Varying ATE premiums and LASPO

One of the mysteries of the last two years, has been the absence of challenges by paying parties to the recovery of staged ATE premiums incurred after 1st April 2013 by purported variations of a contract of ATE insurance after that date which significantly increase the premium claimed to be recoverable.

Section 46 of LASPO 2012 amends the Courts and Legal Services Act 1990 in the following way:

(1) In the Courts and Legal Services Act 1990, after section 58B insert—

“58C Recovery of insurance premiums by way of costs

(1) A costs order made in favour of a party to proceedings who has taken out a costs insurance policy may not include provision requiring the payment of an amount in respect of all or part of the premium of the policy, unless such provision is permitted by regulations under subsection (2).

 (2) The Lord Chancellor may by regulations provide that a costs order may include provision requiring the payment of such an amount where—

(a) the order is made in favour of a party to clinical negligence proceedings of a prescribed description,

(b) the party has taken out a costs insurance policy insuring against the risk of incurring a liability to pay for one or more expert reports in respect of clinical negligence in connection with the proceedings (or against that risk and other risks),

(c) the policy is of a prescribed description,

(d) the policy states how much of the premium relates to the liability to pay for an expert report or reports in respect of clinical negligence (“the relevant part of the premium”), and

(e) the amount is to be paid in respect of the relevant part of the premium.

 (3) Regulations under subsection (2) may include provision about the amount that may be required to be paid by the costs order, including provision that the amount must not exceed a prescribed maximum amount.

 (4) The regulations may prescribe a maximum amount, in particular, by specifying—

(a) a percentage of the relevant part of the premium;

(b) an amount calculated in a prescribed manner.

 (5) In this section—

“clinical negligence” means breach of a duty of care or trespass to the person committed in the course of the provision of clinical or medical services (including dental or nursing services);

“clinical negligence proceedings” means proceedings which include a claim for damages in respect of clinical negligence;

“costs insurance policy”, in relation to a party to proceedings, means a policy insuring against the risk of the party incurring a liability in those proceedings;

“expert report” means a report by a person qualified to give expert advice on all or most of the matters that are the subject of the report;

“proceedings”includes any sort of proceedings for resolving disputes (and not just proceedings in court), whether commenced or contemplated.”

(2) In the Access to Justice Act 1999, omit section 29 (recovery of insurance premiums by way of costs).

(3) The amendments made by this section do not apply in relation to a costs order made in favour of a party to proceedings who took out a costs insurance policy in relation to the proceedings before the day on which this section comes into force.

The relevant provisions of the Civil Procedure Rules 1998 state:

48.1.—(1) The provisions of CPR Parts 43 to 48 relating to funding arrangements, and the attendant provisions of the Costs Practice Direction, will apply in relation to a pre-commencement funding arrangement as they were in force immediately before 1 April 2013, with such modifications (if any) as may be made by a practice direction on or after that date.

(2) A reference in rule 48.2 to a rule is to that rule as it was in force immediately before 1 April 2013.

In respect of ATE policies, the definition of a pre-commencement funding arrangement is as follows:

(ii) a funding arrangement as defined by rule 43.2(1)(k)(ii) where the party seeking to

recover the Insurance premium took out the insurance policy in relation to the proceedings before 1 April 2013;

It is apparent from the terminology used in the primary legislation and the Civil Procedure Rules that the recoverability of the policy premium hinges on the question as to whether the policy in relation to the proceedings in which the costs order was made was “taken out” prior to the 1st April 2013.

Accordingly the starting point is that if an insurance policy was taken out prior to the 1st April 2013, which must mean if the contract of insurance was made prior to the 1st April 2013, then the insurance premium will be recoverable as an item of costs.

There are then two arguments which have to be considered: the first relates to the question of whether the above sections should be read as a statutory limitation on recovery of premiums agreed after 1st April 2013, the second on whether there is scope for the application of the doctrine of variation.

Dealing with the first of these points, the argument is that the effect of section 58C by its reference to the costs insurance policy in relation to the proceedings before the day on which this section comes into force” means that when assessing costs the court must look at the insurance policy as it was prior to 1st April 2013.

That in essence the effect of the statutory section is to freeze in amber the premium agreed before the 1st April 2013 and as a matter of statutory interpretation there is no scope for a variation which has the effect of increasing the recoverable premium.

This means that whilst the parties might still be able to vary the terms of the contract of insurance, that is not actually the real issue: the paying party would argue that there is a statutory prohibition on recovery of increased premium incurred when the same is more than the premium of the policy “taken out” before the 1st April 2013.

The receiving party would argue that provided an insurance policy was effected prior to the 1st April 2013, a “trigger point” for recoverability is reached and provided the contract can be varied, if that results in an increase in the premium, that will still be recoverable, as the statute is concerned with when the policy was “taken out”, not with what premiums were incurred or when the premium was incurred. That is the first point.

The second is to consider if there is no such statutory bar, what the position in law is in relation to amendments/alterations. An insurance contract is still subject to the general law of contract.

This includes the doctrines of variation and rescission and novation. It follows that if a policy is altered or amended, so that it is varied in accordance with the common law doctrine, it remains the original policy which was taken out pre-1st April 2013 and the fact it has been altered/amended does not mean that the premium will be irrecoverable.

Conversely if an alteration or amendment amounts to a rescission of the of existing policy of insurance and the creation of a new policy of insurance after 1st April 2013 then that will not be a policy “taken out” for the purposes of section 58C.

Accordingly it is necessary to consider the law on the common law doctrine of variation closely. The starting point must remain the case of Morris.v.Baron and Co [1918] AC 1. Starting with the speech of Lord Dunedin at page 25

My Lords I find myself unable to subscribe to this view. The difference between variation and rescission is a real one, and is tested, to my thinking by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is sued for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself.

Lord Atkinson noted at page 31:

Moreover, rescission of a contract, whether written or parol, need not be express. It may be implied, and it will be implied legitimately, where the parties have entered into a new contract entirely or to an extent going to the very root of first inconsistent with it.

At page 38 Lord Parmoor stated:

It is necessary further to inquire whether the conditions have been so changed in their essential character that there is a substantial inconsistency, such as to lead to the inference that the parties did intend to rescind the earlier contract of September. It is not possible to lay down any general principle, but where the alteration is such that the conditions of the earlier contract cannot be restored without placing one of the parties under a permanent and substantial disability there is a strong prima facie probability of an intention to rescind. This factor applies in the present case and is supported, not only by the acts and conduct of the parties at the time, but by the whole course of their subsequent acts and conduct.

In the case of British and Beningtons.v.North Western Cachar Tea Company Limited [1923] AC48. At page 62 Lord Atkinson noted this

A written contract may be rescinded by parol either expressly or by the parties entering into a parol contract entirely inconsistent with the written one, or if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it.

At page 67 Lord Sumner said:

Morris v Baron & Co determines the second point, a case which we have only to appreciate and apply. The question is whether the common intention of the parties on May 12, 1920, was to “abrogate”, “rescind” “supersede” or “extinguish” the old contracts by a “substitution” of a “completely new” and “self contained” or “self subsisting” agreement, “containing as an entirety the old terms, together and as modified by the new terms incorporated”.

He concluded at page 68

It was, however, argued before your Lordships that, even so, the old contracts were discharged because a varied contract is not the old contract, and as you cannot have a new and varied contract and an old and unvaried contract regulating the same thing at the same time, the old contract, like other old things must be discarded. As a matter of formal logic, this may possibly be so, but such was not the view taken by this House in Morris.v.Baron since, if their Lordships had thought that any variation whatever would make a new contract and discharge the old one, they would have said so expressly and would not have dealt with the extent and completeness of the changes, as they did. The variation may be a new contract, so as to make writing, duly signed indispensable to its admissibility, for this is a matter of form and of the words of the statute, but the discharge of the old contract must depend on intention, tested in the manner settled in Morris.v.Baron & Co.

Commenting on the law in the case of Ginns.v.Tabor [1995] WL 1082518 Auld LJ stated that it was:

Whether a subsequent agreement amounts to a rescission or a variation of an earlier one depends on the intention of the parties indicated by the terms of subsequent agreement and from all the surrounding circumstances. See United Dominions Trust (Jamaica) Ltd.v.Shoucair [1969] 1 AC 340.However, rescission will be presumed when the parties enter into a new agreement so inconsistent with the earlier one that it goes to its very root. See British & Beningtons Ltd.v.NW Cachar Tea Co Ltd [1923] AC 48 per Lord Atkinson at 62. A new agreement of that kind may have that effect even though it is executory, as here.

However, even if there is no statutory prohibition on the recovery of an increased premium, were a contract of insurance to be “varied” so that a limit of indemnity of £50,000 becomes £100,000, with a consequent doubling in the premium, even if reliance can be placed on the doctrine of variation, this could be argued in turn to be so fundamental a change that it goes to the root of the contract, indicating that instead of a variation there has in truth been a rescission and novation and the premium is irrecoverable accordingly.

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