Challenging ATE premiums

One of the areas of costs practice that has a little while to run yet despite the implementation of the Jackson reforms is the recovery of ATE premiums. A “long tail” of cases where this is an issue continues to bedevil claims for costs. Yet challenging such premiums is often seen as one of the most difficult areas of dispute.

The dangers of recoverable ATE premiums and the potential for them to be calculated at levels which represented what the courts were prepared to allow, rather than on a market basis were recognised right from the start of the implementation of the Access to Justice Act 1999.

In the case of Callery .v. Gray (Numbers 1 and 2) [2002] 1 WLR 2000 and in  paragraph 5 of Lord Bingham’s speech set matters out succinctly where he said this:

A third possible abuse was that claimants, although able to obtain after the event insurance, would be able to do so only at an unreasonably high price, the after the event insurers having no incentive to moderate a premium which would be paid by the defendant or his insurers and which might be grossly disproportionate to the risk which the insurer was underwriting.  Under the new regime, a claimant who makes appropriate arrangements can litigate without any risk of ever having personally to pay costs either to those acting for him or to the other side and without any risk of ever having to pay an after the event insurance premium whatever the outcome:

It was noted by Lord Hoffmann later in the same case at paragraph 43:

ATE insurers do not compete for claimants, still less do they compete on premiums charged. They compete for solicitors who will sell or recommend their product. And they compete by offering solicitors the most profitable arrangements to enable them to attract profitable work. There is only one restraining force on the premium charged and that is how much the costs judge will allow on an assessment against the liability insurer.

Despite these words of warning as the recoverability of ATE premiums was argued through the Courts, the ATE insurers usually won the point that they were making.  In this respect the high point of the ATE insurance industry’s position was probably reached  in the case of Rogers .v. Merthyr Tydfil CBC [2007] 1 WLR 808. At paragraph 117 the Court of Appeal noted:

If an issue arises about the size of a second or third stage premium, it will ordinarily be sufficient for a claimant’s solicitor to write a brief note for the purposes of the costs assessment explaining how he came to choose the particular ATE product for his client, and the basis on which the premium is rated – whether block rated or individually rated. District judges and costs judges do not, as Lord Hoffmann observed in Callery v Gray (Nos. 1 and 2) [2002] 1 WLR 2000 paragraph 44, have the expertise to judge the reasonableness of a premium except in very broad brush terms, and the viability of the ATE market will be imperilled 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. As the evidence before this court shows, it is not in an insurer’s interest to fix a premium at a level which will attract frequent challenges.

Since that high point there has been something of a retreat and in my experience Costs Judges are more prepared to roll up their sleeves and consider the reasonableness and proportionality of a premium but of course have to do so in a principled way.

Assuming that there was no alternative source of funding, or to couch it more accurately, it was reasonable for a receiving party to incept an ATE premium, when attacking the amount of that ATE premium there are really three routes which a paying party might pursue.

The first as was done in the Claims Direct and the Accident Group test cases is to deconstruct the premium because many elements of it in certain context may not be premium at all within the meaning of Section 29 of the Access to Justice Act 1999.  But it takes an exceptional case to persuade a Court to do that and in my experience absent a large scale scheme where the point could be said to be of wider or systemic importance that the Court will be reluctant to do so.

I certainly do not believe that a District Judge in the County Court would be interested in doing so.

Secondly there is the possibility of showing comparable and cheaper premiums were available to the paying party which he should have chosen.  What I mean by this is that if it is possible to show that at the date when the policy was incepted there were other alternatives on the market which were of a significantly lower cost than this premium but which was still available providing a comparable level of indemnity, then that evidence can be put before the District Judge to say that the claimed premium is unreasonable and disproportionate as there were cheaper alternatives available.

This brings me to the third approach which is applicable in individually calculated premiums. The figures for these, whether as a single premium or a staged premium will have been calculated by means of a formula. That formula and its application should be scrutinised carefully by the paying party. The paying party can then invite the Court to consider the basis upon which the premium is calculated and to suggest that the formula is either unreasonable and disproportionate in its effect or in any event has been calculated using variables which are unreasonable and disproportionate in their result.

The starting point is to consider the RSA Pursuit Test Cases (2005) EWHC 90003 (Costs) a decision of Master Hurst dating from May of 2005.  In that case premiums were calculated by RSA on the basis of estimated costs.  It is perhaps only material to note his conclusion on the methodology at paragraph 362.

In summary therefore in relation to the flaws put forward by Mr Bartlett I accept the Defendants’ submissions that the premium rating methodology is inherently and seriously fundamentally flawed in that it assumes a constant relationship between costs at risk and own costs; and, depends too heavily on the relative sizes of the estimate of own costs and defendant’s costs, which are very likely to be inaccurate; and the final premium is calculated by reference to the Claimant’s costs as claimed, however unreasonable or disproportionate. With regard to the fact that the estimates of success adopted by First Assist may be too low in that they do not accurately reflect the likelihood of the insurers having to pay out; the premium starts at a high level where the policy is taken out some time after the CFA was entered into, these are fact sensitive and do not in my judgment less serious amount to fundamental flaws. As to the argument that the premium in successful cases is calculated so as to make up for lack of premium in the unsuccessful cases, I do not regard it as a fundamental flaw.

The conclusion in the test cases led to RSA or First Assist refining its approach over the years and by the time the case of Motto .v. Trafigura Limited (2011) EWHC 90207 (Costs) came before Master Hurst in 2001 the way that the premium was calculated was quite different as Master Hurst noted in paragraph 14 of the Motto case:

This method of calculating the premium was challenged in 2004 by a number of defendant liability insurers, leading to the RSA Pursuit Test Cases in 2005, which was argued before me. I found (Order dated 27 May 2005) that the contract of insurance was not void for uncertainty, nor was the arrangement between the client and/or the solicitors and the insurer unlawful on the grounds of champerty. In my judgment I found certain flaws in the way in which the premium had been calculated in the Test Cases, largely because the estimated costs which formed the basis of the premium calculation were extremely inaccurate. As a result of this, the policy wording was amended by First Assist, thus allowing the premium rate to be applied directly to the actual exposure faced by the company, ie, the actual costs of the opponent at the time the case was settled in favour of the insured (plus the own disbursements to the extent that they were insured). It is this methodology which has been adopted in the present case.

He went on to recite that method which was applied at paragraph 15 as follows:

Mr Smith sets out the formula used for calculating the premium:

  • an exposure multiplicand is calculated, being the sum of own disbursements and opponent’s costs (subject to any limit of indemnity on the former);
  • a risk multiplier is applied to the exposure multiplicand;
  • a basic risk multiplier is ascertained in the same way as a success fee is ascertained, namely by dividing the chance of losing by the chance of winning;
  • this basic figure therefore represents the pure burning cost of the insurance (that is the break even cost disregarding the need for the underwriter to fund its business overheads and make a profit);
  • the basic figure is then adjusted to include an allowance for overheads, marketing and brokerage costs and profit;
  • this provides the overall risk multiplier;
  • the overall risk multiplier is applied to the exposure multiplicand, to derive the net premium;
  • insurance premium tax is then applied to produce the overall figure.

In paragraph 93 of the Judgment the Master recorded that Mr. Smith had claimed a 15% element for administration and profit.  I turn to consider then what Master Hurst concluded on the element of administration and profit.  He said at paragraph 147:

In relation to Mr Bacon’s submissions in respect of deconstruction of the premium and the 15% addition for administration and profit, I accept Mr Butcher’s submissions, which are clearly correct. In both the Claims Direct and Accident Group cases I was persuaded, exceptionally, to deconstruct the premiums, because it was clear from the evidence in each of those cases that the so called premium, whilst containing an element for insurance, contained numerous other elements which were clearly not insurance. Thus, the only way to arrive at the figure for premium was to carry out a deconstruction, and make an allowance for that element which was truly premium. In this case, as Mr Butcher has pointed out, there is one premium, one insurer and one agent. There is no basis whatsoever upon which this court could or should deconstruct the premium. The question for the court is whether the premium sought is reasonable and proportionate. The two areas to be considered are the exposure and the risk multiplier.

This approach was then applied by Master Hurst in the later case of Kelly .v. Black Horse Limited (SCCO) 1st August 2013 where he looked at the case by calculating the burn premium and adding elements for brokerage and profit.

Thus the following propositions are an accurate statement of the law.

First of all I noted that it is entirely possible to construct a premium whereby the premium is to be calculated by a formula rather than being defined in a set figure at the start of the inception of the policy.

Secondly that the formula which was applied in the RSA Pursuit Cases based on estimates of cost was specifically disapproved by the Master who pointed out the dangers of far too high a premium being calculated on the basis of unreliable estimates.

Thirdly that the RSA Pursuit formula was modified by First Assist and the formula that they adopted in place of the discredited one was accepted as calculating a reasonable and proportionate amount in the Motto case.

Fourthly that is a matter for the Court to consider the exposure and the risk premiums which does not require the assistance of expert evidence but rather involves the Court considering the figures of costs incurred by the paying party the receiving party’s incurred disbursements and how risky a case was: all of matters which are well within judicial expertise.

It should be noted that the risk in this context, is not the same as that undertaken by a solicitor calculating a risk assessment for the purposes of a Conditional Fee Agreement: what one is really trying to measure is the risk that the insurer has to pay out which is not quite the same as the risk that the case will be lost.

This is because a case will be lost in circumstances sometimes when insurer does not have to pay out: for example where the receiving party is a fraudster and the insurer is entitled to void the policy.  But for the sake of simplicity I pass over that point at this stage: it requires detailed consideration of the terms and conditions of an individual policy.

Whilst no new recoverable policies (save for those limited exceptions in LASPO (eg mesothelioma claims) have been written since 1st April 2013 this point has a little while to run yet.

 

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