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Cite as: [2005] EWHC 90003 (Costs)

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This judgment has been obtained from the Supreme Court Costs Office pages on the HM Courts Service web site. The citation used by BAILII is not an officially approved citation.

 

Neutral Citation Number: [2005] EWHC 90003 (Costs)
Case Nos: PTH0310421; PTH0402192; PTH0403390; PTH0401699; PTH0404292

IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE

Clifford's Inn, Fetter Lane
London, EC4A 1DQ
27 May 2005

B e f o r e :

Senior Costs Judge Hurst
____________________

RSA Pursuit Test Cases

____________________

Mr Timothy Dutton QC and Mr Andrew Mitchell
(instructed by Hextalls) for RSA First Assist
Mr Jeremy Morgan QC (instructed by Charles Russell) for the Claimants
Mr Andrew Bartlett QC and Mr Alexander Hutton (instructed by Beachcroft Wansbroughs and Kennedys) for the Defendants in the cases of Sandiford, Clarke, Anthony Baker, Deborah Baker
Mr Nicholas Bacon (instructed by Leo Abse & Cohen) for the Defendant in the case of Farr
Hearing dates : 14, 15, 16, 17, 18 February 2005 and 27 April 2005

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

Table Of Contents

   

para

Background

1

The Issues

4

The Applicable Law

8

The Pursuit Policy Wording

19

The Test Cases

22

 

Deborah Baker v Addenbrookes

23

 

Anthony Baker v Euromark

27

 

Clarke v Tom James

32

 

Sandiford v Price's Patent Candles

36

 

Farr v Kerslake

40

The Evidence

45

Rsa And First Assist's Witnesses

45

 

Peter William Smith

45

 

Emmanuel Gilbert

79

The Claimants' Witnesses

96

 

Mark Scrivenger

96

 

William John Vallance

116

 

Amanda Stevens

135

 

Kenneth Besfor

156

 

Peter Henry Evan Bennett

161

The Defendants' Witnesses

173

 

Christopher Wait

173

 

Kate O'Reilly

193

 

John Paul Ivory

211

 

Adam Richard Burrell

222

Comments On The Evidence

225

 

First Assist Witnesses

225

 

The Claimants' Witnesses

228

 

The Defendants' Witnesses

229

   

General Submissions

236

 

First Assist

237

 

Test Case Claimants

247

 

Defendants 1 - 4

251

 

(i) Section 29 Access to Justice Act 1999

252

 

(ii) The Costs Judge

254

 

(iii) The Ultimate Question

255

 

Defendant 5 (Farr)

257

General Conclusions

260

Submissions On The Issues

271

Issue 1: Is the contract of insurance void for uncertainty because at the time the contract is made the amount of the premium is insufficiently certain and is the said contract accordingly unenforceable by RSA against the claimant and if so what is the consequence?

271

 

First Assist

271

 

Defendant 5 (Farr)

275

Issue 1 - Conclusions

277

Issue 2: Is the insurance arrangement between the client, the insurer and/or the solicitors unlawful on the grounds of champerty and if so what is the consequence?

283

 

First Assist

283

 

Defendants 1 - 4

291

 

Defendant 5 (Farr)

296

Issue 2 - Conclusions

297

Issue 3 - Is the method of calculation of the premium inherently flawed and if so what is the consequence?

307

 

First Assist

307

 

Test Case Claimants

322

 

Defendants 1 - 4

323

 

1. Constant Relationship

325

 

2. Policy taken out after CFA entered into

327

 

3. The relative sizes of the estimates

328

 

4. Estimates of success

333

 

5. Premium calculated on Claimant's costs as claimed

335

 

6. Premium calculated so as to make up a lack of

premium income in unsuccessful cases

336

 

Defendant 5 (Farr)

338

Issue 3 - Conclusions

342

Issue 4 - What commissions, if any, are payable to the Claimants' legal representatives and/or any other agents of the insurers and if there are any, when and in what circumstances are they payable?

364

Issue 5 - Should the amount of the recoverable premium be reduced on the grounds that an insurance policy ought reasonably to have been taken out at an earlier stage in the proceedings?

365

 

First Assist

365

 

Test Case Claimants

366

 

Sandiford

367

 

Clarke

368

 

Defendants 1 - 4

369

 

Sandiford

371

 

Clarke

372

 

Defendant 5 (Farr)

373

Issue 5 - Conclusions

374

Issue 6 - Has the claimant acted reasonably in taking out the RSA Pursuit policy, and if not what are the consequences?

378

 

First Assist

378

 

Test Case Claimants

380

 

Deborah Baker

382

 

Anthony Baker

388

 

Clarke

392

 

Sandiford

396

 

Farr

400

 

Defendants 1 - 4

410

 

Deborah Baker

414

 

Anthony Baker

416

 

Clarke

418

 

Sandiford

419

 

Defendant 5 (Farr)

420

Issue 6 - Conclusions

423

 

Deborah Baker

424

 

Anthony Baker

430

 

Clarke

432

 

Sandiford

434

 

Farr

435

Issue 7 - What if anything is the recoverable amount of the premium against the defendant pursuant to Section 29 of the Access to Justice Act 1999?

438

 

First Assist

438

 

The Claimants

440

 

Defendants 1 - 4

441

 

Defendant 5 (Farr)

446

Issue 7 - Conclusions

447

 

Deborah Baker

457

 

Anthony Baker

460

 

Clarke

461

 

Sandiford

464

 

Farr

465

Issue 8 - Has the indemnity principle been breached in the case of Farr?

468

 

First Assist

468

 

Test Case Claimants

469

 

Defendant 5 (Farr)

470

Issue 8 - Conclusions

472

Issue 9 - What is the impact of BTE cover in Farr?

475

Summary

476

Chief Master Hurst

BACKGROUND

  1. First Assist, through a policy underwritten by Royal and Sun Alliance (RSA), provides a bespoke after the event (ATE) insurance policy known as "Pursuit" to claimants. The policy is aimed at claimants whose claims render them unsuitable for "mass market" or "delegated" ATE policies. Mr Smith of First Assist states that each case is individually assessed and underwritten with the premium calculated by reference to a particular underwriting process and method. Five test cases have been selected as the vehicle for the trial of various issues arising from the use of the policy. First Assist has been joined as a party to these proceedings. Mr Dutton suggests that the five Test Cases are more complex and risky than those previously dealt with by the court.

  2. In reality the trial of the issues in these Test Cases is part of the battle between the liability insurers and the ATE insurance providers. The insurers standing behind the Defendants are Allianz Cornhill, AXA, Norwich Union, Ensign and NHSLA. (The NHSLA is in fact a statutory body charged with paying out on claims recovered against English NHS Trusts.) The Defendants argue that the five Test Cases are sufficiently representative and that First Assist could easily have added more cases. The Claimants suggest that the Defendant paying parties have absolute control over the cases which go to detailed assessment by the simple expedient of either not challenging, or making reasonable offers on cases which are less favourable to their argument. Mr Bartlett argues that there were plenty of cases available for First Assist to choose from should they have so decided. In my view nothing turns on this particular aspect of the proceedings. The fact is that I have heard full evidence and submissions on the five Test Cases before me, and, should different issues arise in the future, further Test Cases may be brought in order to resolve those issues.

  3. I should say at the outset that I am satisfied that the Pursuit policy is the product of an honest attempt by a reputable insurer to produce an ATE policy to fill a specific gap in the market. Unlike the packages offered by Claims Direct and The Accident Group ([2003] EWCA Civ 136 and [2004] EWCA Civ 575 respectively), the premium payable in respect of the Pursuit policy is exclusively referable to that policy and does not cover the cost of any ancillary benefits for the insured.

    THE ISSUES

  4. On 4 May 2004, in accordance with an Order dated 19 April 2004 the Defendants served a list of seven issues. On 15 July 2004 I made an Order in the case of Farr v Kerslake adding two further issues to the list. The issues are as follows:
    1. Is the contract of insurance void for uncertainty because at the time the contract is made the amount of the premium is insufficiently certain and is the said contract accordingly unenforceable by RSA against the claimant and if so what is the consequence?

    2. Is the insurance arrangement between the client, the insurer and/or the solicitors unlawful on the grounds of champerty and if so what is the consequence?

    3. Is the method of calculation of the premium inherently flawed and if so what is the consequence?

    4. What commissions, if any, are payable to the claimants' legal representatives and/or any other agents of the insurers and if there are any, when and in what circumstances are they payable?

    5. Should the amount of the recoverable premium be reduced on the grounds that an insurance policy ought reasonably to have been taken out at an earlier stage in the proceedings?

    6. Has the claimant acted reasonably in taking out the RSA Pursuit policy, and if not what are the consequences?

    7. What if anything is the recoverable amount of the premium against the defendant pursuant to Section 29 of the Access to Justice Act 1999?

    8. Does the claimant's claim for the RSA Pursuit premium breach the indemnity principle because the claimant's purported liability to pay the premium is not a genuine liability but purely a device to enable recovery of the premium between the parties?

    9. Assuming the method of calculation is not inherently flawed (issue iii) what is the relevance, if any, to the calculation of the RSA Pursuit premium of any pre-existing legal expenses insurance cover incepted and/or in existence prior to the claimant's agreement to enter into the Pursuit policy?
  5. Issue i) and issue viii) are pursued only by the Defendant in Farr v Kerslake. Issue iv), relating to commissions, was not pursued by any of the Defendants once the evidence had been heard. Issue ix) was not pursued.

  6. The issues fall into two categories, the first relating to enforceability and the second to reasonableness.

  7. It is First Assist's case that: (1) there is no merit in any of the arguments raised by the paying parties to challenge the enforceability of the Pursuit policy and that Section 29 of the Access to Justice Act 1999 is therefore engaged; (2) the Claimants' contention that it was reasonable to use the Pursuit policy, and that the premium itself is reasonable, is, on the analysis of the facts of each individual case, correct; and, (3) the Claimants are right that they should recover all, or substantially all, of the premium in the Test Cases.

    THE APPLICABLE LAW

  8. Section 29 of the Access to Justice Act 1999 provides:

    "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."

  9. The Court of Appeal in Callery v Gray (No.2) [2001] EWCA Civ 1246; [2001] 4 All ER 1 CA, held that the words "insurance against the risk of incurring a costs liability" mean: "insurance against the risk of incurring a costs liability that cannot be passed on to the opposing party" (paragraphs 59 and 60). The court set out 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.


    ...

    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 … 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."

  10. Sections 27 and 28 of the 1999 Act amended the Courts and Legal Services Act 1990 by introducing entirely new provisions relating to conditional fee agreements (CFAs). Section 29 of the 1999 Act was part of the new litigation funding structure introduced by the 1999 Act. Although Section 29 has not been inserted into the 1990 Act it may safely be assumed that Parliament had in mind the Statutory Objective of the 1990 Act:

     

    "17. (1) The general objective of this Part is the development of legal services in England and Wales (and in particular the development of advocacy, litigation, conveyancing and probate services) by making provision for new or better ways of providing such services and a wider choice of persons providing them, while maintaining the proper and efficient administration of justice.

    (2) In this Act objective is referred to as "the statutory objective"."



  11. The second issue, which all Defendants pursue, is the issue of champerty. The most recent definitive decision on the subject of maintenance and champerty is that of the Court of Appeal in R (Factortame) v Secretary of State for Transport [2002] EWCA Civ 932. I quote selectively from the extensive review of the authorities in the judgment of Lord Phillips MR, who gave the judgment of the court:

    "The law of champerty

    31. Champerty is a variety of maintenance. Maintenance and champerty used to be both crimes and torts. A champertous agreement was illegal and void, involving as it did criminal conduct. Ss. 13(1) and 14(1) of the Criminal Law Act 1967 abolished both the crimes and the torts of maintenance and champerty. S.14(2) provided, however:

    "The abolition of criminal and civil liability under the law of England and Wales for maintenance and champerty shall not affect any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal."

    Thus, champerty survives as a rule of public policy capable of rendering a contract unenforceable.

    32. "A person is guilty of maintenance if he supports litigation in which he has no legitimate concern without just cause or excuse" - Chitty 28th Ed. Vol.1 17-050. Champerty ‘occurs when the person maintaining another stipulates for a share of the proceeds of the action or suit' - ibid 17-054. Because the question of whether maintenance and champerty can be justified is one of public policy, the law must be kept under review as public policy changes. As Danckwerts L.J. observed in Hill v Archbold [1968] 1 QB 686 at 697:

    "…the law of maintenance depends upon the question of public policy, and public policy …is not a fixed and immutable matter. It is a conception which, if it has any sense at all, must be alterable by the passage of time."

    33. In Trendtex Trading v Credit Suisse [1980] 1 QB 629 at p.663 Oliver LJ remarked:

    "There is, I think, a clear requirement of public policy that officers of the court should be inhibited from putting themselves in a position where their own interests may conflict with their duties to the court by agreement, for instance, of so called "contingency fees".

    34. The introduction of conditional fees shows that even this requirement of public policy is no longer absolute. This case raises the question of whether the requirement extends to expert witnesses or others in a position to influence the conduct of litigation and, if it does, whether on the facts of the present case the agreements concluded by Grant Thornton can be justified.

    35. In Trepca Mines Ltd (No.2) [1963] 1 Ch 199 at p.219 Lord Denning MR observed:

    "The reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses. These fears may be exaggerated, but, be that so or not, the law for centuries had declared champerty to be unlawful, and we cannot do otherwise than enforce the law; and I may observe that it has received statutory support, in the case of solicitors, in section 65 of the Solicitors Act 1957."

    36. Where the law expressly restricts the circumstances in which agreements in support of litigation are lawful, this provides a powerful indication of the limits of public policy in analogous situations. Where this is not the case, then we believe one must today look at the facts of the particular case and consider whether those facts suggest that the agreement in question might tempt the allegedly champertous maintainer for his personal gain, to inflame the damages, to suppress evidence, to subborn witnesses or otherwise to undermine the ends of justice.

    37. In reaching this conclusion we have been particularly influenced by the approach of the Court of Appeal and the House of Lords in Giles v Thompson…

    38. In the leading judgment in the Court of Appeal [1993] 3 All ER 321 Steyn LJ at p.328 identified the public policy which renders champertous agreements illegal as resting on the perceived need to protect the integrity of public justice. Later, at p.336, he added that the policy focused on the protection of the party confronted with the maintained litigation, it did not exist to protect the plaintiff. At pp.328-9 he gave a valuable exposition of the history of this area of the law, culminating in the enactment of s.58 of the Courts and Legal Services Act 1990, which we shall have to consider in more detail in due course. As to this, he remarked at p.331:

    "The relevance of s58 is that Parliament has, subject to the requirements of the section, empowered the Lord Chancellor to validate by order agreements for a percentage uplift in the costs in the event of success. The ability to recover fees beyond what was otherwise reasonable was intended to be ‘an incentive to lawyers to undertake speculative actions'. Such agreements were, and in the absence of an order still are, unlawful as being contrary to public policy. The rationale of the common law rule is that such agreements allowed the duty and interest of solicitors to conflict with a resultant risk of abuse of legal procedure. Section 58 evidences a proposed modification in relation to an important species of champerty. It represents at least a concession to the view that the abuses associated with champerty are not the inevitable result of all variants of contingency fee agreements. And there is, of course, no more cogent evidence of a change of public policy than the expression of the will of Parliament."

    Subsequently, he observed at p.332:

    "Contingency fee agreements are nowadays perhaps the most important species of champerty. Such agreements are still unlawful. Yet an English solicitor may share in a contingency fee earned in foreign litigation; see r.8 (contingency fees) of the Solicitors' Practice Rules 1990. This reinforces the point that the doctrine of champerty serves to protect only the integrity of English public justice. It is based not on grounds of morality but on a concern to protect the administration of civil justice in this country."

    He continued, on the following page:

    "Ultimately, it is necessary to consider the questions posed in this case in the light of contemporary public policy. The correct approach is not to ask whether, in accordance with contemporary public policy, the agreement has in fact caused the corruption of public justice. The court must consider the tendency of the agreement. The question is whether the agreement has the tendency to corrupt public justice. And this question requires the closest attention to the nature and surrounding circumstances of a particular agreement. That is illustrated by the well-known decision of the House of Lords in Trendtex Trading Corp v Credit Suisse [1981] 3 AllER 520, [1982] AC 679."

    ...

    40. In the House of Lords [1994] 1 AC 142 Lord Mustill gave the leading speech, in which the other members of the House concurred…

    ...

    42. On these facts Lord Mustill held that it was appropriate to consider whether the mischief was established against which the public policy was directed. As to this, he observed at p.161:

    "It is sufficient to adopt the description of the policy underlying the former criminal and civil sanctions expressed by Fletcher Moulton LJ in British Cash and Parcel Conveyors Ltd v. Lamson Store Service Co. Ltd [1908] 1 K.B. 1006, 1014:

    "It is directed against wanton and officious intermeddling with the disputes of others in which the [maintainer] has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse."

    This was a description of maintenance. For champerty there must be added the notion of a division of the spoils."

    43. Lord Mustill held that in neither case was this mischief established. Summarising the position, he said at p.165:

    "Returning to the company, is it wantonly or officiously interfering in the litigation; is it doing so in order to share in the profits? I think not. The company makes its profits from the hiring, not from the litigation. It does not divide the spoils, but relies upon the fruits of the litigation as a source from which the motorist can satisfy his or her liability for the provision of a genuine service, external to the litigation. I can see no convincing reason for saying that, as between the parties to the hiring agreement, the whole transaction is so unbalanced, or so fraught with risk, that it ought to be stamped out. The agreement is one which in my opinion the law should recognise and enforce."

    44. This decision abundantly supports the proposition that, in any individual case, it is necessary to look at the agreement under attack in order to see whether it tends to conflict with existing public policy that is directed to protecting the due administration of justice with particular regard to the interests of the defendant. This is a question that we have to address. In so doing we revert to the statement of Lord Mustill that ‘the rule, now in the course of attenuation, which forbids a solicitor from accepting payment for professional services calculated as a proportion of the sum recovered from the defendant …survives nowadays, so far as it survives at all, largely as a rule of professional conduct'. With respect, this statement is not correct. The basis of the rule is statutory. It is now necessary to look at the relevant statutory provisions …

    . . . .

    62. More generally, however, s.58[of the 1990 Act] evidences a radical shift in the attitude of public policy to the practice of conducting litigation on terms that the obligation to pay fees will be contingent upon success. Whereas before this practice was outlawed, it is now permissible - subject to the requirements imposed by the section. These requirements do not appear designed to mitigate the mischief that had led to the banning of contingency fees - the undesirability of the interests of officers of the court conflicting with their duties to the court. Rather the requirements appear designed to protect the litigants concluding conditional fee agreements who, when the section was first enacted, were required to pay any ‘uplift' out of their recoveries. Conditional fees are now permitted in order to give effect to another facet of public policy - the desirability of access to justice. Conditional fees are designed to ensure that those who do not have the resources to fund advocacy or litigation services should none the less be able to obtain these in support claims which appear to have merit.

    . . . .

    76. In Giles v Thompson Lord Mustill applied the test of public policy identified by Fletcher Moulton LJ in the British Cash case. That test is appropriate when considering those who, in one way or another, support litigation in which they are concerned. It is not, however, really in point when considering agreements under which those who are playing a legitimate part in the process of litigation provide their services on a contingency fee basis. A solicitor who charges a contingency fee which does not satisfy the requirements of s.58, can hardly be said to be guilty of ‘wanton and officious intermeddling in the disputes of others …where the assistance he renders to one party or another is without justification of excuse'. The public policy in play in the present case is that which weighs against a person who is in a position to influence the outcome of litigation having an interest in that outcome.

    ..."

  12. The parties' submissions on champerty are dealt with below at paragraph 283.

  13. The trial of these Test Case issues takes place during the course of detailed assessment proceedings. All the assessments are on the standard basis and are accordingly governed by CPR 44.4(1) and (2). It is not necessary to set out this rule, but it is necessary to bear in mind that the court will resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party. CPR 44.5 sets out the factors to be taken into account in deciding the amount of costs, but again there is no need for me to set out the terms of that rule which is familiar to all those involved in these proceedings. For the sake of completeness I mention that CPR 44.5 is supplemented by Section 11 of the Costs Practice Direction from which I quote selectively:

     

    "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 cost of insurance cover is reasonable, relevant factors to be taken into account include:

    (1) [omitted]

    (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."



  14. Paragraph 17.8(2), referred to in paragraph 11.7, applies only to costs only proceedings.

  15. With regard to what constitutes "premium" MacGillivray on Insurance Law (9th Edition 1997 paragraph 72), defines the word "premium" in these terms:

    "The premium is the consideration required of the insured in return for which the insurer undertakes his obligation under the contract of insurance (Lewis Ltd v Norwich Union Fire Insurance Co [1916] AC 509, 519)."

  16. This definition was adopted by the Court of Appeal in the Claims Direct Test Cases [2003] EWCA Civ 136 at paragraph 25. In a different appeal in the same proceedings [2002] EWCA Civ 428 at [44] Arden LJ said:

    "44. ... The expression "premium" is not defined by the Access to Justice Act 1999. The court has been referred to the Civil Procedure Rules and various authorities. … In my judgment the premium is not necessarily limited to payments paid on inception of cover, but could include any further amounts paid by, or on behalf of the insured, pursuant to terms agreed with the insurer."

  17. She went on to refer to the decision of the Court of Appeal in Callery v Gray (No.2) in these terms:

    "46. ... The court specifically added "Satellite litigation involving such an exercise [i.e. examining evidence of insurance cover] is however unsatisfactory. The Judge can only be expected to give broad consideration to such evidence. It is not part of a function of a Judge assessing costs to carry out an audit of the insurance business" ... The court may wish to check the overall result which it reaches by reference to the alternative method of obtaining access to justice. This might involve looking at alternative rates of cover, or the costs which would be involved if litigation were to be funded in some other way. This has been called the "top down" approach. Nonetheless, in making that comparison it may be necessary to bear in mind that like may not be being compared with like ... Nevertheless in my judgment, the comparison between the cover provided by these appellants and other means of financing litigation, including other insurance cover, is a relevant consideration to which the appellants could properly bring ... the attention of the Senior Costs Judge. I say this, bearing in mind the general purposes of the new methods of funding litigation introduced by the 1999 Act and by the fact that it is obviously highly desirable in the interests of justice that these methods should be competitive. A premium may not be reasonable if there are alternative ways of providing the same funding at significantly less expense."

  18. The Court of Appeal has given guidance as to the correct approach to be taken to proportionality in the context of costs assessments in Lownds v Home Office [2002] EWCA Civ 365.

    THE PURSUIT POLICY WORDING

  19. The wording of the Pursuit policy remains constant throughout the five Test Cases. So far as relevant that wording is as follows. Under "Important Notes":

    "The Insurer will provide the insurance described in this Policy in consideration of the Insured's promise to pay the Premium."

  20. Under "Definitions":

    "INSURED

    The term used to denote collectively both the Insured Litigant and Insured Solicitor in their capacity as beneficiaries under this Policy.

    ...

    LIMIT OF INDEMNITY

    The Insurer's liability in respect of Normal Fees and Expenses shall not exceed in the aggregate 100% of the amount specified in the proposal for this insurance as the Insured Solicitor's reasonable estimate of the sum likely to be recovered from the Opponent, excluding costs, if the Legal Proceedings are resolved in the Insured Litigant's favour. This amount appears on the Schedule.

    ...

    ADVERSE COSTS

    The net costs of the Opponent in the Legal Proceedings to the extent that the Insured Litigant is legally liable to discharge them, after taking account of any costs awarded against the Opponent or agreed to be paid by the Opponent. No cover is provided in respect of any success fee to which the Opponent or Opponent's solicitor or Opponent's barrister may be entitled.

    NORMAL FEES

    The costs of the Insured's Solicitor acting for the Insured Litigant under the Conditional Fee Agreement and which form the basis of the calculation of the Success Fee.

    Where the outcome of the Legal Proceedings is not a Success the Insurer shall have the right to have the Insured's Solicitor's bills taxed or assessed on the standard basis.

    EXPENSES

    Expenses and other disbursements paid by the Insured's Solicitor to other parties which are reasonably and properly incurred by the Insured's Solicitor

    a) in connection with the Legal Proceedings,

    b) in appealing or resisting an appeal against the judgment of a court in connection with the Legal Proceedings provided Our prior written consent has been obtained to the appeal.

    The Insurer shall not be liable for Counsel's fees where Counsel is retained to act in the Legal Proceedings under a conditional fee agreement.

    ...

    PERIOD OF INSURANCE

    Cover commences at the later of the inception date shown on the Schedule and the date of signing of the Conditional Fee Agreement.

    Cover ceases when

    a) the Legal Proceedings are concluded by a judgment of the Court of first instance or following an appeal to which We have given Our prior written consent, or

    b) the Legal Proceeding are discontinued with Our prior written consent, or

    c) the Conditional Fee Agreement is terminated whichever is the earliest.

    PREMIUM

    The amount shown on the Schedule which becomes payable when the outcome of the Legal Proceedings is a Success.

    Where the Insured Litigant receives an offer to settle or a payment into Court which equals or exceeds the definition of Success the Insured Litigant may at that time immediately pay the Premium based on the Normal Fees at that date. The Insured Litigant may elect by written notice to Us to continue with the action and defer payment of the Premium to the Conclusion of the Legal Proceedings. The Premium will then be based on the Normal Fees at the Conclusion of the Legal Proceedings. If, having made this election, the Insured Litigant ultimately fails to achieve a Successful outcome to the Legal Proceedings the Premium payable at the date when the Insured Litigant made the election shall remain payable.

    SUCCESS FEE

    The amount specified in the Conditional Fee Agreement as the percentage uplift to the Insured Solicitor's Normal Fees payable on the successful conclusion of the Legal Proceedings.

    SUCCESS/SUCCESSFUL

    The Insured Litigant is offered or obtains at any time a net entitlement to money and/or damages and/or costs which, taking into account any counter-or cross-claim in the Legal Proceedings, equals or exceeds the sum shown in the Schedule as the definition of Success. If the Insured Litigant achieves such an outcome at trial and is required by Us to defend an appeal which results in a net entitlement to money, damages and costs which is lower than the definition of Success then the action will be deemed unsuccessful.

    Where an offer to settle is received from the Opponent at any time which equals or exceeds the definition of Success then the outcome of the Legal Proceedings is Successful even if the Insured Litigant elects not to accept the offer.

    ...

    COVER

    Section A

    Where the outcome of the Legal Proceedings is not a Success the Insurer will, subject to the Limit of Indemnity indemnify the Insured Litigant in respect of

    a) Adverse Costs

    provided that

    1. the Court makes an award of Adverse Costs against the Insured Litigant or

    2. the Legal Proceedings are settled or otherwise discontinued with the prior written agreement of the Insured Litigant, the Insured Solicitor and Us

    3. the Insurer shall not be liable to pay any Adverse Costs until the Legal Proceedings are finally concluded.

    (b) Expenses

    provided that

    1. the Insurer shall only be liable for any Expenses to the extent that the Insured Litigant is not entitled to recover them from the Opponent or any other party

    2. the Insurer shall not be liable to pay any Expenses until the Legal Proceedings are finally concluded.

    ...

    GENERAL EXCLUSIONS

    This insurance does not cover

    1. The Insured Solicitor's Contribution

    2. Any payment by the Insurer under this Policy which is due as a result of a discontinuance or settlement to which We have not given Our prior written consent.

    3. Damages of any kind.

    4. Enforcement proceedings.

    5. Wasted costs or any increased legal or other costs arising from any unreasonable delay or negligence by the Insured Litigant or Insured Solicitor which in Our opinion is prejudicial to the conduct of the Legal Proceedings.

    6. Under Section B only, any liability of the Insurer arising from the Insured Solicitor's failure to comply with procedural directions or pre-action protocols.

    7. Legal Proceedings made, commenced, brought or transferred outside the Territorial Limits or which are not governed by English law.

    8. Any payment by the Insurer arising from Legal Proceedings in respect of which the Insured is or but for the existence of this insurance would be entitled to indemnity under any other insurance policy.

    9. Any amount which the Opponent is obliged to pay but fails to pay to the Insured Litigant or Insured Solicitor for any reason.

    10. Normal Fees, Expenses and Adverse Costs incurred outside the Period of Insurance.

    11. Any costs incurred by the Insured Litigant or Insured Solicitor in providing Us with any information or documentation under this insurance.

    12. Any payment by the Insurer under the Policy where there has been misrepresentation or material non-disclosure by the Insured Litigant or Insured Solicitor.

    13. Any payment by the Insurer under the Policy if the Legal Proceedings are stayed, discontinued, abandoned or withdrawn by virtue of the bankruptcy, insolvency or liquidation of the Opponent.

    CONDITIONS

    1. Premium

    The Premium payable under this Policy and shown on the Schedule is established by reference to the Normal Fees of the Insured Solicitor.

    The Premium is payable even if the Opponent delays or defaults in settling any judgment or agreed settlement.

    The Premium will not be affected by taxation or assessment or any agreement which reduces the Insured Solicitor's Normal Fees or the level of the Success Fee.

    ...

    3. Termination

    The policy will terminate if the Insured Litigant or Insured Solicitor terminates the Conditional Fee Agreement.

    We may cancel the Policy by giving fourteen days' notice in writing to the Insured Litigant and Insured Solicitor if

    a) the Insured Litigant fails to comply with the terms of the Conditional Fee Agreement

    b) the Insured Litigant does not follow the Insured Solicitor's recommendations with regard to settlement of the Legal Proceedings

    c) the Insured Litigant does not follow Our recommendations with regard to settlement of the Legal Proceedings

    d) the Insured Litigant rejects the Insured Solicitor's advice to discontinue the Legal Proceedings.

    In the event that the Policy is cancelled, the Insurer shall be under no obligation to make any payment.

    4. Minimising Claims or Legal Proceedings

    The Insured must take all reasonable measures to minimise the cost of Legal Proceedings.

    ...

    7. Due Observance

    The due observance of and compliance with the terms provisions and conditions of the Policy insofar as they relate to anything to be done or complied with by the Insured Litigant or Insured Solicitor shall be conditions precedent to any liability of the Insurer to make any payment hereunder. In the event that the Policy is terminated the parties to this Policy shall continue to observe the conditions to the extent that they remain relevant.

    8. Provision of information

    The Insured Solicitor must

    a) provide to Us regular progress reports on the Legal Proceedings and associated costs and when specifically requested by Us.

    b) advise Us in writing as soon as an offer to settle the Legal Proceedings or a payment into Court is made by the Opponent. The Insured Solicitor and the Insured Litigant must not enter into any agreement to settle without Our prior written consent.

    c) advise Us in writing as soon as either the Insured Solicitor or Insured Litigant wishes to discontinue the Legal Proceedings.

    d) provide Us with a copy of the judgment of the Court in the Legal Proceedings.

    e) advise Us immediately in writing if the Conditional Fee Agreement for which the Policy has been issued has been terminated or varied.

    f) provide Us promptly with any requested information.

    g) provide Us immediately with a copy of any Counsel's Opinion.

    h) allow Us to inspect the files of the Insured Solicitor at any time, including after the conclusion of the Legal Proceedings.

    The Insured Litigant or Insured Solicitor must advise Us of any material changes to the prospects of success in the Legal Proceedings.

    ..."

  21. The definition of success in each case is set out in the schedule, together with the premium expressed as a percentage of "normal fees". I deal with the particular definition of success in each Test Case in the next section of this judgment.

    THE TEST CASES

  22. The factual background to each of the Test Cases and the chronology relating to each is not in dispute. The chronology in each case is however of importance. I set out below short details of each of the Test Cases.

    Deborah Baker v Addenbrookes

  23. This was a clinical negligence claim arising out of alleged negligence resulting in the surgical removal of a section of the Claimant's bowel. The claim was ultimately settled for ?400,000. Mr Morgan identified the difficulties with the claim under a number of bullet points:
    • The conduct of the hospital was reviewed by an independent physician from another hospital unfavourably to the Claimant.


    • The claim was assessed for CFA purposes at 33% prospect of success, though that prospect had increased by the time of the proposal for insurance. In view of some favourable medical evidence the prospects were put at 70% for the proposal.


    • The Claimant and her husband had spent two years trying to resolve the claim without litigation.


    • The Claimant was unable to afford a premium payable at the outset. The Claimant made a Part 36 offer of ?75,000 before insurance was taken out. The Defendants refused that offer.
  24. Mr Morgan supplied a full chronology in each case, which I summarise as follows:

    31 July 1999

    The Claimant was admitted to hospital, the alleged negligence occurred in the next few days (limitation 31 July 2002).

    26 September 2001

    Solicitors Scrivenger Seabrook instructed and CFA entered into. Success fee 100%.

    8 January 2002

    Solicitors submit proposal for ATE insurance to LPL.

    18 February 2002

    Solicitors submit proposal for disbursement funding to First National Bank (no response from First National).

    15 March 2002

    Solicitors approach The Judge Broker who in turn (19 March 2002) approaches First Assist.

    2 April 2002

    First Assist correspond with The Judge as to possible cover.

    20 June 2002

    First Assist quotation: limit of indemnity ?18,500 [own disbursements only] premium 172% of normal fees plus IPT.

    20 September 2002

    Inception of cover on terms of quote.

    24 April 2003

    Defendants offer ?100,000.

    16 June 2003

    Defendants offer ?350,000.

    22 July 2003

    Settled by Consent Order for ?400,000 plus costs.

  25. The definition of success contained in the policy schedule reads:

    "Definition of success

    The case is finally decided in favour of the insured litigant whether by a court decision or an agreement to pay the insured litigant damages."



  26. Premium ?52,048.92 plus IPT (?54,787.37), ie normal costs, ?30,261 x 172%.

    Anthony Baker v Euromark

  27. This was a personal injury claim in which the Claimant asserted that he had been hit on the hand with a baton during a training course. Settled for ?1,250.

  28. The difficulties and issues identified by Mr Morgan were:


      • Rejection of the case by the Claimant's union solicitors Thompsons.


      • Rejection of the claim to the CICA on the basis of criminal assault.


      • Adverse evidence of an independent witness.


      • Causation problems because of previous medical history.


      • Various ATE proposals were rejected.

  29. Chronology

    19 August 1999

    Incident occurs.

    1 August 2001

    Thompsons advise client they will proceed no further.

    14 November 2001

    Solicitors AMS Law instructed. CFA entered into, 100% success fee.

    26 July 2002

    After rejection of previous applications for ATE insurance RSA First Assist proposal form submitted.

    12 August 2002

    Quote from First Assist.

    16 August 2002

    Claim form issued (limitation period expires 19 August 2002).

    16 October 2002

    Inception of policy.

    19 August 2003

    Part 36 payment by Defendants ?850.

    25 September 2003

    Settled for ?1,250.

  30. The schedule to the policy put the limit of indemnity at ?2,000 (the limit of indemnity applies only to expenses and excludes counsel's fees). The definition of success reads:

    "Definition of success:

    The claim for damages is finally decided in favour of the Insured Litigant whether by a court order or an agreement to pay the Insured Litigant damages or acceptance of any offer as advised."

  31. The premium is stated to be 74% of normal fees plus IPT. The premium claimed is ?8,536 plus IPT (?8,962) being ?11,535 normal fees x 74%.

    Clarke v Tom James

  32. The Claimant's claim was for an upper limb disorder (tennis elbow) allegedly caused by pulling a heavily laden trolley. The case ultimately settled for ?20,000 after the exchange of expert evidence. The difficulties and issues identified by Mr Morgan were:
      • Causation, the Defendants argued that the Claimant's injuries were caused by the Claimant's karate activities.


      • The Claimant was unsure of the date of the onset of the symptoms, limitation was thought to expire in Summer 2002.


      • The policy was eventually taken up just before the expiry of four months for service, the insurers required further medical evidence.
  33. Chronology:

    23 March 2001

    Claimant instructed solicitors Hart Brown.

    6 February 2002

    The Defendants having denied liability the Claimant instructed Charles Russell.

    7 March 2002

    CFA entered into: success fee 67%.

    27 March 2002

    Proposal submitted to The Judge Broker. Further information requested by First Assist.

    1 May 2002

    Proceedings issued. Further correspondence between Charles Russell and RSA.

    27 August 2002

    Quotation to Charles Russell.

    29 August 2002

    Policy incepted. Limit of indemnity ?7,000 [own disbursements only]. Premium 123% of normal fees.

    10 July 2003

    Acceptance of Part 36 payment, ?20,000.



  34. The definition of success reads:

    "Definition of success:

    The claim for damages is decided in favour of the Insured Litigant whether by a court decision or where an offer is received which the Insured Litigant's Solicitor advises should be accepted or acceptance of any offer."

  35. Premium ?30,772.76 plus IPT (?32,392.38) being normal fees of ?25,018.50 x 123%.

    Sandiford v Price's Patent Candles

  36. This was a claim for damages for stress at work settled for ?44,000 plus CRU benefits. Apart from the normal difficulty associated with a stress at work case the Claimant's solicitors had tried to obtain other ATE insurance but were unsuccessful. They used The Judge broker but only one insurer was prepared to quote.


  37. Chronology:

    August 1998

    The cause of action accrued. The Claimant's condition was diagnosed as a psychiatric injury. Limitation therefore ran to July 2001.

    23 February 2001

    The Claimant instructed solicitors Ormerods in connection with an employment dispute.

    31 July 2001

    Proceedings issued. Subsequent unsuccessful applications for ATE insurance.

    21 August 2002

    The CFA: 70% recoverable success fee.

    23 August 2002

    Inception of policy. Limit of indemnity ?10,000, [own disbursements only] premium 160% of normal fees.

    15 July 2003

    Settled for ?44,000 plus CRU.



  38. The definition of normal fees in the policy wording was to be amended to show that this was based upon the insured litigant's solicitors' total fees and not limited to those under the conditional fee agreement. The definition of success reads:

    "Definition of success:

    The case is finally decided in favour of the Insured Litigant whether by a court decision or an agreement or acceptance of any offer as advised by the Insured Litigant's Solicitor."

  39. Premium ?16,176.75 plus IPT (?16,986) being normal fees of ?10,110.47 x 160%.

    Farr v Kerslake

  40. The Claimant sustained a serious personal injury (his leg was amputated) as a result of being run over by a bus. Settled for ?250,000 on the first day of trial. Mr Morgan identified the difficulties and issues as:

      • The Claimant had amnesia as to the circumstances of the accident.


      • The Claimant had been drinking (which was the purpose of the outing) at the time of the accident.


      • The Defendant bus driver, who was sober, was firm that the Claimant was wholly at fault.


      • There was no independent direct witness evidence.


      • The Claimant had before the event insurance up to ?25,000 which was used up and ultimately applied to disbursements.


      • The defence raised a positive case not indicated in the reply to the pre-action protocol letter.


  41. Chronology:

    23 August 1999

    Accident occurred.

    3 October 2000

    Solicitors (Dolmans) undertake work under the BTE cover.

    18 June 2002

    Proceedings commenced.

    22 July 2002

    Solicitors write to First Assist enquiring about possibility of topping up BTE.

    17 December 2002

    CFA entered into: 80% recoverable success fee.

    18 December 2002

    Proposal to First Assist.

    16 January 2003

    First Assist quote (the quote is based on incorrect figures).

    23 January 2003

    Insurance policy incepts.

    15 August 2003

    Defendants offer ?100,000 otherwise will proceed to trial on liability and quantum.

    29 September 2003

    Settled on first day of trial for ?250,000.


  42. The limit of indemnity for own disbursements was nil (the BTE policy covered disbursements). The definition of success read:

    "Definition of success:

    The claim for damages is finally settled in favour of the Insured Litigant whether by a court decision or where an offer is received which the Insured Litigants Solicitor advises should be accepted or any other offer accepted."

  43. Notwithstanding the definition of normal fees in the policy the premium will be based on the insured litigant's solicitors' total fees from the date of first instruction in this claim and not just those incurred under the conditional fee agreement.

  44. Premium claimed ?153,378.76 plus IPT (?161,047.69) being 257% of normal costs, ?59,680.45. It is common ground that the premium calculation was based on incorrect figures.

    THE EVIDENCE

    RSA AND FIRST ASSIST'S WITNESSES

    Peter William Smith

  45. Mr Smith is the technical director of First Assist Group Ltd. He had been with that company and its predecessor, the Legal Protection Group Ltd ("LPG"), since 1990. He is a Fellow of the Chartered Insurance Institute and has extensive knowledge of the insurance industry, working for some time with the Royal Insurance Company. In 1990 he joined LPG whose business included legal expenses insurance and the provision of associated legal help lines. Royal Insurance and Sun Alliance merged in 1997 to form RSA. First Assist was formed by consolidating LPG with RSA's equivalent subsidiary, the Care Assist Group Ltd. Mr Smith became the legal expenses manager of the First Assist, a post which he held until 2003. In March 2003 First Assist became independent of RSA. Mr Smith was appointed legal expenses and technical claims director and then technical director in late 2004. He has overall responsibility for the underwriting and claims performance of the company's insurance products.

  46. In his witness statement Mr Smith sets out the origins of the Pursuit scheme. He states that the introduction of conditional fees with recoverable success fees created a vastly enhanced need for ATE insurance. He says (paragraph 13):

    "Without ATE the use of CFAs would be impossible (since a litigant who could not afford to meet his own solicitor's costs could also clearly not afford to meet his opponent's costs if unsuccessful in the action)."

  47. Since First Assist and RSA were already one of the market leaders in before the event insurance (BTE): "The decision was made to take on the challenge of developing an ATE product as well." Because of the perceived instability of the mass personal injury market, the company set out to design a product to support the use of CFAs in areas going well beyond that market. The Pursuit policy was designed to cater for multi track actions in any area in which CFAs could be employed. Mr Smith identifies two problems (paragraph 14):

    "Firstly it was obvious that the premium for such cases would have to be much larger than in run of the mill personal injury cases … Secondly it was obvious that a losing litigant would not have the means to pay the premium."

  48. In order to overcome these problems it was decided (paragraph 15):

    "That the premium needed to be deferred and conditional upon success. Those who won their cases would have the means to pay the premium. Those who lost would not need to do so."

  49. It was decided that the policy needed to provide unlimited cover for adverse costs, giving an unsuccessful litigant full protection, even if the case proved more expensive than had been originally expected.

  50. At the time the Pursuit policy was being developed success fees and ATE insurance premiums were not recoverable from the paying party. These items became recoverable from 1 April 2000. The product was therefore developed on the assumption that the insured would be responsible for meeting the whole cost of the premium out of his or her own resources. On 12 March 1999 a letter of explanation and marketing package was sent out to solicitors firms describing the Pursuit policy:

    "A ground breaking "after the event" conditional fee agreement protection plan."

  51. The letter, which was signed by Mr Smith, put forward as the unique benefits of the Pursuit policy:

      • "No premium is payable at the outset.


      • No premium is payable if your client's case is unsuccessful.


      • Unlimited cover is provided for adverse costs.


      • The majority of your costs and disbursements are paid if your client's case is unsuccessful."


  52. Mr Smith explains (paragraph 19):

    "One further feature of the product's development was that we were aware that some solicitors were reluctant to use CFAs for fear of the effect of losing cases on the firm's financial position. We therefore incorporated a section of cover … under which we would cover a proportion of the solicitors own costs. This facility was not used in any of the Test Cases but does have relevance to the rating mechanism explained below."

  53. Mr Smith then goes on to set out the principles of the Pursuit model. He explains that the cover needs to be unlimited because the level of own and adverse costs is inevitably uncertain.

  54. Since First Assist wished to concentrate on the more complex cases they realised that the payment of the premium in advance would cause problems (paragraph 22):

    "We therefore determined to make the premium deferred and we did this prior to any legislation as to recoverability of the premium from the opponent."

  55. Even after recovery of ATE premiums became possible the insured was and is liable to pay any shortfall in the premium.

  56. It was a feature of the Pursuit policy that the insured would not have to pay the cost of the premium if the case was lost. Mr Smith suggests that ATE policies which defer payment of the premium until an order for payment of the insured's costs is made, or the use of a self funding premium in the event of failure, are different ways of achieving the same underlying objective of not leaving an impecunious, unsuccessful claimant with an outstanding ATE premium to pay.

  57. Mr Smith explains the method by which the premium is calculated at paragraphs 26 to 38 of his statement. The cost of the premium had to reflect the fact that because legal fees and disbursements inevitably increase the further the litigation progresses, the risk to the insurer increases in a similar way. When considering how to quantify the value of the premium this had to be based "upon those costs and disbursements that we were able to know about at the time the risk was presented to us" (paragraph 27).

  58. Ideally, the insurers would need to know the amount of the claimant's disbursements, the defendant's costs and the defendant's disbursements. That information not being available however, the premium could not be calculated on that basis. Mr Smith goes on to suggest that the winning party's solicitors (paragraph 30):

    "will always be in a position at any stage in the case to know what their costs are and these will be quantifiable at whatever stage the case is concluded."

  59. Mr Smith and First Assist took the view that, although it is not possible to say whether the opposing party's costs and disbursements are the same as the claimants, they were often similar, and in more difficult cases particularly so. Mr Smith continues (paragraph 32):

    "We felt that it was a reasonable assumption … to make in broad terms, for the purpose of establishing and maintaining a consistent underwriting procedure that the level of the insured's costs and the opponent's cost would escalate for the duration of the case on a roughly equal basis … We thus arrived at the basic fundamentals of a sliding scale premium calculated by reference to own solicitor's fees. It is important to appreciate that each case is rated on the estimated costs of that case. There is no standard assumption, for example, that the insured liability will always be a fixed proportion of own costs. The only workable assumption is that, as costs for both sides start at zero and proceed to the estimated levels at trial, the relationship between own costs and the insured's liability will remain constant throughout the action."

  60. In order to work out the monetary value of the premium a multiplier (the premium rate) had to be ascertained which could be applied to own solicitor's fees. He explains (paragraph 33):

    "In order to do this it was necessary to form a view as to:

    (i) the likelihood of the insured's case succeeding in percentage terms; and

    (ii) if the policy was called upon, how much would have to be paid out in order to work out the break even position, or "burning cost" for the scheme, where the cost of the claims paid exactly matches the value of risk premium income (excluding expenses and commission) received. Given the product was an entirely new concept, the absence of previous underwriting data, and the considerable volatility in rates in the ATE market, we resolved to apply basic principles to arrive at an appropriate rating model."

  61. Mr Smith continued (paragraph 36):

    "In order to form a view as to the burning cost it was necessary for rating purposes to predict what the policy liability, ie own disbursements and adverse costs and disbursements, might come to in each case. This was done by asking the prospective insured's solicitors in the proposal form to provide us with the best estimate of these costs and disbursements to trial … The insured's solicitors would also be in the best position to know the likely rate of the other side in coming to their estimate which we could then use to calculate the premium."

  62. At paragraph 39 and following Mr Smith gives details of the calculation method of the premium.

  63. The premium is expressed as a specified percentage of the claimant's solicitors' basic or "normal" fees. This percentage is arrived at by:

    (a) adding together the opponent's solicitor's estimated fees and disbursements and the claimant's solicitor's own disbursements;

    (b) dividing the total by the anticipated basic fees of the claimant's solicitors (producing an exposure multiplier);

    (c) arriving at a multiple, which is inversely proportionate to the percentage prospects of success of the case at the time the cover is taken out (producing a risk multiplier);

    (d) applying the risk multiplier to the exposure multiplier to reach the relevant burning cost premium rate;

    (e) adding an allowance for profit and administration and an allowance for broker's commission (if a broker is appointed). IPT is then due on the resultant premium (paragraph 41).

  64. The higher the risk of failure the higher the risk multiplier becomes. Likewise the higher the ratio is between insured costs and disbursements and uninsured costs, the higher the exposure multiplier becomes. The view of Mr Smith and First Assist is that this reflects in a fair and logical manner the risk that the ATE insurer was running.

  65. Mr Smith states that in each case there was a period after the quotation was provided by First Assist before cover was incepted. This period was used to encourage the Defendant to settle before the liability for premium was incurred. He goes on to suggest that since some of the liability insurers have already paid Pursuit premiums at the lower levels in other cases, the Defendants have cherry picked the Test Cases for the trial of these issues (paragraph 75). The Defendants deny that assertion pointing out that First Assist and the Claimants were given the opportunity by the Order of 19 April 2004 to identify test cases of their own.

  66. Having seen the evidence of the Defendants' witnesses Mr Smith put in a further witness statement in which he criticises the evidence of Mr Ivory, firstly on the basis that he has put forward a selection of cases of clinical negligence where the costs were always above ?50,000. He comments that had cases below that level been included this would have brought down the overall average in respect of premium. On Mr Smith's figures, which he exhibits, he calculates an average premium of ?21,606 when considering all Pursuit cases won against the NHSLA since the introduction of the policy. This exhibit was taken from the First Assist database of all ATE cases which had been written using the Pursuit policy and the Pursuit rating in respect of clinical negligence cases only, and where, according to their records, the opponent in those cases was the NHSLA. There were 46 cases in all, of which 16 incurred premiums below ?10,000. The average premium rate across all the cases is 115% of normal costs. He explains (paragraph 7):

    "It can also be seen that our exposure is on average approximately ?60,000 compared with the solicitors' exposure of ?38,000. If it is reasonable for a solicitor to recover a success fee in a range of 60% - 100% to reflect the risk, it follows that the required premium rate for our exposure is in the range of 100% - 150% to reflect the risk we take."

  67. Mr Smith also exhibits an analysis of the lost cases in respect of all classes of legal actions which have been unsuccessful since the inception of the Pursuit policy. The exhibit shows for these cases the date the cases were lost, details of the litigant and solicitor, the date that cover was taken out, the estimated exposure as it was presented by the solicitor at the time First Assist were asked to go on cover, and the amount which they have either been obliged to pay under the terms of the policy or which they currently hold as a reserve in the expectation that they will have to pay out. This analysis demonstrates that the maximum exposure to date had been ?170,000 paid out to a successful opponent where the estimate of adverse costs had been ?15,000. Mr Smith explains about one particular commercial case where there had been deliberate misrepresentation and non disclosure by the Claimant and in respect of which the Judge at trial found fraud. The policy was repudiated, but otherwise the policy liability would have been ?520,000. He describes the business as "long tail". That is, that there is a risk that some of the cases which will conclude in future years will not only take longer to go through but will, if lost, turn into heavily losing cases, although expected to win when put on risk. He describes this as a continual cause for concern.

  68. Mr Smith describes the "Watermark" policy which is for routine personal injury cases, and which is offered at a competitive premium. Watermark is a delegated authority scheme allowing solicitors to provide ATE at agreed premiums for personal injury risks within agreed parameters. There is also another policy called "Pursuit PI" or "Small PI" which is written on the Watermark wording not the Pursuit wording. The product was introduced in June 2003. He states (paragraph 11):

    "The intention was to introduce a policy that was cost effective and also was aimed at solicitors who did bulk PI work and had the demonstrable track record of using CFAs effectively. Such solicitors needed to have high quality systems in place for handling such large scale work, and expertise in it. Watermark was designed as a delegated authority scheme for such solicitors as opposed to one off cases only - they were therefore expected to place all eligible risks with us.

    ...

    14. The cover is similar to Pursuit to the extent that premium is conditional and deferred. However there is a limit of indemnity of ?125,000, and in common with other delegated authority schemes in the market there is a stringent set of acceptance criteria for cases to be eligible to be put on cover by the solicitor."

  69. He goes on to explain that, even had the Watermark policy been available, none of the Test Cases would have fallen within the eligibility criteria. The range of premiums for the Watermark policy was from ?195 in a fast track RTA case to ?845 in a non RTA multi track case (excluding IPT). The Small PI Pursuit policy was designed to fill a gap in the market where solicitors had PI cases which they wished to insure, but which fell outside the terms of their scheme with another provider. The base rates (as used in the Watermark policy) were subject to loading when considering factors such as: individual case prospects, the state of the case, limitation issues, multiple defendants and the fact that the case represented a higher risk than Watermark eligible cases. The scheme was introduced in July 2003 and cover was available only for cases which were introduced by The Judge broker. Underwriters retained a discretion on rating and certain parameters were laid down. The underwriting team retained a discretion whether or not to offer cover but the policy wording itself was the same as the Watermark policy and the limit of indemnity remained ?125,000. Mr Smith exhibited a chart showing how the basic Watermark premiums were loaded, depending on the time when the policy was taken out and whether the merits exceeded 60% or 70%. This meant that the range of premiums for a fast track RTA case outside the Watermark scheme could be as high as ?1,755 and for a non RTA multi track as high as ?7,605 (exclusive of IPT).

  70. At paragraph 22 of his witness statement Mr Smith points out that in the past the NHSLA have paid premiums rated at 253% and 212% and actual premiums of ?39,048 and ?38,095 but have declined to pay other cases with much lower premiums, for example ?800 and ?1,900. He suggests that their approach is inconsistent.

  71. Mr Smith also comments on the evidence of Kate O'Reilly and Mr Burrell and finally on the evidence of Mr Wait of Temple Legal Protection Ltd an underwriting agency.

  72. In cross examination Mr Smith was asked about the difficulty which solicitors might have in giving accurate estimates, his response was:

    "It [obviously] depends on the state of proceedings. It depends on whether information has been shared under protocols between the solicitors, and often in our cases, because they are taken on late, there may be reliance on an estimate provided by the other side, but that still suffers from the same propensity for variance as the solicitor's own costs. By the nature of the fact that they are estimates, they are not likely to be absolutely accurate. On the other hand, they may be much more accurate than saying that you want, let us say, ?100,000 cover in every case. I would say there is some difficulty. In the majority of cases those estimates are unlikely to be seriously adrift in terms of their relationship one to the other, which is fundamental to Pursuit rating. In some cases -- in the Gouldens case I mentioned previously, which is such an example -- where because the case had an unexpected turn, all the estimates were similarly affected and were wrong. From my experience there is a tendency for estimates to be inaccurate in individual cases. In most cases, the inaccuracy is not material. In some cases both sides costs will be materially underestimated because the case goes all the way to trial and the trial is more complex than is anticipated, but I have some difficulty with the assertion that there is systematic under - or over - estimating ..."

  73. It was suggested to Mr Smith that the Claimant's costs build up first and Defendant's costs gradually catch up. He stated that in his company's experience settlements tended to be quite late or very early. If the settlement was very early then the premium would be very low because it would be based on very low basic costs. He pointed out that in the Test Cases the settlement was very late. Most of the cases had been running for three years before proceedings were issued and then subsequently continued to run, in one case settling at trial. He agreed the Defendants' costs would rise as trial approached, as it became necessary to focus on the issues. If a case settled late, then the premium would very fairly reflect the proportion which had been assumed at the outset.

  74. With regard to the calculation of the premium rate, Mr Smith pointed out that this had to be done case by case. It is a small book, it is immature and other people have been in that market, have quoted rates, and have had to exit the market because their rates were unsustainable. First Assist have to compete in that market, and, he said, if they are to acquire business, their premium case by case must be seen as realistic and appropriate by the solicitor and the client.

  75. Mr Smith was asked questions in relation to champerty. He was not sure how First Assist could run up solicitors' costs. If the case had a definition of a "win", which is the Law Society definition, as soon as there is a win the cover comes to an end. There is nothing which First Assist can do about it. He did not see how First Assist could force the solicitor to incur costs. He agreed that the company has an ability to control the costs in losing cases, which is, he said, quite different, but does not go to the premium.

  76. The policy contains a provision that a subsequent assessment which reduces the insured solicitor's normal fees, or the level of the success fee, will not affect the premium. Mr Smith explained:

    "… the reason for that is if we charge an up front premium there would be no reduction if solicitor's costs were taxed or assessed down, so why should there be with the benefit of hindsight? We set the premium rate up-front. If we charge an up-front premium amount there would be no adjustment and we think it is inequitable that there should be a retrospective adjustment."

  77. He went on to explain that if the company found that the premium needed to be reduced, because there has been some kind of injustice or error or it facilitated a settlement, they would take a pragmatic approach to that.

  78. At my request Mr Smith clarified the premium rate in the case of Farr using the correct figure for own costs of ?84,000 as opposed to the ?112,000 used in error at the time the policy was set up. According to his calculation the premium rates should have been 193% which would have produced a premium of ?115,182.40 plus IPT (?120,941.52).

    Emmanuel Gilbert

  79. Mr Gilbert is the managing director of The Judge, an insurance broker specialising exclusively in the provision of advice and services in connection with the ATE insurance market. At paragraph 3 of his witness statement, dated 27 January 2005, Mr Gilbert explains:

    "I set up The Judge in April 2000 as an advisory source and started broking in 2001. The Judge is deliberately not a tied agent. Its business purely comes in from solicitors. The Judge has broked about 2,500 cases since November 2001 on behalf of about 700 firms of solicitors. There has been a 50% increase in cases submitted on an annual basis. We reject about 40% of cases on sight of the proposal forms and these do not go to the insurers at all."

  80. He states that the Pursuit policy is the only product which offers an unlimited indemnity with a deferred premium payable only on success. Whilst some policies have premiums payable on a stepped basis he knows of no others which are based on a sliding scale.

  81. On receipt of a proposal he says (paragraph 5):

    "We would usually send a proposal to the most suitable three or so of them [ATE insurers] on any occasion. I would regard it as a tight market so far as the availability of ATE insurance underwriting capacity is concerned. There are only a limited number of insurers active in the market. In most cases it would be rare to get as many as three quotations back accepted … Outside the mainstream personal injury field the market is a declining one and is far from vibrant. This is particularly the case with clinical negligence where there are only a handful of providers remaining in the market."

  82. His assessment of the Pursuit policy is as follows (paragraph 8):

    "Pursuit is a somewhat different product than some of the alternatives in the market in that it operates on a sliding scale and does not have a specified premium figure at the outset. At the time we supply the quotation to solicitors we take pains to make it clear how Pursuit operates, particularly to any solicitors who may be unfamiliar with the product. When in discussion with solicitors, I seek to tell them that there is a parallel between the premium and their success fee, with the risk for solicitors bearing their own fees being comparable to the risk being borne by the insurers. I also explain that the risk for insurers can in fact be substantially greater than theirs, because the policy covers adverse costs, adverse disbursements and own disbursements. I also tell them that the nature of the policy can also be an incentive for the other side to settle, because the cost of the premium rises the longer the case proceeds."

  83. Mr Gilbert explains that The Judge does more business with First Assist than with any other provider. In his experience they deal with claims promptly and the company is a substantial organisation in terms of financial backing and continuity of service. He describes the availability of a deferred premium as a strong selling point. He suggests that banks generally have little appetite for lending in this area and if a loan is arranged it will be made to the solicitor's firm not to the client. The availability of deferred premiums elsewhere is only possible by specific arrangement.

  84. With regard to his own commission Mr Gilbert explains (paragraph 13):

    "We receive a deferred commission of a general rate of 10% from First Assist conditional upon the successful outcome of the case."

  85. He suggests that some brokers may receive up to 20% commission from other insurers. He suggests that the effective rate of commission is below 10% because no commission is payable on unsuccessful cases.

  86. In his second witness statement Mr Gilbert comments on the feasibility of solicitors trying to obtain policies for their clients by individual requests to insurance providers rather than through a broker (paragraph 2):

    "Where insurance cover is provided under a delegated authority scheme, it is a condition of the scheme that the solicitors must insure all their CFA cases using that particular policy and for the policy to be incepted at the same time that the CFA is entered into, usually before any letter of claim is dispatched. Solicitors who are not part of the insurer's panel authorised to work on a delegated basis could not access that type of policy. … The usual period of time for acceptance is 14, 21 or 28 days. Once a claimant has been declined cover by one insurer, that has to be disclosed in any future insurance applications and in my experience if a proposal has been turned down by two insurers it is almost "certain death" to the prospects of sourcing insurance from any other provider."

  87. Mr Gilbert goes on to explain that the majority of policies listed in Litigation Funding or on The Judge website are provided by insurance intermediaries, who are not themselves underwriters, who have the authority to bind underwriters within the limits of the authority which they hold from the underwriter. In respect of his own website he points out that it contains a general warning:

    "Premiums shown here are indicative only and may vary depending on a number of factors which might include the stage the case has reached, whether liability is in dispute, the prospects of success, etc."

    There are also other more specific warnings relating to particular policies.

  88. Mr Gilbert goes on to consider the policies apparently available in respect of Clarke v Tom James, Sandiford v Prices Patent Candles Ltd, Baker v Euromark (although he was not personally involved in this case) and Baker v Addenbrookes. In respect of each policy he sets out the reasons why in his view such a policy would not have been available. It is not necessary for me to set out all the policies and the reasons that in his opinion they would not be available, but the reasons include that: the policy could not be used unless the Claimant's solicitors insured all their business through the particular scheme; the policy was not available or not funded at the particular time; in respect of some policies applications were actually refused; a number of policies were underwritten by NIG so that a refusal in respect of one policy would mean that applications under other policies funded by NIG would also be refused. A number of policies were available only for specific types of claim, such as personal injury, housing disrepair and employment. In respect of Baker v Euromark Mr Gilbert thought that LPL might possibly have provided a quotation but did not think this was likely given the possible criminal element involved. He also thought that M Young Legal Associates and Oracle Legal Services migh