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RSA Pursuit Test Cases, Senior Courts Costs Office, 27th May 2005

27 June 2005
The issues

Costs – ATE Insurance Policy

The facts

The Royal & Sun Alliance (RSA) provided a bespoke after the event insurance policy known as “Pursuit” which was aimed at Claimants whose claimed rendered them unsuitable for mass market or delegated ATE policies. Insurers behind the Defendants were Allianz Cornhill, AXA, the Norwich Union, Ensign and the NHS LA.

Five test cases were brought to do with nine issues relating to the validity of the insurance contract, champerty and the calculation of premium.

Five cases were Baker v Addenbrookes a clinical negligence claim. Baker v Euromark, a personal injury claim, Clarke v James, an upper limb disorder claim allegedly caused by pulling a heavily laden trolley; Sandiford v Price’s Patent Candles, a stress at work claim and Farr v Kerslake, a personal injury claim relating to a running down incident.

The decision

Issue 1 – Is the contract of insurance a void for uncertainty as at the time the contract was made the amount of the premium was insufficiently certain and was the contract unenforceable therefore by RSA against the Claimant – if so – what was the consequence?

The conclusion – the Defendant argued that the policy was void for uncertainty. They argued that the basis by which the premium was to be calculated namely percentage of the “normal fees” as defined in the policy was uncertain. The Claimant argued that the method by which the premium was to be calculated was quite clear and although the premium was not a fixed amount at the time the policy was taken out the insured had agreed the relevant premium rate percentage in relation to his own costs.

The Claimant’s submissions were correct. The policy was not void for uncertainty. The method by which the premium was to be calculated was clearly set out. There was no doubt what the parties were agreeing to with the reference to “normal fees”. Where a client had entered into a CFA the client would have the agreement fully explained to him and be given the necessary information under Rule 15 of the Solicitor’s Practice Rules. It was true that there was an underlying problem with CFA’s in that the client had no real interest in what he was being asked to agree to – although it was technically possible for him to have his solicitor’s base costs assessed, the likelihood of him doing so was negligible. In most cases however there would be an implied term of reasonableness applying to the amount of the solicitor’s base costs.

The fact that the pursuit premium would not be affected by any assessment which reduced the solicitor’s normal fees was not a matter which went to the certainty or lack of it of the meaning of normal fees.

Issue 2 – Is the insurance arrangement between the client and the insurance and/or the solicitor unlawful on the grounds of champerty?

The Defendants asserted that the contract of insurance was champertous because it was an agreement to share in the spoils of litigation. They argued that there was a tendency to undermine public justice because the insurer had the power to veto settlements and might want to make the parties take the case to Trial simply to obtain a higher premium. In Factortame the Court had been faced with a potentially champertus agreement in that the accountants had agreed to act for an 80% share of the proceeds of the litigation. The Court had found that that agreement was not champertous. The suggestion that there was a tendency to undermine public justice was at best far fetched hypothesis not made out in any of the five test cases. The agreement was not unlawful on the grounds of champerty.

Issue 3 – Is the method calculation of the premium inherently flawed?

The methodology used to set the premium depended on three estimates given by the Claimant’s solicitor – the percentage prospects of success, an estimate of own costs to Trial, and an estimate as to adverse costs and disbursements to Trial.

The Conclusion – Estimates of costs both own and adverse were susceptible to being wrong however careful the solicitor might be in arriving at the estimate. An underlying element of the premium rating methodology was the assumption that the ratio between Claimant and Defendant costs would remain constant as the litigation progressed. This was not necessarily the case however.

The calculation based estimates of costs which solicitors found difficult accurately to make would lead to a calculation based on them in respect of the premium that was inherently likely to be arbitrary.

It could not be reasonable to require the paying party to bear a premium based on costs claimed which might be higher than those which the Court had found to be reasonable and proportionate. It followed that if the costs claimed were found to be unreasonable and disproportionate the premium calculated on the basis of those costs must itself be unreasonable and disproportionate. The methodology was inherently and seriously fundamentally flawed. It had assumed a constant relationship between costs, risks and own costs and depended too heavily on the estimates of own costs and Defendant costs which were likely to be inaccurate; and the final premium was calculated by reference to the Claimant’s costs as claimed however unreasonable or disproportionate.

The consequence was that the recoverable premium in each of the test cases would be such sum as was reasonable and proportionate to expect a paying party to pay having regard to all the circumstances of each case and the factors set out in CPR 44.5. The parties should make some sensible approximation on the basis that both parties’ Trial costs are likely to be similar but that the Claimant’s pre trial costs are likely to be substantially greater than the Defendants.

Issue 4 – What Commissions If Any, Were Payable To The Claimant’s Legal Representatives?

No point arose under this issue having heard the evidence.

Issue 5 – Should The Amount Of The Recoverable Premium Be Reduced On The Grounds Of An Insurance Policy Ought Reasonably Have Been Taken Out At An Earlier Stage In The Proceedings.

Conclusion – In Callary v Grey the Court of Appeal had stated that it was not unreasonable for ATE insurance to be taken out early. The correct test was whether the individual claimed it acted reasonably in taking out ATE insurance when he or she did.

The individual Claimants in these cases had acted reasonably in taking out insurance when they had done.

Issue 6 – Had The Claimant Acted Reasonably In Taking Out The RSA Pursuit Policy?

The Conclusion – save for Baker (?) all Claimants had acted reasonably. In the Baker once it had been identified at a Conference with Counsel that the maximum potential damages were £5,000.00 immediate steps should have been taken to advise the RSA proposal or to apply through a broker for appropriate ATE cover. The premium and the potential premium and the policy taken out were disproportionate given the maximum level of damages obtainable.

A number of companies had been identified which might have provided a quotation. It was unreasonable therefore for this Claimant to have selected the pursuit policy.

Issue 7 – What If Anything Is The Recoverable Amount Of The Premium?

Conclusion – Deborah Baker. The premium of £52,000.00 048.92 plus ITP or a total of £54,787.37 was claimed. £13,042.49 plus ITP or £13,695.00 in all was allowed. It was calculated on the basis of utilising the actual exposure ration which should have been used in the first place.

Anthony Baker – premium claimed of £11,535.00 including ITP. The premium was disproportionate given the value of the claim and the use of the pursuit policy not justified. £750.00 would be allowed.

Clarke – premium £32,392.38 including ITP was claimed. Settlement had taken place after Trial Bundles had been prepared. Both estimates in respect of own and adverse costs were very inaccurate. The ratio of estimated adverse costs to estimated own normal costs was 1.66. The actual ratio was 0.64. Using that figure to calculate the premium produced a premium of 11.666 including ITP.

Sanderford – In this case costs incurred by the Defendants were double those of the Claimant. Costs estimates were inaccurate. The exposure multiplier based on the estimates was 2. The actual was 2.96. The calculation based on that ratio would have produced a higher premium than that claimed. The actual premium claimed of 16.986 including ITP was reasonable therefore and allowed.

Farr – no figures had been produced for the estimated Defendant’s costs. Using the actual exposure ratio of 1.42 a premium of 41.708 was produced including ITP which would be allowed.

Issue 8 – Had The Indemnity Principle Been Breached In The Case Of Farr?

The Defendant had argued that the premium payable was not an insurance premium in the ordinary sense and within Section 29 the sum payable when it was certain that no insurance cover was required. He argued that it was a conditional promise to pay a sum of money it if turned out that no cover was required.

Under the contract of insurance the insured was required to pay a premium in return for which the insurer would pay the adverse costs and own disbursements in the event of the claim being unsuccessful. It has been argued that the premium was not a premium because it was paid only by successful parties. The point was bad and there was no breach to the indemnity principle.

Issue 9 – What Is The Impact Of DTE Cover In Farr?

This issue was no longer pursued.

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