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After the event insurance premiums and proportionality: uncomfortable bed fellows, at least for the moment

Proportionality is a cornerstone of the Jackson reforms and was implemented on 1 April 2013 through changes to the Civil Procedure Rules (CPR) effective from that date. The problem is that the legal profession remains in ignorance for the most part about how proportionality is to be applied in practice. One thing is clear: costs which are to be recovered from and paid by a losing party must bear a reasonable relationship to the sums in issue in the proceedings (see CPR 44.3(5)). Thus it does not take a rocket scientist to work out that where damages are £1,000 and costs are £10,000, those costs are likely to be disproportionate, but where damages are £10,000 and costs are £1,000, they are not.

So far, so simple.

Suppose, however, that the £10,000 of costs have been incurred in a clinical negligence claim which has settled without proceedings and has contained an after the event (ATE) insurance premium of £6,000.

Using the “eyebrow” test, to spend £10,000 to recover £1,000 still gives the appearance of being disproportionate under CPR 44.3(5), but that was not the view reached by the Court of Appeal in Peterborough & Stamford NHS Trust v McMenemy, a conjoined appeal with Reynolds v Nottingham University Hospitals NHS Foundation Trust (judgment handed down on 20 November 2017 by Lewison, Beatson LJJ and Hildyard J), albeit that the figures were slightly different. In McMenemy, the claimant recovered £2,500 damages without the need for proceedings and served a bill on her opponent for £15,795, including an ATE premium of £5,088. The respective figures in Mr Reynolds’ case were £12,500 damages, costs of £13,215.68 and £5,088 for the premium, also without proceedings. The total block-rated premium in each case was £6,042, with the policies having been incepted in August 2013 and 2014 respectively and covering the costs of experts’ fees in the event that the claims failed.

How did the court reach its decision, which gives the appearance of knocking the foundations out of the proportionality cornerstone of the Jackson reforms? Surely it must be obvious, asking the perennial rhetorical question, that to spend more in costs than the amount of your damages, must be disproportionate and offend against CPR 44.4(5)? Whilst Mr Reynolds’ overspend was “only” about £1,000 above his recovery, in Ms McMenemy’s case, she was liable to pay about 85% more than she was going to receive in damages. In proportionality-speak, surely a clear case of res ipsa loquitor!

In the Court of Appeal, the paying trusts clearly had some powerful strings to their bows. In the first place, the claimants had taken out their ATE policies at the same time as they had signed conditional fee agreements (CFAs) with their solicitors. No objection to funding the claims under CFAs, but there was no justification, it was said, for incepting the insurance policies before the NHS trusts had had an opportunity to show their hands. Had the claimants not been in such a hurry and had they waited until the trusts had been asked whether liability was in dispute (it was not), there would have been no need for any ATE insurance at all.

And what about the level of the premiums? These were block-rated policies under which the premium would be the same whether the claims were small, as here, or were worth hundreds of thousands of pounds. In so far as any ATE insurance was needed, the reasonable and proportionate approach was to have taken out a policy at very modest cost. When it came to looking at the amount of those premiums, the court should have approached its task in the conventional way that detailed assessments are undertaken, that is to say on a case-by-case basis, looking at reasonableness and proportionality.

Not so, said the Court of Appeal. Whilst there was “force” in the trusts’ submissions, they were insufficient to persuade the court to depart from the “macro” policy in Callery v Gray, that the reasonableness of taking out ATE insurance should not be examined on a case-by-case basis. Premiums payable under block-rated policies had been assessed by reference to a basket of cases and were lower than would otherwise have been the case. Moreover, Callery v Gray remained good law and still authority for the proposition that entering into a block-rated ATE policy at the same time as signing a CFA was a reasonable way to conduct litigation. A real incentive remained for claimants to insure against the possibilities of adverse costs orders, even in cases which were successful, in order to avoid the risk that part of the damages designed to compensate the claimants for pain and suffering, or proving financial loss, would be swallowed up by paying legal costs. Round one to the claimants.

What about the proportionality of the premium itself? Whilst an argument that CPR 44.3(5) did not apply at all was unsuccessful, the real issue for the court was to decide whether the premium could be “deconstructed”, as had been done in Reynolds. There, the court below had accepted that it had been reasonable to insure against the costs of expert reports on causation, but not with regard to quantum. In those circumstances, the policy had been “deconstructed” and disallowed in its entirety.

On this point, it might be thought that a more imaginative Court of Appeal might have given some guidance about whether we have moved on from the days of Rogers v Merthyr Tydfil when Brooke LJ said that:

“District Judges and Costs Judges do not as Lord Hoffman observed in Callery v Gray have the expertise to judge the reasonableness of an ATE premium except in very broad brush terms and the viability of the ATE market will be in peril if they regard themselves without the assistance of expert evidence as better qualified than the underwriter to rate the financial risk the insurer faces. Although the claimant very often does not have to pay the premium himself, this does not mean that there are no competitive or other pressures at all in the market. The evidence before this court shows that it is not in an insurer’s interest to fix the premium at a level which will attract frequent challenges.”

For his part, Foskett J in Surrey v Barnet & Chase Farm Hospitals NHS Trust has said that matters have moved on since Rogers:

“This guidance was, of course, itself, given in 2006 and was based upon the observations of Lord Hoffman in Callery v Gray given in 2002 when the new arrangements concerning CFAs were in their relative infancy. This does not diminish the importance of the guidance but it must be recalled that there is now some 10 years of experience gained by Costs Judges since Rogers. Neither Callery nor Rogers expressly held that an adjustment of a premium by a Costs Judge should not be made on a broad brush basis, but each, in effect, urges caution in doing so”.

However, this Court of Appeal (in McMenemy) was not for moving. What the court was concerned with was whether it was permissible in principle to take out ATE insurance at the outset. In Lewison LJ’s view:

“Questions relating to quantum are not before us and are, we were told, due to be considered by this court in another case”.

With appropriate respect, this observation does not do justice to the trusts’ arguments that firstly, the proportionality rule in CPR 44.4(5) applied (which the court accepted that it did), in which case, secondly, was the premium a reasonable and proportionate expense to incur? Given the wording of CPR 44.4(5), it would have been within the gift of the court to have given guidance about how to adjust the premium where it is found that to spend over £5,000 on a policy to recover damages of half that amount, has meant that the sums in issue have not borne a reasonable relationship to the costs claimed.

That decision has been put off for another day and will be for another Court of Appeal to adjudicate upon in Demouilpied v Stockport NHS Foundation Trust, for a hearing on appeal in July 2018. In that matter, the case was settled without proceedings for £4,500 with the ATE premium being £5,700 plus tax, which the court reduced to £650, thereby wiping out the damages. In the conjoined case of West v Stockport NHS Foundation Trust, the respective figures were damages of £10,000 and £5,700 plus tax for the premium, which was reduced to £2,500.

So where does that leave the state of the law? In flux is the answer. Whilst McMenemy has answered one question, namely that CPR 44.4(5) applies to ATE premiums in clinical negligence cases, it has ducked the other, which is the extent to which, if at all, the court should look at the level of a block-rated premium. That is all for another day, so until Demouilpied is decided, ATE premiums and proportionality will continue to co-exist as somewhat uncomfortable bedfellows.

In the result, the trusts’ appeal in McMenemy was dismissed, and the judge’s decision disallowing the premium in Reynolds was reversed. Both rounds one and two to the claimants. Round three (Demouilpied) to come.

Kain Knight Colin Campbell

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