In Percy v Anderson-Young, the Queen’s Bench Division of the High Court allowed recovery of an after the event (ATE) insurance premium of £533,017.13, overturning the district judge’s decision to cut it to £82,513.07.
The district judge had taken into account the extent of the additional cover, the amount of the premium and the late stage at which the cover was increased. While considering it reasonable to take out the extra cover, the district judge held that the premium should have been structured so that the increase only incurred after mediation.
On appeal the High Court distinguished cases where a judge thought the level of cover was too high from the position here, where the judge found the underwriting decision to be flawed. In cases of over-insurance the court could reduce the premium proportionately to reflect the appropriate level of cover, on a broad brush basis as in Rogers v Merthyr Tydfil.
However the district judge should not have used a broad brush approach to claim that he was better placed than the underwriter to identify the financial risk, which the insurer faced. Furthermore, it was wrong to reduce the premium to such an extent without hearing expert evidence. There was no evidence here that the underwriting risk was misjudged and therefore the High Court found that the premium was proportionate.
Due to the way the policy had been structured, the defendant had had no opportunity to settle before the final stage premium was reached, but the court said that a defendant who settles late must know that he or she is taking that risk and an experienced defendant (as here – an insurance company) will know that a claimant is likely to have taken out additional ATE insurance.
The High Court said that the district judge, having decided that it was reasonable for the claimant to have increased cover, should not then have criticised him for taking it out at that late stage. The true issue then was the reasonableness of the amount and that was a separate and freestanding question.
The facts of this decision are complex and the full judgment needs to be read for those, but the message is that it is difficult to challenge the reasonableness of ATE premiums and that judges should not second guess decisions of underwriters, at least without hearing expert evidence.
The court also said, at paragraph 55, that the so called “silver bullet” schemes, whereby the premium insures itself, is lawful:
“… I should state that it is clear that it is wholly permissible to insure the premium so that it is not payable by the Claimant in the event that the case is lost…”
Security for costs
In Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP & Lloyds Bank PLC, the Court of Appeal considered the extent to which the existence of ATE insurance is relevant when the court is considering an application for security for costs sought by the defendants, in a claim brought by an insolvent company in liquidation.
Once a court is satisfied that a company is insolvent, then it has jurisdiction to order security for costs providing that ordering security does not stifle the claim. It will normally be appropriate to order security for costs, whether or not there is ATE insurance in place. Nevertheless an appropriately framed ATE insurance policy “can in theory be an answer to an application for security.”
The Court of Appeal rejected the submissions on behalf of those seeking security to the effect that ATE insurance is not to be considered at all and said that it is necessary to consider whether the particular ATE insurance in any given case gives the defendants sufficient protection. On the facts of this case, the Court of Appeal held that the ATE policy did not give sufficient protection, and therefore ordered security for costs.
The judgment considers the case law on the interplay between security for costs orders and ATE insurance, but holds that it will always be a fact sensitive issue, largely depending upon the terms of the particular ATE policy.
ATE insurers have no lien over sums recovered by their insured
In Glasgow (Bankruptcy Trustee of Harlequin Property Svg Ltd) v ELS Law Ltd and others, the High Court rejected claims by ATE insurers for security, including liens, over sums recovered by their now insolvent insured in its successful litigation against professional advisors.
The insurers argued that they had a claim by way of a lien in respect of premiums due, because their position was similar to that of the lawyers who brought the case to trial. In particular, without the insurance, the claimant would not have obtained judgment.
The court referred to the decision in R (Prudential plc) v Special Commissioners of Income Tax and held that the decision on whether persons in the position of the insurers should be entitled to the benefit of a lien, by analogy with a solicitor’s lien, was a decision for Parliament and not the courts. To hold otherwise would create an exception to the statutory regime for the distribution of insolvent estates contained in the Insolvency Act 1986.
In addition, the insurers’ arguments were inconsistent with a priorities agreement reached between the claimant, its legal team, insurers and relevant funders, whereby the insurers did not have a right of priority to the relevant sums in respect of their claims to premium. The principle in R v Condon, ex p James, that, in certain circumstances, the court has a discretionary jurisdiction to disregard a legal right of a trustee in bankruptcy administering an estate, did not apply because the bankruptcy trustee here was not an officer of the English court.
To minimise their exposure, ATE insurers, if agreeing to defer payment, should ensure that any agreement regulating the rights of recovery confers on them an enforceable right to priority in respect of the premium. The court was reluctant to put insurers in a better position than they had bargained for as they had contracted for unsecured rights only.
Premium recoverable when incurred at outset
In Peterborough & Stamford Hospitals NHS Trust v McMenemy and others, the Court of Appeal held that in clinical negligence cases, where recoverability is still allowed to a limited extent, claimants can take out ATE insurance immediately when a case commences and recover the premium.
The recoverable element in policies taken out on or after 1 April 2013 is in relation to the cost of the claimant’s own expert reports.
Here, the claimants took out insurance immediately when solicitors were instructed and both cases were settled, before proceedings were issued and before any expert report was commissioned. The premium in each case was around £5,000.
The Court of Appeal said that it was known that such policies were taken out at the same time as clients entered into conditional fee agreements (CFAs) with their solicitors, generally very early on in the case, and, when restricting, but not abolishing, recoverability in the Legal Aid, Sentencing and Punishment of Offenders Act 2012, Parliament had chosen “not to disturb that practice”.
Echoing the views of the High Court in Percy v Anderson, the Court of Appeal said that it was not for judges to second guess the insurance market. Furthermore, judges should not deconstruct an ATE policy that is offered as part of a package to firms of solicitors.
The Court of Appeal also said that it was unfortunate that the Civil Procedure Rules Committee had decided that there was no need for rules or Practice Directions dealing with the recovery of ATE premiums in clinical negligence cases. The Court of Appeal asked the committee to reconsider this issue.
It also held that the new proportionality test applies to this type of premium, that is, the post-April 2013 limited recoverability premiums. Recovery of such premiums engaged the Civil Procedure Rules (CPR) in relation to matters such as proportionality, and the fact that the CPR made no mention of this type of premium and its recoverability was irrelevant. Once a costs order was made, then the assessment of costs, including the ATE premium, is subject to the CPR.
As in Percy v Anderson, the Court of Appeal approved the silver bullet concept of the insurance premium insuring itself if the case was lost, meaning that the claimant in a losing case never had to pay the premium.
This case confirms the point that it is very difficult for a paying party to challenge ATE insurance premiums.