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In the light of Master Haworth’s judgement in Burgess v J Breheny Contracts Ltd [2009] EWHC 90131, which again demonstrates the judiciary’s resolve to resist interfering with actuarial decisions in the after the event (‘ATE’) market, this article explores how the judiciary have arrived at this position and considers the rationale behind it.

It has been seen that injustice is found not so much in the cases that come to Court, but in those that are never brought there. For time has shown that the main field of injustice is not litigation, but non-litigation.

The objective of introducing the Access to Justice Act 1999 (the Act) was to ultimately make justice affordable to all. Allied to this, it was seen as imperative that adequate ATE premiums should be recoverable. So much so, that the impetus behind s.29 of the Act was to revolutionise access to justice as it paved way for the ability of ATE insurance premiums to be a recoverable from the opponent as part of costs.

Nevertheless, over the years there has been significant debate over the recoverability of premiums. The self-insured deferred premium has been seen as central to the controversy, and it has been contested that the client would not suffer any real detriment if they did not ‘shop around’ and simply accepted the first policy offered. This is seen to remove any real market force from the system, diminishing competitive rivalry which is the pre-eminent dynamitic force which operates, in Adam Smith’s vivid image, as an ‘invisible hand’ surreptitiously co-ordinating transactions within the market.

As the ATE market is very much dependant on the recovery of reasonable premiums, one needs to question whether it is still reasonable to purchase any policy knowing that the opponent will ultimately pay the premium, although the have no input in selecting the cost or provider of the policy.

BROAD TERMS

Case law has played a fundamental role in establishing that Costs Judges are reluctant to interfere when it comes to classifying a reasonable premium, which indicates that they are not capable of performing the role of a financial regulator of the insurance industry. For instance in Callery v Gray [2001] EWCA Civ 1246 the Court of Appeal articulated a tentative view, expressing their reluctance to set a premium, as at that particular point in time they felt that they were not in a position to confirm whether the premium was reasonable.

Once again in Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134, the Court ordered that the full premium should be recovered and reinforced the idea that District judges and Costs judges do not have the expertise to judge the reasonableness of a premium. Judges can only review the reasonableness of the premium “in very broad brush terms” and they should not regarded as better qualified than the underwriter to rate the potential financial risk the insurer faces.

Nevertheless, the RSA Pursuit Test Cases (27th May 2005) saw a challenge to some substantial premiums, principally on the basis as to how they were calculated. At the heart of the case were Master Hurst’s comments on the premium methodology. It was held that a premium based on anticipated costs was flawed, particularly as it relies on costs as claimed, not as agreed or assessed. Master Hurst ultimately held that it is permissible to have a policy that tracts the litigation so that the longer the case runs, the higher the premium payable.

As time has progressed, it has been questioned whether the Courts should deconstruct the premium and identify what is covered by the policy in order to conclude whether the premium is reasonable. In the Claims Direct Test Cases [2003] EWCA Civ 136, the Court of Appeal upheld the views of the Defendant and deconstructed the premium.

Furthermore, in the Accident Group Test Cases [2004] EWCA Civ 575 [2004] 3 All ER 325 the Court of Appeal also deconstructed the premium and noted that this should only be done in “exceptional” circumstances.

Generally case law demonstrates the Courts reluctance to interfere with the pricing of ATE policies, preferring to indicate that the standard of “reasonableness” should be applied. As each case is unique in itself, the premium needs to be considered in the context of each case and its risks. Thus, the onus is on the Defendant to show that the premium is unreasonable. If, on a detailed assessment, it is found that the premium is unreasonable then the courts have the discretion to set a premium that they believe should be payable. The default of which is that the Claimant will be liable for any shortfall in the premium. Although most insurers state that they will take a commercial view if there is any shortfall, their reluctance to put this in writing puts the Claimant in a difficult position.

This is particularly so in commercial litigation cases where ATE policies are tailored to meet the specific needs of corporate clients, and it has been feared that the premium could be regarded as irrecoverable as the policy of one provider will be completely different from another. Clearly if parties were to reach a global settlement, the rate of the premium that needs to be paid plays a vital role, as clients will have to pay for any shortfall from their own pockets. This shortfall is not based on pounds or hundreds of pounds but could reach many thousands.

A lawyer is potentially negligent is he or she fails to appropriately identify the risks to a client who doesn’t shop around. Should a case settle on a global basis (as many commercial cases will) with the client being liable to pay the premium from their recovery, the price is of paramount significance to the client as it would be for a defendant facing such premiums. Were they to find they could have secured a more competitive rate with an equally suitable policy from alternative providers but can demonstrate they were encouraged to deal solely with another insurer, there could be potential consequences for the legal representative.

SEARCH AND RESCUE

The award of costs is always discretionary, and so notwithstanding implications of case law, one must show strong credible evidence that the search of the market has taken place. If one cannot show this, then it could still potentially mean that the whole premium is not recovered, curtailing the ATE insurance market and ultimately reducing access to justice.

Once a lawyer has taken efforts to search the market and compare terms of different policies available, the Claimant is in a much stronger position when it comes to recovering the premium as they would not have simply approached one insurer and accepted the first policy offered. Not only does this maintain competitive rivalry with the ATE market, the Claimant is in the position to displace any challenges by showing that a reasonable search of the market has been undertaken, whilst also mitigating any risk over the solicitor’s advice.

Of course, one must note that the cheapest premium does not necessarily afford the Claimant the best policy. When comparing the different terms offered by different insurers, one must note that it is wrong to compare policies on price alone and so as some insurers do not make certain benefits obvious on the face of the quotation, reading and understanding the policy wording is the difficult eye of the needle through which a legal representative must travel through in order to ensure that the client has selected the most reasonable premium.

Notwithstanding the above, it is possible that even though if it is shown that a reasonable search of the market has taken place, the client’s legal representative could still potentially jeopardise the recoverability of the premium if the Notice of Funding is not served on time.

The Civil Procedure Rules (CPR) 44.15 requires one to serve their Notice of a funding arrangement to the other side within 7 days of entering into an ATE policy. This must be read in conjunction with CPR 44.3B which prohibits a party from recovering any additional liability for any period in the proceedings during which he failed to provide details in connection to the funding arrangement. 

This is clearly reflected in Kutsi v North Middlesex University Hospital NHS Trust [2008] EWHC 90119 (Costs) and provides the paying party with an added protection.

In Kutsi, the Claimant’s solicitors had failed to notify the Defendant of the existence of the ATE policy, and only did so after the claim had settled and therefore breaching CPR 44.15. The Claimant argued that the failure to comply with the CPR and give information regarding the premium was unintentional and an oversight. Nevertheless, it was held that there was not a strong enough argument to displace the requirement to notify and Master Campbell indicated that if such an argument was allowed then it would not only prejudice the opponent’s position, but it would also undermine the existence of the CPR and the requirement of notification.

The Costs Practice Direction has recently increase the amount of information that needs to be disclosed when completing the N251. As of 1 October 2009, it is now a prerequisite that one informs the opponent of the name and address of the insurer, the level of indemnity and whether the premium is staged, and if so, the points at which an increased premium is payable.

FLEXIBLE FRIENDS

It is clear that the current body of case law allows the policyholder to displace assertions made that the premium is unreasonable relatively easily but the alternative is to jeopardise the intention of Parliament. It is clear that s.29 of the Access to Justice Act was a product of the legislature’s concern for access to justice and it is evident that the Courts are reluctant to intervene thereby risking the destabilisation of a market crucial to the end. Their reluctance to provide a strict methodology as to what is classed as a reasonable premium to aid recoverability means that the rudimentary framework that they do provide enables flexibility within the ATE insurance market.

However, the paying party is not left without any protection from the courts. Judges are not insurance experts but they are aware of the need to avoid unfairness to the paying party when it comes to recoverability of additional liabilities and where it appears a premium is too expensive, they will no doubt consider the evidence (or lack of evidence) of a search of the market and the insurer’s exposure to risk.

Farah Saleh is a broker at risk transfer specialists TheJudge (http://www.thejudge.co.uk)