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Ms Herbert and her insurance premium: disbursement or no disbursement?

To costs “anoraks”, the judgment of the Court of Appeal in Herbert v HH Law is likely to be one of the most important decisions of 2019, memorable for guidance about what constitutes “informed consent” by a client to the terms of their solicitor’s retainer. That is, however, to overshadow the tail-end-Charlie part of the judgment which concerns after-the-event (ATE) insurance premiums and whether they are disbursements which must be included in a solicitor’s bill or are items which should appear only in the cash account.

What, a client might reasonably ponder, does all this legal mumbo jumbo mean?

That is a question which Ms Herbert might have asked herself when she was deciding whether to have HH’s bill assessed by the court under section 70 of the Solicitors Act 1974 (the Act). That bill had covered the firm’s work in handling her personal injury claim after she had suffered whiplash when a lorry had driven into the back of her car. For her damages, she had recovered £3,400: for her costs, HH had charged 25% of that sum by way of the firm’s success fee, and had held back £349 for the ATE premium, leaving a balance in her pocket of £2,221.79. Unhappy about the charges, Ms Herbert had commenced proceedings for detailed assessment under the Act so that the court could decide whether they were fair.

It is to be remembered that on an assessment under section 70, the court not only has the task of assessing the solicitor’s bill, but also of approving a cash account, that is to say:

“An account that includes money received by the solicitor to the credit of the client and sums paid out of that money on behalf of the client, but excludes outgoing payments that were made in satisfaction of the bill.” [see PD 46 paragraph 6.6(b)]

The PD 46 at paragraph 6.19 continues:

“After the detailed assessment hearing is concluded the court will (a) complete the court copy of the bill so as to show the amount allowed; (b) determine the result of the cash account.”

The purpose of the cash account is to enable the court to see the full extent of the solicitor’s financial dealings with the client, since it will show sums expended on items which have not appeared in the bill, such as money provided for security for costs. The solicitor can only recover items which the court certifies have been reasonably charged in the bill. There is no obligation on the client to pay for anything that has not appeared in the bill. Thus, it is essential to know what is and what is not a disbursement, since if, by accident or design, the solicitor misses a valid disbursement off the bill, it is irrecoverable from the client on a section 70 assessment.

And it can get worse: if a disbursement is included in the bill which should have appeared in the cash account and the costs judge transfers it from the former to the latter, that will count against the solicitor in the reckoning up under the “one fifth” rule under section 70(9), in deciding who should pay the costs of the assessment. On the Herbert figures, had it been in the invoice, moving the ATE premium (£349) to the cash account would have left just £850 in the bill, meaning that Ms Herbert would have won the costs of the assessment under the one fifth rule, having reduced the charges by more than 20%.

But that is to get ahead of ourselves. The issue in Ms Herbert’s proceedings was whether the ATE premium was a disbursement in the first place. If, contrary to her case, it was an item not for the bill but for the cash account, it could not be subject to assessment under the Act, in which event, in so far as Ms Herbert wished to know whether she had paid too much for her insurance, the section 70 proceedings would be of no help to her whatsoever.

What a lot of fuss over a £349 policy, it might be thought, but the implications could be far reaching. To start with, what is a disbursement? For the answer, as so often with matters under the Act, it is back to Victorian case law and In re Remnant (1849). Per Lord Langdale MR:

“… it seems to me a very reasonable and proper rule, that those payments only, which are made in pursuance of the professional duty undertaken by the solicitor, or which he is bound to perform, or which are sanctioned as professional payments, by the general and established custom and practice of the profession, ought to be entered or allowed as professional disbursements in the bill of costs.”

Into which category would an ATE premium fall given that, in the days of Lord Langdale, the concept of ATE insurance was not even a twinkle in a judicial eye? In Herbert, in the court below, Soole J had held at paragraph 70 that:

“The premium falls within the first rule in re-Remnant namely as a sum paid by HH ‘in pursuance of the professional duty undertaken by the solicitor and which he is bound to perform’.”

He continued at paragraph 83:

“If a payment by a solicitor is properly to be classified as a solicitor’s disbursement, it should be contained in his bill of costs and thus be amenable to the section 70 process of solicitor-client assessment. The effect of allowing the solicitor to include the item in the cash account would be to deprive the client of the opportunity to challenge the item on a solicitor-client assessment.”

It was, accordingly, a disbursement to be excluded from the cash account.

On appeal, Etherton MR disagreed.

“The test is not what is agreed between an individual solicitor and client, but what every solicitor, as such, is obliged to pay irrespective of funding by the client or what is properly included in a bill of costs on assessment as a matter of general custom of the profession.” (Paragraph 69.)

In his view:

“The ATE insurance does not fall within either of those categories… An ATE insurance premium is not a payment which a solicitor is obliged, as such, to make irrespective of whether or not put in funds by the client comparable to court fees and counsel’s fees… It is a premium on a policy of insurance under which the client is the insured, pursuant to a contract of insurance made between the insurer and the client… in the present case, it was an insurance contract effected by HH as Ms Herbert’s disclosed agent…”

Absent, too, any material to support the proposition that there was a custom in the solicitors’ profession that an ATE premium was to be included in the bill, its proper place was in the cash account. The consequence of that was that Ms Herbert could not challenge its amount through an assessment under the Act.

The Court of Appeal recognised that this could be an unsatisfactory outcome for clients wishing to challenge the amount of any insurance premium on a policy which their solicitor has advised them to take out as a safeguard against an adverse costs order being made against them if the case be lost. That however, was a matter for the Solicitors Regulation Authority or the Law Society, not the courts.

That may be so, but it is not likely to be of much help to clients such as Ms Herbert, given that such policies are commonplace where the solicitor takes on a case under a no-win-no-fee agreement and costs protection (such as qualified one-way costs shifting or legal aid) is not available. ATE insurance is often part and parcel of the overall funding package on offer by the solicitor. The client is not involved in the negotiation of the premium and yet, in the light of Herbert, has no entitlement to challenge it under the Act. That can be contrasted with a between-the-parties assessment, where the premium is recoverable from an opponent in litigation (for example, privacy and mesothelioma). In such an assessment, the paying party is permitted to advance evidence in order to challenge the quantum of an insurance premium on the basis that it is far too high.

Deprived of her remedy under the Act, where can clients such as Ms Herbert turn?

The answer might be in separate proceedings involving undue influence, albeit a risible proposition for a premium worth £349. That said, the law is replete with cases where the premiums are much larger and worth fighting over. In Kris Motor Spares Ltd v Fox Williams LLP, the premium was £95,550 for £130,000 of cover and in Percy v Anderson-Young, the total premium was £533,107 which included top-up cover of £450,000 costing £319,315. With policies at that level, paying parties and clients might find themselves on the same side in arguing that they are out of all proportion to what is reasonable, albeit via different routes.

Going down the undue influence route, the argument would be put along the lines of those advanced in Birmingham City Council v Forde, in which Christopher Clarke J said at paragraph 101:

“In a case where the complainant placed trust and confidence in the other party in relation to his or her affairs… and a transaction is entered into which calls for explanation, the complainant will normally discharge the onus of proving undue influence if there is no satisfactory evidence to the contrary, establishing the independence of will of the counterparty in entering into the transaction. The court is likely in those circumstances to infer that the defendant has abused his position.”

Had the argument succeeded in that case, the outcome would have been to render the contract of retainer voidable at the instance of the client, but the mounting of such an action will be a formidable task in circumstances where the Solicitors Act 1974 is supposed to provide a safety net for clients who consider that their solicitors have taken them for a ride over their fees. Herbert has closed that avenue of remedy, unless or until a professional body such as the Law Society does anything about it. Hark back, therefore to the wise words of eminent member of the Costs Bar, Roger Mallalieu, at the Costs Law Reports Conference 2018 that “the Solicitors Act is not fit for purpose”.

Well said, and a fortiori after Ms Herbert’s experience. It is high time that the powers that be did something about it.

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