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Callery v Gray No. 2

6 August 2001
The issues

Master O’Hare’s report – insurance premiums – uplift

The facts

This is of course the second Callery judgment, the Court of Appeal reconstituting itself for consideration of Master O’Hare’s report.

It is clear that the report is not part of the judgment. It is to be taken as no more than his own provisional view on a number of issues raised in his report which will in due course fall to be judicially determined. The judgment itself deals only with those aspects of the report strictly relevant to the facts of Callery.

The issues remaining from Callery were:-

1. Whether the amount paid by Mr Callery for an ATE premium – £350 – was reasonable.

2. Whether or not the cost of insuring against failure to recover a parties own costs could be recovered under section 29 of the Access to Justice Act 1999. Specifically, the court was asked to consider whether the phrase “the risk of incurring a liability in those proceedings” (in respect of which the costs of insurance taken out by a party was recoverable against the other side) included a liability for ones own costs.

The decision

The Premium

It was common ground when considering whether to award an insurance premium by way of costs that the court had to consider if the premium was reasonable and so far as it was not reasonable the court could and should reduce it.

It was important to distinguish between two separate matters:-

a. The type of benefits purchased by the litigant.

Was the claimant getting benefit over and above cover for his liability for costs.

b. The use made by the insurer of the premium.

The court would not concern itself with how the insurer spent the premium income. However the court might well have regard to comparable premiums. “If an insurer is conducting his business in a manner which incurs extravagant, extraneous and otherwise unnecessary expenditure which has to be covered by the premiums, those premiums are likely to be uncompetitive”. For a litigant to pay uncompetitive premiums may effectively disentitle him for making a full recovery. Master O’Hare had concluded that there was not enough information available yet for him to identify standard or average rates. Nonetheless the solicitor advising the client should be in a position to assist the client in selecting reasonable aid/cover, the magazine “Litigation Funding” published by the Law Society and the website www.thejudge.co.uk were recommended by Master O’Hare.

In the meanwhile, when a premium is challenged the insurer should be able be able to put evidence before a court in an attempt to demonstrate the reasonableness of the premium in regard to the costs to be recovered. Only broad consideration can be given by a judge of such evidence however; “It is not part of the function of a judge to carry out an audit of an insurers business”. It was to be hoped that fairly quickly courts could develop bench marks.

There were two elements responsible for the size of the premium:-

a. Cost and expenses of the insurer
b. Benefits received

(a) Costs and expenses

These included four elements:-

(i) Burning costs
(ii) Risk/Profit costs
(iii) Administrative costs
(iv) Distribution commission

(i) Burning Costs

i.e The cost of meeting claims and policies issued. The premium income must be enough to cover the claims made. This cost was covered by insurers on two bases:-

Either an individual premium per risk or category of risk (individual assessment) or a uniform premium in respect of any claim carrying a prospect of success of more than 50 percent (block rating).

(ii) Risk/Profit costs

This includes the cost of laying off the risk by way of re-insurance. The market would constrain this element in “the longer term”.

(iii) Administrative costs

i.e. the cost of personnel, premises, policy issues and processing claims administration “no objection can be taken to a premium reflecting costs such as these”.

(iv) Distribution commission

Objections were made to premiums being increased to cover advertising etc. The court agreed with Master O’Hare that no objection in principal could be taken to these. In the long run the market would prevent premiums being unreasonably inflated to reflect extravagant commission payments etc.

(b) Benefits

Different benefits were identified by Master O’Hare in respect of the premium paid.

(i) Costs awarded by the court to the other side. Four circumstances are identified. Defendants would be entitled to an order against the claimants for costs.

(a) as a result of a liability judgment
(b) as a result of a failure to beat part 36 offer
(c) as a result of losing an issue whether it was an interim or final hearing
(d) any other costs order made in the exercise of discretion

The Defendants argued that the defendant should never be liable for that part of the premium reflecting the risks under the last 3 categories. Since these liabilities were likely to have been incurred as a result of the failure of claimants to conduct litigation reasonably.

The court dismissed this argument. Insurance against all four risks fell within section 29.

4. Collateral Benefits

There were no collateral benefits in his case. This was in contrast to the benefits provided by an organisation such as Claims Direct which provides services such as handling and negotiating the claim, comforting and reassuring the insured and his family, counselling, helping over any business matters, going with the insured to hospital appointments etc. The court was not prepared to determine this issue at this stage but noted that it was at least arguable that in respect of these matters the relevant part of the premium did not fall within section 29.

5. Own disbursements indemnity

Mr Callery was entitled to an indemnity in return for his premium in respect of the cost of his own disbursements when his claim failed. The court noted that the issue was wider than this. Some legal costs insurers (including Claims Direct) provided a form of insurance not designed to be used in conjunction with a CFA, provided the litigant with insurance against the risk of having to pay both sides costs if the claim failed (BSI insurance). Was that part of a BSI premium reflecting the risk that the insurer would have to bear his own costs (or disbursements) within section 29? The defendant argued that the cover provided in these cases was not against the risk of incurring liabilities but the risk of being able to recover the indemnity in respect of those liabilities if the claim failed. The liabilities themselves, the defendants argued, were incurred voluntary. After consideration of parliamentary material (and incidentally a discussion of the principle in Pepper v Hart) the court concluded that section 29 could and should be interpreted to include own costs liability insurance (In doing so the court declined to comment on the premium rebate provision and its enforceability. The indemnity principle rears its head again – policies provide in certain situations for the premium itself to be rebated to the extent that it is not recovered on detailed assessment).

6. Can the premium cover itself?

There was no reason why section 29 should not include the cost of cover against the risk of being unable to recover the premium itself.

7. Deferred payment

(How long before the consumer credit act raises its head here?).

CPR 44.3 prevent a solicitor from recovering a proportion of uplift relating to deferred receipt of fees and expenses. The premiums are frequently paid at the conclusion of proceedings. No challenge was made in Callery on this ground and the court stated that the issue would be decided if and when there was an objection to an insurers premium on the ground that it has been incurred to compensate for deferred payment.

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