BTE insurance and hourly rates

The post below was published as a newsletter in November 2011. Please note that the case of Brown-Quinn is due to be heard by the Court of Appeal on 21st-22nd November 2012 and may yet reverse the decision in the Commercial Court.

The controversies surrounding the provision of an indemnity to an insured by a before the event insurer (BTE) providing legal expenses insurance (LEI) are well known.

In particular, BTE insurers try to steer their insured towards their panel firms of solicitors in order to achieve the sensible tripartite aims of (i) securing the payment of referral fees for the case (ii) keeping costs incurred under the policy to a minimum and (iii) retaining a closer degree of control on the litigation.

A recent case that of Christine Brown-Quinn -v- Equity Syndicate Management Limited and Others (2011) EWHC 2661 indicates that the iron grip of BTE insurers on which firms of solicitors may undertake work for the lay client and under what terms as to payment is perhaps weaker than popularly perceived.

The Insurance Companies (Legal Expenses Insurance) Regulations 1990 were enacted to apply directly within the United Kingdom the provisions of Article 4 of EC Council Directive 87/344/EEC made on the 22nd June 1987 which in turn has been updated as article 201 of EU Directive 2009/138 EC.

Regulation 6 of the Regulations provides:

(1)Where under a legal expenses insurance contract recourse is to be had for a lawyer (or other person having such qualifications as may be necessary) to defend, represent or serve the interests of the insured in any enquiry or proceedings, the insured shall be free to chose that lawyer (or other person).

(2)The insured shall also be free to chose a lawyer (or other person having such qualifications as may be necessary) to serve his interest whenever a conflict of interest arises.

In practical terms, the wording of Regulation 6 has been invariably argued by the providers of legal expenses insurance to indicate that the freedom of choice provisions do not arise until proceedings are issued.

As the vast majority of litigation is compromised without the need for the issue of proceedings this has presented something of a hindrance to those who wish to instruct Solicitors of their own choice at a relatively early stage.

On the 19th July 2010 and re-issued on the 12th August 2010, the Financial Services Authority wrote a letter which set out its position which went much further than the Financial Services Ombudsman had done in preceding complaints made to him.  That letter says in terms of the FSA’s opinion on the Regulations:

Under the Regulations, the freedom to choose a lawyer arises in the following areas:

(i)Principally under Regulation 6, where recourse is had to a lawyer to represent the insured in any or any inquiry or proceedings.  It is important to note that freedom of choice arises before the commencement of any inquiry or proceedings;

(ii)Whenever there is a conflict of interest;

(iii)Finally if firms have chosen the option in Regulation 5(4) where the insured is afforded the right to entrust the defence of his interest to a lawyer of his choice, then the freedom to choose a lawyer exists as soon as the right to claim under the policy arises, and cannot be curtailed.

Thus the starting point has to be now that under the domestic law an insured pretty much has the right to chose who they wish to represent them, from the date of first instruction.

Does this mean that necessarily the BTE insurer is obliged to offer full indemnity to the insured when the insured chooses an expensive lawyer or more accurately a lawyer who will charge more than panel rates agreed by the BTE insurer with its own preferred panel of solicitors?

The point is of significance in two respects.  First the nature and extent of any indemnity is to a large degree going to be governed by the terms of the contract of insurance made between the lay client and the BTE insurer and secondly even if the policy is couched in prescriptive terms in terms of such things as hourly rates this may well not avail a BTE insurer at all if to do so would practically undermine the freedom choice expressed in European Union law and given direct effect in United Kingdom law.

There have been two cases of interest on this issue this year.  In the case of Pine -v- DAS Legal Expenses Insurance Company Limited (2011) EWHC 658 the issue arose in circumstances where a lay client wished to instruct not a Solicitor of her own choice but Counsel under the public access arrangements some members of the Bar accept instructions on.

The position adopted by DAS was that they were prepared to allow (and indeed could not realistically have prevented) Miss Pine to instruct Counsel of her own choice but wished to do so through the offices of a solicitor rather than on a
direct public access basis.

The action was therefore commenced by Miss Pine seeking declaratory relief and damages for breach of the terms of an insurance policy that she had effected with DAS.  It is noteworthy that Section D of the policy in issue in the case provided this.

Extra Definitions 

The lawyer, accountant or other suitable qualified person who has been appointed to act for you in line with the terms of this section.

Costs and expenses

(a) Legal costs

(a)All reasonable and necessary costs which the appointed representative may charge on a standard basis.  Also the costs your opponents have to pay in civil cases if you have been ordered to pay them or pay them without agreement.

On the face of those provisions, subject to the limit of indemnity DAS agreed to indemnify Miss Pine, in the events which have happened, the costs reasonably and necessarily incurred by her which her lawyer charged on a standard basis for his services in acting for her in the Solicitor’s action.  The limit of the indemnity was £50,000 so the terms of the insurance policy provided that subject to that long stop provision costs reasonably and necessarily incurred was the measure of benefit to be enjoyed by Miss Pine under the policy.

The issue of whether hourly rates and the quantum of costs which would be recoverable by the insured from the BTE insurer if she chose the services of a lawyer charging more than panel rates, would be limited to hourly rates, or only by the criteria of reasonableness was thrown into stark relief by the case of Christine Brown-Quinn -v- Equity Syndicate Management Limited and Others (2011) EWHC 2661.

In that case a number of clients represented by a firm of solicitors brought proceedings for declaratory relief against two insurance companies, Equity Redstar at Lloyds and ULR Norwich in order to recover their reasonable costs of acting for the lay clients.  Interestingly the solicitors were joined as parties to the proceedings.

The dispute however had a further complication to it.  The insurers in question had both panel rates and what they called non panel rates.  As the judge noted at paragraph 5 of his judgment:

BTE insurers traditionally, as did these insurers, retain a panel of Solicitors, with whom they have been able to negotiate reasonable, and no doubt discounted or reduced, fees for acting for their insured, in return for an expectation of receiving a quantity of such work, through clients being referred to them on a regular basis.  I have not seen evidence of what these rates are, but I shall call them panel rates.

The insurers also had a further set of rates described in these terms at paragraph 7 of the judgment:

The position taken by the insurers was that, so far as outset and transfer cases were concerned, they were entitled to insist that if an insured did not wish to instruct a panel solicitor, any other solicitor of the insured choice must not charge more than the rates prescribed by their terms of appointment for  non…. panel solicitors.  These included the following provisions….

(a)An hourly rate of £125 plus VAT which is expected to be fully inclusive of any relevant mark up;

(b)Letters out and in at 1/10 and 1/20 of the hourly rate respectively;

(c)Travelling and waiting time to be charged at two thirds of the agreed hourly rate.

The costs incurred on this basis as the learned judge found at paragraph 8 were described in these terms:

There were two significant constituents:

(i)There was a fixed hourly rate irrespective of the importance or complexity of the matter;

(ii)It was a flat rate chargeable in respect of whoever should carry out the work on behalf of the firm, be it partner, associate, assistant or trainee.  The rates which WD have sought to charge are very much more than that, in respect of the claim a very substantial global investment bank for redundancy, unfair dismissal and sex discrimination  (see BQ), race discrimination, constructive unfair dismissal, victimisation, breach of part time workers regulations and breach of flexible working regulations against a very large foreign investment bank (CJ) and unfair dismissal and disability discrimination against her former employer, an educational establishment (JB).  WD put forward hourly rates for a partner or associate (grades A/B) of £274, for a Solicitor £210 and for a trainee solicitor £205.

The insurers had informed the solicitors they would not agree to their acting for the clients.  The claim was accordingly brought against the insurers pursuant to Regulation 6 of the Insurance Companies (Legal Expenses) Insurance and the relevant terms of the policy provided as follows:


Cost and Expenses

Legal and professional fees for which you are responsible, including reasonable fees, costs and expenses incurred by the appointed representative acting for you in connection with the pursuit for defence of legal proceedings (there is a limitation for such costs and expenses of a maximum of £50,000 provided for by the terms and conditions).

When matters came before the Court the issue was to what rate the insurers were obliged to indemnify the Solicitors who were instructed by the Claimants and in particular whether the Claimants are restricted to recover recovery of solicitor’s fees at the rate of £125 or £139 per hour.

The insurer’s case was predicated upon Part 48.3 of the Civil Procedural Rules which stated:

Where the Court assess (whether by the summary or detailed procedure) costs which are payable by the paying party to the receiving party under the terms of the contract, the costs payable under those  terms are, unless the contract expressly provides otherwise, to be presumed to be costs which:

(a)Had been reasonably incurred, and

(b)Are reasonable in amount and the Court will assess them accordingly.

The position noted by the judge at paragraph 18 that the insurers chose to adopt was as follows:

The Defendants do not contend that, in this case, the policy expressly provides otherwise.  They submit that by reference to the policy the starting point should be the rate of £125 (or £139) as contained in the non-panel costs and the assessment of what is reasonable should take place in the light of and by reference to those figures, effectively such that they should only be departed from if such rates can be shown to be unreasonable….

Both parties prayed in aid the case of Stark -v- DAS Oesterreich Algemeine Rechtsschutz Ver Sicherungag (2011) case C-293/10 which noted that the member states remained free to determine the body of rules applicable to legal expense insurance contracts on condition that those comply with EU Law, and in particular with Article 4 of Directive 87/344.  The Court’s conclusion was that Article 4(1):

Must be interpreted as not precluding a national provision under which it may be agreed that a person covered by legal expenses insurance may select…. only persons professional authorised to represent parties who have their Chambers at the place of the Court or administrative authority having jurisdiction at first instance, on condition that … that restriction relates only to the extent of the cover by the legal insurance provider in respect of costs linked to the involvement of a representative and that the reimbursement actually provided by that insurers is sufficient, as being a matter for the referring Court to determine.

The European Court said at paragraph 33:

Consequently freedom of choice, within the terms of Article 4(1) of Directive 87/344 does not mean that member states are obliged to require insurers, in all the circumstances, to cover in full the costs incurred in connection with the Defence of an insured person, irrespective of the place where the person professionally entitled to represent that person is established in relation to the Court of Administrative Authority with jurisdiction to deal with the dispute, on condition that that freedom is not rendered meaningless.  That would be the case if the restriction imposed on the payment of those costs were to render de facto impossible a reasonable choice of representative by the insured person.  In any event, it is for the national courts, if an action is brought before them in this regard to determine whether or not there is any such restriction.

The Learned Judge rejected the stance taken by the BTE insurers that in effect they could impose non-panel costs upon solicitors who were instructed by the claimants.  In particular terms, however it should be noted that this was a decision made within the context of the wording of the policies in this case.

Thus the statement by the High Court judge at paragraph 23 must be taken with that in mind.

I conclude that the correct position on the wording of these policies is closer to that contended for by Mr. Wynter, namely that the Claimant’s entitlement to recover legal costs (and thus WD’s expectation of receiving fees covered under the insurance policies) will fall to be assessed, in the absence of agreement under CPR 48.3, not as restricted to the provision for £139 or £125 per hour but taking it into account.

However the judge went a little bit further in paragraph 24:

It is plain from Eschig that an insured is entitled to conclude that he would rather have his own solicitor than be part of a group at discounted rates, and agree with Mr. Wynter that the analogy is a close one, though not identical to a situation in which an insured prefers to have a solicitor of his own choice rather than one imposed upon him at panel rates or non panel costs.

However, the significant difference is that as a result of the concession referred to in paragraph 16 above, the Defendants are no longer seeking to prevent the insured from taking that course, but only to pay for the consequences of doing so.  I take into account Mr. Wynter’s submissions that Stark is addressing a national legislative provision, but it was still necessary for the European Court to consider whether that provision offended against Article 4; and I find helpful the consideration referred to in paragraph 33 of the European Court’s Judgement as to whether a restriction, or in this case a Feta would render de facto impossible a reasonable of representative by the insured person.  I also take into account the commercial background of the need for availability of BTE insurance on the basis of economically viable but reasonable premiums.

The judge concluded at paragraph 25:

My judgment accordingly is that, in the absence of agreement between the insurer and the firm which will have been accepted de facto as Authorised Representative but will not have accepted the insurers non-panel costs any assessment of costs due pursuant to CPR 48 will address the non-panel costs not as a starting point but as a comparator.  As I have concluded, it will be necessary and right for the Court assessing the costs to take into account the availability of any other suitable firms on lesser rates negotiated with the insurers, but there will also fall to be taken into account and both sides can draw assistance in this regard from the words of Kennedy L.J. in Wraith -v- Sheffield Forge Masters Limited (1998) 1WLR 132 at 1.42:

 (i)The location of the chosen solicitors.

(ii)Their specialisation and in particular any special qualifications for taking on the instant claim.

(iii)The complexity of the claim.

(iv)The importance of the claim for the insured.

(v)The substance and strength of the proposed defendant to such claim.

(vi)The nature of the work to be carried out, in particular whether it should sensibly be carried out by senior solicitors or partners whose rates would inevitably be likely to be greater than the hourly rate provided for in the non-panel costs.

This to my mind leaves open a sufficient ambit for the interplay (necessary within these policy provisions) between the recovery of reasonable fees and the requirement that the insured keep the costs as low as possible.

This case then is a useful indicator not only of the breadth now to be afforded to the 1990 Regulations and their provisions as to freedom of choice for solicitors but also as indicative that when a case is obtained by non-panel solicitors who seek to  make a claim on behalf of the insured under the BTE policy, the majority, one suspects, of policies which are written at the current time providing as they do for reasonable costs to be paid by the insurer, subject to a longstop maximum of £50,000 or in some cases £100,000 mean that the solicitor is entitled to charge what could be described as their normal rate or the Court approved rate subject to the considerations noted in paragraph 25 above.

Conversely this case indicates that BTE insurers may wish to reconsider the wording of their BTE policies and in particular whether they should be writing into those policies contractually binding restrictions on hourly rates that an insured can claim under those policies whilst relying on a longstop cap of £50,000 or £100,000 or whatever the limit is set at alone.

However a caveat must be noted that were hourly rates to be set at a level which in effect rendered the choice of lawyer provisions in the 1990 Regulations otiose there is a very real risk that European Union law will be infringed as the ability to chose will be rendered meaningless if there are no solicitors who are prepared to take on the job.

Having said that, it remains to be seen if a BTE insurer could successfully use the facility in English law for solicitors to work on a contingency or conditional fee basis to argue that it provides a base level of cover in terms of hourly rates and thereafter a client is expected to “top up” their costs provision by the solicitor working on a conditional or contingency fee basis.

This could be put into place relatively easily, as it already is in many cases involving BTE cover and personal injury claims by means of a collective conditional fee agreement and, of course, “discounted” collective conditional fee agreements are lawful and indeed normal in respect of a lot of litigation carried out on behalf of insurance companies by their panel firms.

However, again it remains a very real danger that a person’s freedom of choice might be unduly restricted by provisions of this nature.   Plainly these considerations will have to await a further case before the interrelationship between the conditional fee regime contained in the Courts and Legal Services Act 1990 and European Law falls to be considered further.

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