it is argued that (subject to the ruling upon the own cost question)
allowing recovery of these items falls within the policy underlying the new
legislation. This is a matter discussed in para 99 of the Court of Appeal
judgment (note especially para 99 (viii)). The opposing argument is that the
"no win no fee" principle which applies to profit costs and counsel's fees does
not apply to insurance premiums. The new legislation replaces the old legal
aid regime. Under that scheme it was expected that there would be "legal aid
only" items payable by the claimant out of his compensation. It is said that
claimants in the new regime should similarly expect to shoulder the cost of
premium loss cover. There are other items in the new law which they must
shoulder, eg, the fee deferment element of a success fee under a CFA (see CPR
rule 44.3B(1)(a)). In my view if the legislative policy does not justify the
recovery of these items, the effect they are likely to have on most prospective
claimants is such as to make the discount appropriate to them zero. However,
I note that, in some policies premium loss protection is available on payment
of a substantial sum (see, for example, the premiums quoted for the following
policies issued by Litigation Protection Ltd, "conditional fee protection plan"
and "conditional fee protection plan plus".
(h) Partial indemnity in respect of the premium if the full premium is not
successfully recovered
46. This benefit covers the insured who obtains an order for costs against his
opponent but, on detailed assessment, part of the premium is disallowed as
unreasonable or the whole premium is disallowed as unreasonable because, for
example, of some pre-existing cover which the claimant had. The benefit
sometimes takes the form of a ring fencing of some of the damages recovered.
47. This benefit clearly provides own costs protection and therefore a premium
containing it is at risk of discount on that score. In my view a discount
should be attempted in any event. I do not think the legislative policy
argument sought to justify the last two items can be extended to this item.
This item protects the policyholder against the risk of loss of taking out
insurance which, if he has or might have taken it out, would not have been
recoverable from the opposing party. In my view this item is best regarded
as extraneous to the legal expenses insurance contemplated by Section 29.
48. It should be noted that the value of this benefit increases in proportion
to the unreasonableness of the sum unrecovered. As to valuation the only
information I am aware of relates to the increase in premiums made by Claims
Direct (a BSC insurance provider) when it decided to ring fence the first
£1,000 of compensation payable to customers who take out the new policy.
In the Datamonitor report referred to above (see para 33) the increase is said
to have cost over £200 per policy (ie, over 15% of the old premium).
(i) Any premium loading because of the claims record of the insured's
solicitor
49. Whilst the cost of this benefit may have to be discounted as an own costs
protection, most parties and interested parties submitted that it should be
discounted in any event if it can be identified. Like (h) this benefit has
a spiralling effect: the worse the solicitor's claims record appears to be the
greater the cost of insurance. Presumably, it is to be excluded as being
extraneous to ordinary legal expenses insurance. Several ATE providers
commented that rather than load a premium because of perceived incompetence by
the solicitor, the insurer should not issue the policy in the first place.
Indeed, most of the major players operate through panels of solicitors and,
presumably, a firm's membership of a panel can be restricted. I am aware
that at least one provider does require solicitors to complete a comprehensive
proposal form giving details about the firm's past litigation experience and
losses.
"This enables us to try to match the right premiums to the firm and that firm's
profile of risks. We ask the Court to not take that ability away from us.
The solicitors who have a very low rate of claims against the ATE policy have
been snapped up (unfairly we believe) by [other providers]."
Two other interested parties point out that it is wrong to suggest that a poor
claims record reflects poor levels of competence. The claims record is more
likely to reflect the type of case taken on. Both of these parties state
that it would be contrary to the public interest to discourage solicitors from
taking on worthy cases which might adversely affect their claims record.
This would mean that potential claimants might be unable to pursue their cases
or at least be unable to pursue them with the solicitor of their choice. In
my view the public interest they identify (and which I accept) would not
justify the recovery of the cost of this benefit. The same public interest
element arises in respect of the operation of panels of solicitors.
(j) Interest payable on disbursement loan where the claim fails
50. Many interested parties, including APIL and several ATE providers concede
that it is necessary to discount a premium for a policy including this benefit
whichever way the ruling as to own costs element goes. This benefit is
extraneous to legal expenses insurance. It relates more to funding costs.
I am unable to give guidance on valuation save to say that, in some policies, a
price for it may be shown separately. If it is not, it would presumably be
necessary to take into account the following factors as they reasonably
appeared to be at the time the policy was taken out; the likely rates of
interest, the size of the loan in question and the likely duration of the
proceedings and the risk of loss.
(k) Advice and help supplied by claims managers
51. The work done which I have in mind is work done handling and negotiating
the claim (whether or not it duplicates what the solicitor may do), and work
done to comfort or reassure the insured and/or his family (eg practical help in
the home, counselling, helping in the arrangement of business matters and
accompanying the insured on hospital appointments and other appointments). In
my view these benefits are extraneous to legal expenses insurance and a
substantial discount on the recoverable premium should be made in respect of
them. I have received no information or valuation of these services so far
as CFI policies are concerned. This will have to be valued on a case by case
basis but, in respect of major ATE providers, benchmarks will no doubt develop
quite quickly.
QUESTION 6
Of the premium, what percentages are attributable to, administration,
advertising and other matters?
52. Most of the ATE providers who answered this question have sought
confidentiality as to their answers. Several of them have given me very
specific details of commercially sensitive information including the amount of
risk premiums paid and their commission arrangements. I will not of course
repeat that information and, indeed will strive to maintain the confidentiality
claimed for it. In respect of Question 6 there are five matters upon which
I must report: definition of premium, expenses and commissions, assessment
fees, referral fees and advertising.
Definition of premium
53. In my view the premium to be assessed by the Court is that sum paid or
payable by the litigant. The sum to be allowed should include (to the
extent that they are recoverable and reasonable) the four main elements
identified in para 35, above: the first two (burning cost and risk/profit cost)
comprise the pure risk premium and are usually retained by the underwriter;
most if not all of the work of issuing policies, supervising the conduct of
cases and handling claims will be dealt with by brokers and other
intermediaries. Thus they will receive most but not all of the
administrative costs and of course their commissions. The total sum paid or
payable by the insured is the sum upon which insurance premium tax (IPT) is
calculated.
Expenses and Commissions
54. I have been given a copy of the ABI Insurance Statistics Year Book for
1989-1999 (the latest available) and have been invited to consider four tables
setting out average commission and expenses ratios for certain types of
insurance. The figures for commissions and expenses which I am about to
quote are expressed as percentages of the retained premium, ie, that part of
the gross premium which is net of reinsurance. For 1999 the
commission and expenses ratio for each of the following types of insurance are
shown as follows:
UK motor insurance |
24.1% |
UK accident and health insurance |
37.4% |
UK general liability insurance |
35.8% |
UK property insurance |
37.3% |
55. Having now received submissions from other interested parties (in
particular, the Accident Group, Claims Direct and DAS) I do not accept that
statistics such as these are a useful yardstick to apply. No statistics have
yet been given for ATE insurance and I am told that, as a specialist sector of
the market, the commission and expenses ratios are likely to be much higher.
I am invited instead to treat as a comparable the "extended warranties" market
where, it is said, commission and expenses ratios often equal or exceed 70% of
premium. Other specialist areas which are not included in the statistics are
said to be "creditor premiums" and legal expenses insurance which, I am told,
have rates much higher than those shown in the Yearbook.
Assessment fees
56. In policies issued with the delegated authority of the insurer (see
Question 10) the risk assessment will be made by the solicitor not the insurer
and the insurer can therefore make no charge for it. In other cases the
underwriter, or, more likely, an intermediary, will make a risk assessment.
The cost of that assessment may be included in the premium (when it will bear
IPT) or levied as a separate assessment fee. In the latter case the fee may
attract VAT. In my view, although such an assessment fee is not a premium,
the insured can recover it (subject to assessment) under an order for costs if
it is a fee paid or payable by him. The reasonable cost of the policy is
itself recoverable. In my view reasonable costs expended in obtaining such a
policy are of and incidental to it. I would apply the same approach to time
spent by the solicitor in completing the proposal forms and obtaining the
policy and also to time spent in complying with policy terms (eg reporting
matters or obtaining authority to reject an offer to settle or Part 36
payment). The compliance work must not, of course, be extraneous to the
policy.
Referral fees
57. The overwhelming majority of parties and interested parties agree that
referral fees paid by a solicitor to the ATE provider are not recoverable as
such by the solicitor from his client and therefore by the client from an
opposing party. The cost to the solicitor is a typical overhead expense of
his firm. They replace or comprise part of any budget the solicitor has for
advertising and marketing. Being part of the solicitor's overhead costs, it
will form a legitimate component in the calculation of hourly rates by that
solicitor.
58. Another, and much more contentious, use of the expression "referral fee"
is in the context of fees paid by ATE providers to claims managers. The cost
of these fees will be passed to the insured as part of the gross premium he
must pay. In my view that part of the premium which is fairly attributable
to work which is extraneous to the legal expenses insurance is not recoverable
(see further para 51, above). It is immaterial whether the work is done by
an agent of the claims management company or by an employee.
Advertising
59. Many submissions have been made to me in answer to Question 6 and a
supplementary question I raised about this topic. There is a perception that
some market leaders in ATE insurance spend far more than is reasonable on
advertising the products they sell. In fairness to the persons attacked,
such as The Accident Group, I think I should spell out more exactly what is
being said against them.
(i) Abbey acknowledges that it is perfectly reasonable to include in the
premium an element for marketing and advertising but implies that the absence
of controls may cause advertising budgets to spiral towards infinity.
(ii) APIL express the belief that that part of a premium which is attributable
to:
"large commissions on sale to the client and the cost of marketing cases
(claims farming) should be stripped out from the premium and should not be
recovered. Otherwise all insurers could add this to their premium and could
all run expensive television advertising campaigns, all ultimately paid for by
the liability insurers."
(iii) The Appellants, like Abbey, accept that:
"a reasonable premium will include a modest percentage
in respect of commissions and other payments to brokers and intermediaries,
including payments for advertising. However excessive or disproportionate
percentages should obviously be irrecoverable. Given the widely differing
amounts currently being spent it would not be appropriate to allow or disallow
a set percentage in all cases. Rather, a view should be taken now as to the
current average percentage in a range of reasonable premiums and that
percentage not exceeded when assessing maximum guideline premium
figures."
60. The converse case is put by The Accident Group and Claims Direct. One
denies a point (which I do not think has actually been alleged) that any slice
or percentage of its premium is calculated specifically to raise an advertising
budget. Both emphasise that advertising is a legitimate part of any
insurance business and both suspect that the accusations made are:
"prompted by the commercial ambitions of our competitors. The small ...
providers have every reason to claim that they can prosper without heavy
advertising or marketing overheads; they fail to acknowledge that the very
market in which they operate has very largely been created, at no cost to them,
by the big providers ... the smaller providers are now looking to increase
their market share at the expense of those who have created it."
61. I have set out the arguments as fully as I can so as to enable the Court
of Appeal to take this issue from me and make their own ruling upon it if they
so wish. I respectfully record here my own view that the court has neither
the jurisdiction nor the means by which to regulate the advertising budgets of
insurers. If regulation is needed it must be extra judicial regulation.
I respectfully suggest that the proper function for the court when deciding
questions of reasonableness concerning insurance premiums, is to consider the
conduct of the insured, not the conduct of the insurer. In other words the
proper question to ask is whether the choice of policy made by the insured was
a reasonable one. If it was the premium paid or payable is recoverable
(possibly subject to certain deductions such as those described above). A
choice may be regarded as reasonable even if the insured did not in fact make
the best choice available.
62. There is however another aspect to the advertising issue which may merit a
reduction in premium recoverability. There are two pre-requisites to the
case which I have in mind:
(i) the policy in question must have been issued by an ATE insurance provider
who, at the time of issue, conducted a high volume advertising and marketing
programme in order to attract customers; and
(ii) the court must have already decided to make a substantial reduction in the
premium recoverable on the basis that it included substantial extraneous
benefits, including the non recoverable benefits of work done by a claims
manager or the like.
63. I respectfully suggest that the premium to be allowed should be further
reduced to take account of the fact that the advertising costs recouped in the
full premium are properly regarded as attributable not only to selling the
standard insurance products but also to selling the disallowed extraneous
benefits. In the likely absence of evidence of the cost of advertising per
policy I would make the reduction the same as the reduction in respect of the
extraneous benefits.
QUESTION 7
Is it practicable to obtain a policy in which premiums are rebated in the
event of early settlement and are there any policies on the market which
provide for this?
64. The existence or non-existence of rebates is one of the factors listed in
para 11.10 of the Costs Practice Direction to be taken into account when
considering the reasonableness of insurance. However the general consensus of
most interested parties, including ATE providers, APIL and FOIL is firmly
against rebates of premium on early settlement. Such a scheme runs counter to
the calculation of "burning cost" explained in paragraph 36 above. If such
policies were introduced it would be necessary to increase the premium in every
policy in order to provide for a rebate in some of them. Such a system would
also give rise to increased administrative costs and, for the insured or his
funder costs increased funding charges. Some parties are unaware of any such
policies. Some parties report seeing such policies in some commercial cases.
Litigation Protection Ltd makes the point that rebates would become viable
only in exceptional cases involving very large amounts of indemnity and
accordingly a very high level of premium. In RTA claims the average costs of
claims rarely exceeds £15,000.
65. There is in fact a CFI policy (issued by Temple) which is applicable in
RTA cases and which has a three-step premium, ie, a premium the amount of which
depends on the procedural stage reached by the time the case is concluded.
The first stage covers the period up to issue of court proceedings. The
second period covers the stage from there to a date at least 45 days before
trial. In cases which conclude at stage 1 or stage 2 the policy has a limit
of indemnity of £25,000. In cases which do not conclude until stage 3
the highest premium is payable and the limit of indemnity is £50,000.
The advantage to the insurer of a reduced limit of indemnity in the earlier
stages is obvious. The advantage of the three step premium to the insured is
not obvious to me given that the policy includes premium loss protection.
QUESTION 8
What are the advantages and disadvantages of policies permitting the
purchase of further cover as a claim proceeds?
66. Most interested parties felt that the disadvantages would outweigh the
advantages. The position is clearly stated by the Law Society whom I quote in
full:
"Some policies permit the purchase of further cover as the claim proceeds.
It may be that in these cases the cost of the initial cover may be less than if
cover is purchased for the maximum reasonable exposure for costs. The
disadvantage is that the inception of further cover at a later stage will
require reference back to the ATE insurer. There is unlikely to be any
guarantee that further cover will be provided. It is likely that the
provision of an initial amount of cover followed by the provision of further
cover when a claim has not settled at an earlier stage would be considered to
be high risk to the insurer. Insurers may fear that claimants will only take
out the further cover if the case becomes more complex and more risky. The
cost of further cover may therefore be expensive. The overall cost of
insurance under a model of this sort is likely to be greater than at present
because of the administrative costs involved in giving individual consideration
to "second stage" cover."
It was in relation to this question that Litigation Protection Ltd made the
remark I quoted in para 30 above that it is a basic premise of good
underwriting practice that all risks are adequately insured.
67. Two interested parties made submissions which run in favour of "top-up
cover", FOIL and Greystoke. As to FOIL I respectfully doubt that the
advantages they list do in fact outweigh the disadvantages they note (higher
administrative costs for the ATE insurer and the need for more detailed
explanation of the policy by the solicitor). I shall state my doubts
alongside each of the advantages listed.
(a) Ensures that the amount of cover at any stage of the case will relate more
closely to the extent of the risks involved (this runs counter to the burning
cost principle explained in paragraph 36 above).
(b) Encourages the defendant to settle claims where appropriate before the
level of premium increases (this assumes that the claimant informs the
defendant of the limited cover bought so far; such a disclosure might encourage
the defendant to sit tight until the cover was exhausted).
(c) Reduces the scope for dispute between the parties in respect of the quantum
of the policy taken out (so would not taking out any insurance at all).
However, I do find merit in FOIL's suggestion that ATE insurers will not be
disinclined to provide further cover unless of course the merits of the claim
have substantially deteriorated: they point out that if a claim now has no
reasonable prospects of success the insurer would be entitled to cease cover
even if a large limit of indemnity had been taken out originally.
Nevertheless, it seems to me reasonable for an intending insured to take out
adequate cover from the outset of the policy. Delay will not bring peace of
mind and, if the defendant is aware of it, may encourage the defendant to play
a waiting game. Cover bought late is almost bound to be more expensive than
if it had been bought at the outset (cf the policy described in para 65,
above).
68. The written submissions made on the original questions by the ABI included
a copy of the BSC comparison chart published in "Litigation Funding" in January
2001. The chart covers 11 ATE providers. In answer to the question "can
limit of indemnity be topped up later?" the answer most frequently given is
"yes, subject to approval". The exception is at Greystoke where the answer
given is "yes, guaranteed option available". In Greystoke's written
submissions on the original questions a brief explanation is given of their
"Lawassist starter policy". I am told that, for a premium of £175 plus
IPT for RTA cases, the initial level of cover is sufficient to investigate the
case up to settlement during the protocol period. "If the limit of indemnity
is exhausted without the claim being resolved, then it is possible, subject to
the continuing merits of the case, to obtain additional ATE cover under our
standard Lawassist ATE policy with the option to increase that additional level
of indemnity at a later stage." So far as I am aware no other insurer
offers a similar policy. This policy is not mentioned in the Litigation
Funding comparison chart mentioned above but is mentioned in the search result
produced to me by APIL from the website www.thejudge.co.uk. I
presume that a policy such as this would find favour with the liability
insurers. If it thrives it may well solve some of the problems raised in
this Inquiry. However, it is, of course, too early to know whether it will
thrive. The policy is a form of BSC although, because it covers the pre
issue period the question of adverse costs orders does not arise. A CFI
version of this policy (which presumably would cover little more than experts'
fees) would be even cheaper.
QUESTION 9
How is the insurance marketed or sold?
69. ATE policies are sold to policyholders in two main ways:
(i) via firms of solicitors throughout the UK, and
(ii) via various claims agencies including claims management companies.
In (i) the solicitor meets the intending insured first and introduces him to
the insurer. In (ii) the claims agency or claims management company meets
the intending insured first and introduces him to a solicitor. I use the
term claims agency here to refer to organisations which simply act as the
advertising arm of the solicitors they deal with. Claims management
companies may investigate and screen cases to a greater or lesser extent and
provide supervision and a point of contact for the insured/claimant throughout
the litigation (see further, para 51). Some claims agencies and claims
management companies charge membership fees and referral fees to the solicitors
they deal with (see further, paras 56 and 57).
70. In paragraph 20, above, I have referred to FOIL's submission that there is
no true market for ATE insurance. It does seem fair to say that, with
policies sold via claims agencies and claims management companies, the
intending claimants do not shop around on the basis of premium. Moreover,
in those cases and in cases sold via solicitors, clauses in the policies which
indemnify the insured for the loss of the premium itself removes any incentive
for that insured to seek a reasonably priced policy.
71. In its submissions, Abbey draws attention to the solicitor's professional
duties, which include an obligation to examine how the claimant's case can be
funded. I am in no doubt that a solicitor must not cause a client to enter
into an arrangement which he knows to be unsuitable and must not negligently
overlook other forms of funding (eg existing legal expenses cover which the
client may have). However I respectfully doubt whether, in cases in which
ATE insurance is appropriate, the solicitor must act as an insurance broker
advising his client upon the best deal available.
QUESTION 10
Do any insurers give solicitors delegated authority to issue policies,
and, if so, on what terms?
72. I cannot improve upon the answer given to this question by APIL which I
quote and adopt in full.
"A few insurers give delegated authority to solicitors who have been
admitted to their panel. It will almost certainly be a requirement of
delegated authority that the solicitor puts all his claims through the system
and at the earliest moment - i.e. receipt of instructions. The following
insurers offer delegated authority:
* Abbey Legal Protection with accident line protect relaunched and which
came into effect on 1 October 2000. The membership fee is £3750 + VAT.
An annual fee [and] a £50 referral fee is charged. Members have to put
all their CFA cases through the Abbey scheme. This is a common requirement.
* DAS/ Law Insure
* Claims Advance
* Law Club Legal Protection
* Temple
Temple has two insurance schemes - one a delegated authority basis and one
where premiums are quoted for individual cases. With the delegated authority
scheme (which is not available for all cases) the solicitor can issue
certificates in respect of any case taken on using a premium table supplied by
Temple. The solicitor rates the case and then applies a corresponding
premium. Temple also does not interfere with the way in which the case is
run leaving the solicitor free to take all decisions."
QUESTION 11
To what extent are the insured and his lawyers affected by the amount of
the premium payable;
(a) In cases which later settle (i.e. the great majority of
cases)?
(b) If the insured succeeds at the trial?
(c) If the insured is unsuccessful at the trial?
73. Answers to this question did not make much distinction between (a), (b)
and (c). The real questions here are who pays for the insurance if the
insured loses and who pays in whole or in part if the insured wins. Most
considered it immaterial whether the loss or win occurred at trial or before
trial.
74. If the insured loses, the insured must pay the premium unless the policy
contains an indemnity against such loss (as to which, see further, para 45).
75. If the insured wins, the opponent will be liable to pay the premium to the
extent that it is reasonable. If some part of it is disallowed as
unreasonable, the insured will suffer the shortfall unless, again, he has some
indemnity against such loss (as to which, see further, para 46).
76. Several interested parties have pointed out that the solicitor cannot or,
at any rate, should not make any offer to cover any shortfall or loss on
premium since to do so would breach the indemnity principle. A breach of the
indemnity principle would endanger the recovery of any sum of costs from an
opposing party.
77. It is appropriate to repeat here the submissions made by several
interested parties that one must not overlook the deleterious effect on most
litigants which an obligation to pay or finance any costs will have. Many
litigants, including those with strong claims, would be strongly disinclined to
proceed if they had to pay insurance premiums at the outset (most premiums are
funded by disbursement loans) or if they had the risk of paying them or part of
them later (see further para 45).
CONCLUSIONS
78. The Court of Appeal directions which set up this Inquiry stated that its
purpose is "to enable the Court of Appeal to give guidance in its judgment as
to the practice to be adopted in future when taking out [ATE] insurance [in RTA
cases]." In the light of the information and submissions which I have
received I would respectfully recommend the Court of Appeal to consider what if
any guidance to give on the following points:
(a) Guidance upon the recoverability of the own cost element in a CFI policy
(see paras 8 and 31 to 34).
(b) Whether, in future, further guidance should be published by the Senior
Costs Judge after arranging consultations with interested parties from time to
time unless and until such guidance becomes unnecessary (see para 3(b)).
(c) Guidance upon the recoverability of additional benefits included in ATE
policies (see paras 31 to 34 and 41 to 51).
(d) Whether it is ever appropriate to reduce the amount claimed for ATE
insurance because of the advertising policy of the ATE provider at the time the
policy was issued (see paras 59 to 63).
(e) Whether to give guidance to Costs Judges and District Judges now conducting
detailed assessments in which claims are made for the recovery of ATE premiums
(see below).
79. As to the conduct of detailed assessments I conclude by setting out the
approach which I would recommend when determining the reasonableness of an ATE
premium claimed in RTA proceedings:
(a) The range of variation between policies issued by different providers makes
it inappropriate for the time being to think in terms of benchmarks for
premiums. However, with more experience of cases, a Judge may develop a
sufficient feel to set individual benchmarks for policies issued by the major
ATE providers (see para 23).
(b) In the case of a standard "off the peg" policy, a high limit of indemnity
does not by itself indicate that the receiving party paid too much (see para
30).
(c) As a general rule the choice of an off the peg policy which covers all
risks (eg an accident group policy) can be regarded as a reasonable choice even
though other policies limited to RTA cases may have been cheaper (see para
15).
(d) Recent history of the ATE insurance industry makes it reasonable to presume
as a starting point that the premium charged is reasonable (subject to any
necessary reductions to be made) unless the contrary is shown (see para 19).
(e) The premium to be allowed (subject to reasonableness) is the total premium
paid or payable by the receiving party, not the pure underwriting risk premium
(see para 53).
(f) Reasonable sums paid as assessment fees and profit costs in respect of
obtaining and complying with the ATE policy may also be recoverable (see para
56).
(g) In proving the reasonableness of a premium the receiving party only has to
show that he made a reasonable choice. He does not have to show that he made
the best choice (see para 61).
(h) A paying party who claims that the premium claimed exceeds the maximum
premium it was reasonable to pay at the time should make available to the court
and the receiving party charts or tables from the relevant issue of "Litigation
Funding" or similar information (see para 11).
(i) It may well be reasonable to take out ATE insurance before sending a letter
before claim. Also, it is usually reasonable for an intending claimant to
delay taking out ATE insurance until the defendant has given an indication
whether the claim will be contested. The later the insurance is taken out the
more expensive it is likely to be (see para 26).
(j) A receiving party who purchased a policy the cost of which lies at or above
the top of the range of other polices available at the time of purchase should
explain why (see para 17).
(k) A high cost premium is easier to justify in cases in which the court has
already held that a high success fee is reasonable (see para 17).
(l) Conside