AFTER-THE-EVENT INSURANCE – UNIFIED
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In Coventry v Lawrence  UKSC 50 the Supreme Court rejected an argument that recoverability of success fees and After-the-Event insurance premium constituted a breach of either the Human Rights Act 1998 or the European Convention on Human Rights which is scheduled to that Act.
In The Queen (on the application of Tony Whitston for and on behalf of Asbestos Victims Support Groups Forum UK) and Secretary of State for Justice and The Association of British Insurers  EWHC 3044 (Admin) the Administrative Court quashed the Government’s attempt to abolish recoverability of success fees and After-the-Event insurance premiums in mesothelioma cases.
I gave expert evidence for the successful party in each case.
The abolition of recoverability of after-the-event insurance premiums came in on 1 April 2013 and this was achieved by Article 3 (c) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013, Statutory Instrument 2013 No 77.
Article 2(1)(c) brought Section 46 of LASPO in to effect from 19 January 2013 in relation to the exercising of any power to make orders, regulations or rules of court.
Section 46(3) provides that the abolition of recoverability does not apply in relation to a costs order made in favour of a party to proceedings who took out the policy before the commencement date, 1 April 2013. The courts have consistently upheld the rights of parties to enter in to retrospective agreements, including retrospective conditional fee agreements and after-the-event insurance policies, so in theory a policy made retrospective to before 1 April 2013, even though arranged after that date, would carry a recoverable premium.
It is unlikely that the court would exercise any discretion in favour of the receiving party; in other words a claimant is unlikely to be awarded the cost of the after-the-event insurance premium in a retrospective agreement, even if technically allowable.
The section refers to when the policy is taken out, not when the premium is paid.
Thus it is unclear what the position will be in relation to a policy taken out in March 2013 with a ceiling of, say, £50,000.00 which in May 2013 was increased on payment of a further premium.
Is only the pre-1st April 2013 premium recoverable, or are both recoverable as the policy was taken out before the commencement date?
What about staged premia? Suppose a further tranche of the premium is payable on setting down. It appears that the recoverability of that element, often of tens of thousands of pounds, may depend upon whether setting down took place before 1 April 2013 or not.
In relation to staged premiums my view is that they are recoverable in full as staging is simply a method and timetable for payment, analogous to agreeing to pay a builder one sum when the foundations are completed and another on completion of the first floor.
Also both the courts and paying parties encouraged staged premiums as it reduced the costs if the matter settled.
What about a single premium, subsequently heavily discounted in the event of settlement? Will the courts view this as an unlawful attempt to recover an element of premium really incurred since 1 April 2013?
Thus a single premium of £50,000 is incurred, but will be discounted to £40,000 if settled before trial and to £30,000 if settled before setting down. The case was set down in May 2013 and settled shortly thereafter. Thus the premium is discounted to £40,000. Clearly the extra cost of the risk for the period between setting down and trial is £10,000 as reflected in the proposed discount from £40,000 to £30,000 if it does not reach that stage. Will the defendant be able to argue successfully that there is a separate risk incurred wholly after 1 April 2013, and thus not recoverable?
This is possible, but unlikely, as it would simply lead to after-the-event insurers not discounting at all in relation to premiums incurred before 1 April 2013.
Parties and their advisers now have to consider whether or not to take out after-the-event insurance at all, but in the event that they do take out such insurance, they will need to decide whether to choose a staged premium policy or a single premium policy.
If a claimant believes that the claim will settle early he or she may favour a staged premium, in which case only the stage one premium will be lost from the damages, or indeed may choose not to insure at all.
A claimant who thinks that the case will fight might prefer a single premium as that is likely to be cheaper than a staged premium once a number of stages are reached.
It must be noted that QOCS applies only to personal injury claims, including clinical negligence claims.
CPR 21.12 provides that a Litigation Friend who incurs expenses on behalf of a child is entitled to recover them out of monies received provided that the expenses have been reasonably incurred and are reasonable in amount.
CPR 21.12(6) limits the total expenses that a Litigation Friend may recover to 25% of the sum awarded where the claim dos not exceed £5,000 unless the court orders otherwise and in any event must not exceed 50% of the sum agreed or awarded.
An after-the-event insurance premium is specifically an expense, rather than legal costs, because CPR 21.12(2)(a) says so:
“(2) Expenses may include all or part of –
- a premium in respect of a costs insurance policy (as defined by section 58C(5) of the Courts and Legal Services Act 1990.”
In A & M (by a litigation friend) v Royal Mail Group (2)  Misc. B3 (CC) District Judge Lumb, sitting in Birmingham County Court, dealt with the issue of litigation expenses incurred by a litigation friend under CPR 21.12.
The judge said that under CPR 21.12 “simply because an ill-informed litigation friend signs up to a CFA with a success fee of 100% does not automatically mean that a 100% success fee is a reasonable expense for the purposes of CPR 21.12.” That must be right.
As the success fee is calculated by reference to base costs then for the purposes of CPR 21.12 the judge assessed base costs and reduced them notionally, purely for the purposes of calculating the success fee, by 60%.
Again that concept must be right. However it is important to note that the reduction was purely notional in order to calculate the potential deduction of costs from the child’s damages. It does not affect the sum due from the litigation friend to the solicitor. The judge has no power to reduce that sum except on a Solicitors Act assessment, where very different legal considerations apply.
Here the judge found that the After-the-Event insurance premium was not a reasonable expense within CPR Part 21.12 saying:-
“27. In the circumstances of this case there were effectively no risks to ensure against and this was confirmed by Mr Susak [the claimant’s representative] who when challenged by the court to specify any risk that could justify taking out an ATE policy in this case could not do so. Even if there was a risk, that risk was so small or remote that any competent solicitor would not advise a client to go to the expense of taking out an ATE policy. It follows that the court will not give its approval to the ATE premiums being deducted from the children’s damages.
It is true that this was a case involving two children who were passengers, and one would think that there was no chance of the case being lost.
However the judge’s reasoning at paragraph 26 is full of errors and omissions and he clearly does not begin to understand Qualified One-Way Costs Shifting and the very many circumstances in which protection can be lost. I set out the paragraph below but readers will note that there is no reference to the fact that protection is lost if part of the claim is for the benefit of another, or if it is struck out on one of the number of grounds. This can include delay, which means that an apparently safe case can be struck out and QOCS dis-applied.
For these reasons this first instance judgment, which has received considerable publicity, is almost certainly wrongly decided and in any event will be distinguishable on its facts. It is not binding on anyone.
“The Jackson Reforms introduced the concept of Qualified One-Way Costs Shifting (QOCS). Under these provisions claimants only become liable for defendant’s costs in the event that the claim is lost in very limited circumstances. Essentially full QOCS protection would only be lost if the claim featured fundamental dishonesty by the client (highly unlikely if not impossible in the circumstances of the present case and in any event if present would provide a ground for the solicitors to be no longer bound by the CFA) and partial loss of QOCS protection would only apply up to the amount of damages recovered in the event of a claimant failing to beat a CPR Part 36 offer. Again that does not arise in this case and even if it did would represent such a negligible risk that it would not be reasonable or proportionate to take out insurance to protect against it.”
That statement is fundamentally flawed.
Section 47 abolishes recoverability of notional insurance premia by membership organisations and contains similar provisions as section 46 in relation to liability incurred pre-commencement date.
By virtue of a new Section 58C(2) to (4) of the Courts and Legal Services Act 1990 the Lord Chancellor is empowered to make Regulations allowing recovery of just that element of an after-the-event insurance premium relating to the costs of a claimant’s own risk of having to pay for one or more expert’s reports.
New Regulations were laid before Parliament on 28 March 2013 to rectify the defects in SI 2013/92, which has been revoked.
The Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No 2) Regulations 2013, effective 1 April 2013, provide that recovery of the ATE premium is only allowed if
- the financial value of the claim for damages in respect of clinical negligence is more than £1,000; and
- the risk insured is of incurring liability to pay for an expert relating to liability or causation, and
- recoverability is limited to that part of the premium relating to the “risk of incurring liability to pay for an expert or reports relating to liability or causation in respect of clinical negligence in connection with the proceedings.”
See also my blog Clinical Negligence and ATE Recoverability.
All of this is a huge improvement on the issues raised in the consultation paper. In particular out go:
– any limit on the number of reports;
– any limit on the costs of those reports;
– any limit on the ATE premium;
– any requirement to give notice to the defendant;
– any restriction on a liability/causation report also dealing with quantum.
Clinical Negligence – Recovery of ATE Premium
In Nokes v Heart of England Foundation NHS Trust 29 May 2015 – SCCO CL 1404886
the Senior Courts Costs Office upheld a Costs Master’s decision to allow recovery of a premium of £5,680.00 in respect of cover of £10,000.00 in relation to liability and causation reports in a clinical negligence case where, to a limited extent, recoverability remains post LASPO. The cost for the reports was £2,530.80.
The regime means that both the cost of the reports and the insurance premium insuring them are recoverable from an unsuccessful defendant. The relevant regulations are the Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No. 2) Regulations 2013, made under Section 58 C of the Courts and Legal Services Act 1990.
The premium for £100,000.00 of adverse costs cover was 3% of damages.
The premium in relation to reports “self-insured”, in other words the claimant did not actually have to pay it if the case was lost. This is standard and is often known as a silver bullet scheme. The SCCO rejected the defence submission that this made it unrecoverable as the premium included insuring the cost of the premium itself, as well as the cost of the liability/causation reports.
On the facts the SCCO found that it was the separate 3% premium which “self-insured” both premiums. The judgment is somewhat confused and it appears to say that even if each part was a self-insuring premium it would still have been recoverable.
The claimant settled for £40,000.00. The SCCO rejected the defendant’s argument that the premium was disproportionate in relation to the sum insured. Proportionality must be measured against the whole value of the claim, not just one part.
As to the reasonableness of the amount, as compared with proportionality, the court rejected the defendant’s submission that a premium of £6,020.80 (including Insurance Premium Tax) for an indemnity of £10,000.00 defies logic and makes no commercial sense. The defendant said that although it was not known by the paying party how the premium was calculated, the calculation must have been fundamentally flawed, as well as grossly disproportionate. The premium was compared to the actual costs of the medical reports in this case – £2,530.80 – and the defendant asked:-
“Why would any Claimant pay an ATE premium that was nearly three times the potential exposure?” (Paragraph 34).
The SCCO rejected the defendant’s statement that “it is difficult, if not impossible, to avoid the conclusion that the insurer is greatly inflating its prices where there is the prospect of inter parties recovery” (paragraph 59).
Diffuse mesothelioma claims have been exempted from the ban on recoverability of success fees and after-the-event insurance premiums; in other words claimants will continue to recover success fees and insurance premiums even when the conditional fee agreement is entered in to after 1 April 2013 and the insurance is taken out after that date. In relation to the success fee this remains recoverable, and not subject to the 25% damages cap by virtue of Article 6(2)(a) of The Conditional Fee Agreements Order 2013.
In relation to ATE insurance the continuing recovery of the ATE premium from the losing party is achieved by Article 4 (a) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013. Statutory Instrument 2013 No 77.
In The Queen (on the application of Tony Whitston for and on behalf of Asbestos Victims Support Groups Forum UK) and Secretary of State for Justice and The Association of British Insurers  EWHC 3044 (Admin) the Administrative Court quashed the Government’s attempt to abolish recoverability of success fees and After-the-Event insurance premiums in mesothelioma cases.
Diffuse Mesothelioma is defined in Section 48(2) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 as having the same meaning as in the Pneumoconiosis etc. (Workers’ Compensation) Act 1979.
The all-party House of Commons Select Committee on Justice, in its 1 August 2014 report was highly critical of the decision to scrap the mesothelioma exception.
On 17 December 2015 the Ministry of Justice announced that with effect from April 2016 recoverability of ATE premiums and success fees will cease in insolvency matters.
That will leave full recoverability of ATE premiums and success fees in mesothelioma cases and defamation and privacy cases.
There is limited recoverability in clinical negligence cases in that the ATE premium in relation to the cost of a liability and causation medical report remains recoverable.
At the same time Justice Minister Lord Faulks said that the review of those remaining exemptions is unlikely to take place until the end of 2017 or the beginning of 2018.
Defamation and Breach of Privacy
Recoverability of the success fee is maintained by Articles 1 and 6(2)(b) of The Conditional Fee Agreements Order 2013 and of the ATE premium by Article 4(b) of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 5 and Saving Provision) Order 2013, Statutory Instrument 2013 No 77.
Clients changing firms
The policy is between the client and the after-the-event insurance company and therefore there is nothing to stop the policy continuing and, in the case of a pre-1 April 2013 premium, remaining recoverable from the other side, in circumstances where the client changes solicitors. This may come about because the client chooses to move firms or, more likely, because the original law firm becomes insolvent or sells it caseload to another firm.
However many after-the-event insurance policies provide that the policy ends if the client moves firms.
If the after-the-event policy is cancelled then clearly the premium will not be payable by anyone and this is not recoverable, whatever the outcome of the case; the after-the-event insurer is off risk but has also lost any chance of getting a premium and typically such premiums are not paid by anyone until the end of the case and in the event of defeat are not paid at all.
If the policy is not cancelled, then there should be no problem. If it is then there are a variety of options:-
- to continue without after-the-event insurance in place;
- for the new firm to self-insure, that is to accept liability for any adverse costs Order; this is perfectly lawful – see Sibthorpe and Morris v Southwark London Borough Council (Law Society intervening)  EWCA Civ 25;
- for the new firm to fund the unrecoverable after-the-event insurance premium; the lawfulness of this has been recently confirmed by the Court of Appeal in Flatman and Germany v Weddall and Barchester Health Care Limited  EWCA Civ 278;
- for the client to pay the premium himself; generally such a premium is a so-called “silver bullet” one which is payable only in victory, and therefore the client would not physically have to pay anything out unless and until the case is won; payment can then be taken by deduction from damages;
- for the solicitor to self-insure or arrange the insurance and pay for it out of an overall charge to the client, typically 25% of damages in a post-31 March 2013 conditional fee agreement.
In any situation where the client pays, directly or indirectly, for the after-the-event insurance premium he or she is likely to have a valid complaint that this expense has been forced upon him or her by the conduct of both the outgoing firm and the incoming firm.
In my view, in the absence of the after-the-event insurer allowing the policy to continue with the new firm, the firms should arrange between them for the insurance to be obtained, or an indemnity given, at no cost to the client.
Clearly the most satisfactory outcome is for the After-the-Event insurance provider to agree to allow the policy to continue with the new or merged firm and I advise that the After-the-Event insurer in each case be approached and be asked to agree.
The benefit to the After-the-Event insurer is that they stand to recover a premium in a case which they had previously agreed to insure and where the risk profile should not have changed.
In Jones v Spire Healthcare Ltd. Liverpool County Court, 11 September 2015, case no. A13YJ811 District Judge Jenkinson held that a Conditional Fee Agreement entered into between one firm of solicitors and a client was not capable of assignment to another firm. However this decision does not mean that a client changes firms loses the benefit of After-the-Event insurance, although as set out above, that will depend upon the contract between the client and the After-the-Event insurer as many policies provide that it ends if the client moves firms.
Is ATE still necessary in personal injury cases?
Here I deal only with personal injury claims, where the introduction of Qualified One-Way Costs Shifting may lead solicitors and clients to consider after-the-event insurance unnecessary. In non-personal injury cases where a losing party still pays all of the winner’s costs the argument in favour of having such insurance is much clearer.
As we have seen recoverability of After-the-Event insurance premiums was abolished in relation to policies incepted after 31 March 2013 except in relation to mesothelioma claims, insolvency proceedings, defamation and privacy cases, and, to a limited extent, clinical negligence cases.
Most After-the-Event insurance policies are not paid for upfront by anyone. During the period of recoverability the premium was paid by the unsuccessful Defendant at the end of the case. If the Claimant was unsuccessful no premium was payable by anyone. Thus for the Claimant it was always free.
Given that situation it was very common for After-the-Event insurance to be taken out as it gave protection to a client at no possible cost to the client. Such insurance generally covered the Claimant’s solicitors own disbursements if the case was lost and the post Part 36 costs of the Defendant who had made a successful Part 36 offer, that is one that the Claimant failed to beat.
Thus take a case where a Defendant had made a Part 36 offer of £50,000.00 and the Claimant proceeded to trial and failed to beat that offer. The Defendant’s post Part 36 costs and disbursements, as well as the Claimant’s own post Part 36 disbursements, were all picked up by that insurance thus leaving the only risk to the client being that the court would award less than the sum on offer under Part 36. That should rarely happen as solicitors will generally advise acceptance of an offer below the sum likely to be recovered at court; there is always a litigation risk.
The solicitor in such a case did not recover post Part 36 costs but had taken the matter on under a Conditional Fee Agreement and thus always anticipated a risk of not being paid.
After-the-Event insurance was, and is, available as a freestanding product even if no Conditional Fee Agreement has been entered into, although it is more difficult to obtain in such circumstances.
However in relation to personal injury work a system of Qualified One-Way Costs Shifting was introduced on 1 April 2013, although it is fully retrospective – see Wagenaar v Weekend Travel Limitedt/a Ski Weekend and Serradji (Third Party)  EWCA Civ 1105 (31 July 2014).
To put it simply, a Claimant in a personal injury matter who is not seeking a recoverable success fee or After-the-Event insurance premium from the Defendant will be awarded costs in the usual way if successful but will not be liable for the Defendant’s costs in the event of defeat.
The theory behind this is that Defendants are relieved of the cost of recoverable After-the-Event insurance premiums but that Claimants are not deterred from bringing claims by the risk of paying costs if they lose, that risk being removed by Qualified One-Way Costs Shifting.
Thus a personal injury Claimant can enter into a Conditional Fee Agreement with their own lawyer, thus removing the risk of payment of their own legal fees in the event of defeat, and is off risk of paying the successful Defendant’s costs due to Qualified One-Way Costs Shifting.
However Part 36 retains its full force in such cases. In other areas where costs are not recoverable Part 36 has no application, for example in Employment Tribunals, in family work and Smalls Claims Track matters.
Thus a successful Claimant who fails to beat a Defendant’s Part 36 offer is liable for the Defendant’s costs from the expiry of the date for acceptance of the Part 36 offer, which must be a minimum of 21 days after the offer is made.
A full costs order is made in the usual way but cannot be enforced by the Defendant beyond the level of damages awarded, so the Claimant faces losing all of their damages but not having to pay the Defendant’s costs over and above those damages.
That concept alone is not without its problems. Supposing a Defendant has made an interim payment of £25,000.00 and the overall damages awarded by the court are £50,000.00 and the Defendant’s costs are exactly £50,000.00. The Defendant can enforce to recover the £25,000.00 interim payment without leave of the court.
It also leaves outstanding the issue of the Claimant’s post Part 36 own disbursements.
Both of these matters are generally picked up by a typical After-the-Event insurance policy.
It is strongly arguable that the Claimant’s pre Part 36 costs can be eaten into either by set off under CPR 44.12 or by the common law doctrine of set off. Thus if the Defendant’s costs are £60,000.00 and the damages are £50,000.00 then potentially the Defendant, as well as paying no damages, can set off the unrecovered £10,000.00 against the Claimant’s pre Part 36 costs.
It is well established law that costs belong to the client and not the solicitor and therefore in theory the doctrine of set off applies. There is a case on similar principles under the old Legal Aid system and that case is R (Burkett) v London Borough of Hammersmith and Fulham  EWCA Civ 1342 where the court did indeed find that a Defendant could set off costs against, in that case the Claimant’s costs for part of the period when they had been legally aided.
Clearly a Claimant who has After-the-Event insurance is in a stronger position in relation to Defendants’ Part 36 offers than a Claimant without such insurance.
Thus the apparent answer is to continue to take out After-the-Event insurance to deal with the Part 36 risk. However the cost of that insurance must be paid out of damages if the client wins although nothing is paid if the case is lost on liability.
I deal with the whole subject of Qualified One-Way Costs Shifting elsewhere but it is clear that the courts are working very hard to award defendants in personal injury cases costs when they win and many consider Qualified One-Way Costs Shifting to be almost meaningless. The problem is that the grounds that disqualify Qualified One-Way Costs Shifting, including fundamental dishonesty and striking out for abuse of process or because there was no reasonable ground for bringing the case, are also likely to void the After-the-Event insurance policies.
When I am lecturing or carrying out consultancies I put forward the scenario of a case that is good on liability where the Claimant will be awarded £100,000.00 at court if all heads of damages are awarded and the Claimant wins on all points, in other words the best case scenario for the Claimant. The question I then ask is at what point, with After-the-Event insurance in place, would a solicitor advise their client to accept an offer or, if those attending are Defendant solicitors, when they would expect the offer to be accepted.
The typical answer is around £80,000.00.
I then put forward the same scenario with the same question but with no After-the-Event insurance in place and the answer is then generally around £50,000.00.
They would be my answers.
I have no doubt that Claimants in personal injury cases where they do not have After-the-Event insurance will settle claims for significantly lower sums that when After-the-Event insurance is in place. That is not under-settling; it is settling at the appropriate figure given the much more serious consequences of failing to beat the Defendant’s Part 36 offer. The risk of failing to beat the offer has not changed, but the consequences of failing to beat the offer have changed. It is like shoplifting in Britain as compared with Saudi Arabia; the chances of getting caught may be the same but the consequences are very different indeed.
The crucial, and very difficult, issue in each case is as to whether the cost of the After-the-Event insurance premium will outweigh the extra sum achieved by the greater negotiating power of the Claimant’s solicitors.
To take the above example – let us assume across a basket of cases the existence of After-the-Event insurance gains an extra £30,000.00 damages. If the premium is £35,000.00 then the client has actually lost in financial terms. Thus a cost benefit analysis needs to be undertaken in each case. This is very difficult given the variables in any given case, and given that this exercise has to be carried out early in the case in order to obtain After-the-Event insurance.
It is correct that this is a reversion to the pre-April 2000 position.
However Legal Aid was far more widely available then. It has now for all intents and purposes been abolished for conventional personal injury work although there is a limited exception in relation to clinical negligence where a child is injured in the womb or within eight weeks of birth and certain further conditions apply.
The exceptions to the prohibition on the recoverability of the After-the-Event insurance premiums are the same as for success fees with the same history and the same proposals, with one exception. That exception is in relation to clinical negligence cases where the After-the-Event insurance premium remains recoverable in relation to medical reports obtained in relation to liability and causation and that is achieved by The Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No 2) Regulations 2013.
Many consider this to be the third piece of protection required for clients. The existence of no win no fee arrangements under Conditional Fee Agreements protect clients against their own legal costs and Qualified One-Way Costs Shifting theoretically protects clients against adverse costs, but subject to the whole issue of Part 36 set out above. If the Part 36 exception was removed then that would leave just the issue of the Claimant’s own disbursements which in clinical negligence cases is dealt with by the After-the-Event insurance premium for such disbursements remaining recoverable from the other side.
The protection apparently afforded by Qualified One-Way Costs Shifting is very substantially reduced by the continuing full force of Part 36 of the Civil Procedure Rules, subject only to the starting point that the Defendant’s post Part 36 costs cannot be enforced over and above the level of damages awarded.
It is clear that the personal injury claimants will receive significantly less in damages than they did prior to April 2013. The protection apparently given by Qualified One-Way Costs Shifting is largely illusionary, although clearly there is protection to the Claimant where the case is lost on liability.
Security for Costs
the Technology and Construction Court held that, depending on the terms of the policy, After-the-Event insurance may be adequate security for costs.
Previously in Michael Phillips Architects Ltd v Riklin  EWHC 834 the court held that the ATE insurance policy was insufficient, saying:-
“it is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs.”
In Geophysical the defendant contended that the insurer could avoid the policy if there was fraudulent non-disclosure or misrepresentation and that this was likely as the claim was partly based on alleged representations made by the defendant to the claimant. Rejection of the claimant’s case by the court, the trigger for a costs liability, was likely to lead to avoidance of the policy.
The court said that this was no more than a theoretical possibility; it was not alleged that the claim was fraudulent or a sham. There is a significant difference between a finding that evidence is incorrect and a finding that it was fraudulent.
The court also considered that there was only a theoretical chance that breach of the ATE insurance could lead to avoidance; the terms were not onerous.
Furthermore the insurers here would be liable to provide an indemnity for the defendant’s costs incurred before cancellation and so the defendant was safe up until that point and could then make a fresh application for security of costs.
The court said:-
“… the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of the parties to gain access to justice.
In the absence of evidence to the contrary, the court’s starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding.”
There is no requirement that a client be able to satisfy an adverse costs order before a solicitor takes the matter on under a conditional fee agreement, nor is there any requirement to have after-the-event insurance in place – see Heron v TNT (UK) Limited and Mackrell Turner Garrett (a firm)  EWCA Civ 469 where the Court of Appeal said at paragraph 37:-
“A solicitor is entitled to act on a CFA for an impecunious client who they know or suspect will not be able to pay own (or other side’s costs) if unsuccessful”.
Solicitors need a clear policy, which may differ from firm to firm. For example it may be that one firm is prepared to cover the Part 36 adverse costs risk in relation to all cases within the portals; another may cover all cases within fixed recoverable costs etc. This policy of indemnifying a client against an adverse costs risk has been approved by the Court of Appeal in Sibthorpe and Morris v Southwark London Borough Council (Law Society intervening)  EWCA Civ 25. The specific wording of that indemnity, which the Court of Appeal said was lawful and unobjectionable, was:-
“If you lose, you pay your opponents charges and disbursements. You may be able to take out an insurance policy against this risk. If you are unable to obtain an insurance policy against this risk, we indemnify you against payment of your opponents charges at the end of the case if you lose. This means that we will pay those charges.”
For taking such a risk it is perfectly proper to charge an additional fee to the client, say 30% of damages rather than 25%.
A solicitor is free to fund disbursements on a contingency fee basis, that is without recovering them from the client if the case is lost – see Flatman and Germany v Weddall and Barchester Health Care Limited  EWCA Civ 278.
It is again reasonable and proper for a solicitor to charge the client an additional fee, by way of a percentage or some other method, for providing this service.
Contrary to popular belief there is no maximum percentage of damages that may be taken from a personal injury client, subject to the Solicitors Code of Conduct duty not to take advantage of clients. It is the success fee alone which is capped at 25%, including VAT, of certain specified damages. The same limit applies in Damages-Based Agreements, but with DBAs that is indeed an absolute cap and no more may be charged.
Unrecovered disbursements, in particular the now unrecoverable After-the-Event insurance premium, and unrecovered solicitor and own client costs may be charged to the client without statutory limit in a non DBA case.
Is the firm prepared to act for a client who has not got ATE insurance in place and is not prepared to pay extra for the solicitor to indemnify her or him? Such a client is likely to be the one who complains about “under-settling” and rushes off to one of those parasitic companies seeking to encourage such claims.
For more substantial claims is third party funding rather than ATE the answer? It normally provides the benefit of ATE plus disbursement funding and some own costs, win or lose. The disadvantage is that the third party funder will take the 25% or 30% of damages as its fee. This is done under a no win-lower fee conditional fee agreement.
A policy of the law firm indemnifying claims of a certain value, in return for a higher fee, and utilizing third party funding for claims above that ceiling, may be the answer.
Clear advice sheets should be prepared for clients and the client care letter, terms and conditions of business and funding agreement should reflect the agreement reached.
Each client should be seen in person as this needs a verbal explanation. In any event the Consumer Contracts Regulations 2013 make it very risky not to see a client in a litigation matter, as does the negligence finding in finding by the Court of Appeal in Procter v Raleys Solicitors  EWCA Civ 400
Failure to explain the consequences of not having After-the-Event insurance
In Adris and Others v Royal Bank of Scotland  EWHC 941
the solicitor took on claims under the Consumer Credit Act 1974 on the basis that it was cost free to the claimants whose cases had been referred by a claims management company.
However the solicitors failed to obtain after-the-event insurance and failed to explain to the claimants that they would have to pay the other side’s costs if the claims were lost.
The High Court held that this was a “gross breach of duty” towards the clients and that the solicitors were effectively acting without instructions as the clients were “prevented from giving instructions on anything like an informed view of the case” and said “it is obvious that if the clients had been told of the true position they are likely to have instructed (the law firm) not to progress the claims”.
The solicitors were made the subject of a non-party costs order upon the application of the defendant.
Insurer Avoiding Policy
In IHC (a firm) and Another v Amtrust Europe Ltd  EWHC 257
the High Court considered the ability of an ATE insurer to avoid a policy for fraudulent misrepresentation in circumstances where it had made a payment out under the policy and increased the indemnity limit.
The High Court rejected the claimants’ pretension that by paying out £10,000.00 under the policy to comply with a costs order and increasing the limit of the indemnity the ATE insurer had made clear and unequivocal representations that it would not refuse to indemnify the insured in respect of its costs liability.
Although the representation giving rise to waiver by estoppel could be either by words or conduct, it must result in a clear and unequivocal message by the insurer to the insured that it will not exercise that right and the insured must rely on that message in a way that makes it inequitable for the insurer to go back on it.
Here the ATE insurer was unaware that the insured had lied on the proposal form, so the representations could not carry an apparent awareness of the right to avoid the policy. Therefore the insured could not have understood the representations to mean that the ATE insurer would not avoid the policy.
ATE Insurance and Professional Indemnity Insurance
the Court of Appeal considered the interplay between After-the-Event insurance and professional indemnity insurance and disbursements used or necessary to fund cases.
Here Impact Funding Solutions Ltd had made funds available to Barrington Support Services Ltd to fund disbursements in relation to noise induced hearing loss claims.
The funding was made available by way of loans to the claimants and if the claim was successful the costs would be recoverable from the defendants but if the claims failed, or settled on unfavourable terms, the loans made by Impact, together with interest, would have to be recovered in some other way.
If the claimants had Before-the-Event legal expenses insurance or After-the-Event insurance then the loans may be recoverable from the insurers. However if those insurers, for any reason, did not pay then Impact Funding Solutions Ltd would look to the solicitors, rather than their clients, to pay.
Solicitors must have professional indemnity insurance and the issue in this case was whether those professional indemnity insurers were obliged to indemnify solicitors who are liable to reimburse the loans made to their clients in order to defray the disbursements made by those clients.
Here the After-the-Event insurers succeeded in avoiding liability to Barrington on the ground that they had failed properly to assess the merits of the claims and also that they drew monies down from Impact apparently to pay for disbursements but in fact to pay referral fees to claims management companies and also to pay fees to a company called LCS Sprint for work that could and should have been done by Barrington.
In those circumstances Impact successfully sued Barrington and obtained judgment in the sum of £581,353.80 but Barrington had gone into liquidation.
Consequently Impact brought proceedings against Barrington’s insurers, AIG Europe Ltd, pursuant to the Third Parties (Rights Against Insurers) Act 1930 and AIG is entitled in those proceedings to rely on any defence which it would have had if it had been sued by its insured, that is Barrington.
AIG argued that they were not liable to indemnify Barrington in respect of liabilities to repay what the insurers referred to as “commercial loans” since professional indemnity insurers are not in the business of helping Impact or anyone else to obtain repayment of loans to solicitors which were made or drawn down for the purpose of carrying on their practices. The judge at first instance accepted that argument and thus gave judgment in favour of AIG and thus refused to allow Impact to claim against the solicitor’s professional indemnity insurance.
On appeal the Court of Appeal overturned that decision and entered judgment against AIG.
It held that obligations arising out of loans made to cover disbursements in intended litigation are essentially part and parcel of the obligations assumed by a solicitor in respect of his or her professional duties to the client, rather than obligations personal to the solicitor such as, for example, paying for a photocopier.
They are inherently part of the professional practice and are assumed as an essential part of the duty to advise the client as to the likelihood of success in the intended litigation. Disbursements should not be incurred in litigation which is unlikely to succeed. A solicitor who negligently advises the client that a claim is likely to succeed and causes a client to incur disbursements which should not have been incurred, will be liable to the client for disbursements needlessly incurred.
It makes no difference from the point of view of a professional indemnity insurer that the disbursement had been incurred before such advice is given or without such advice having been given at all.
Thus Barrington’s liability to Impact fell within clause 1 of the insurance cover as being “civil liability” arising “from private legal practice in connection with the insured firm’s practice” which is part of the Minimum Terms required by the Solicitors’ Indemnity Insurance Rules.
The fact that the loan was nominally made to the solicitor’s client but was in fact an inherent part of a set of interlocking agreements all intended to enable the solicitor to earn a professional livelihood did not alter that position.
Each issue of Litigation Funding has, at the back, several pages listing those companies which provide After-the-Event insurance and the names of brokers who deal in such policies. There is also a list of third party funders and as such arrangements commonly include, or have available, After-the-Event insurance, they too should be considered.
Contact each and every one – there are not that many – and see what deals are available so that you have the maximum and most up to date information for the firm and the client.
Qualified One-Way Costs Shifting is set to make relief from sanctions look like the proverbial vicar’s tea party.