Recovering premiums for insurance against adverse litigation costs
In the recent case of Parker v Seixo  EWHC 90162 Master Wright, a costs judge in the High Court, was asked to consider whether the amount of an insurance premium covering the claimant against the risk of having to pay costs was recoverable. Master Wright's decision confirms the attractiveness of "after the event" costs insurance to parties able to find such insurance and the pressure that recoverability of insurance premiums can put on a party defending a claim to agree early settlement to avoid paying sometimes significant insurance premiums.
Parker was a road traffic accident personal injury case, but the principles it confirms are equally applicable to commercial litigation, especially given the judge's reasoning that where premiums are individually rated and staged (which is more likely in the case of costs insurance for commercial litigation), the Court should not (without the assistance of expert evidence) regard itself as better qualified than the underwriter to rate the financial risk the insurer faces (and thus the reasonableness and recoverability of the premium).
In Parker v Seixo the defendant, Mr Seixo reversed his vehicle into Mr Parker in a petrol station causing him a fractured leg which required surgery and the insertion of metalwork. Liability was admitted without delay, but the parties were initially unable to agree the amount of damages which Mr Seixo's motor insurers, Norwich Union should pay Mr Parker. The damages were eventually agreed at £120,000.00 and Mr Seixo's insurers agreed to pay Mr Parker's legal costs in addition. The parties were able to agree the amount of the legal costs, but not the amount of the insurance premium.
Mr Parker's solicitors had taken out on his behalf insurance to cover the risk of Mr Parker having to pay his own and Mr Seixo's costs. Liability had been admitted, so this was most likely to be in circumstances where Mr Parker did not beat Mr Seixo's "Part 36" offer, which could result in Mr Parker having to pay Mr Seixo's costs as well as his own from 21 days after the offer was made.
The accident took place on 23 August 2004. The "after the event" insurance policy with a stage 1 premium of £551.25 was taken out and became payable on 13 October 2004. A Letter of Claim was written on 19 October 2004 and shortly afterwards on 4 November 2004 liability was admitted. On 26 January 2007 the defendant was notified of the "after the event" insurance policy and the premium stages. The stage 1 premium covered costs from the start of the matter to service of the Defence or Judgment in Default. The stage 2 premium covered from service of the Defence until 28 days before trial. Proceedings were issued in August 2007 and served in September 2007. The defendant offered £75,000.00 in settlement of the claim on 6 November 2007. On 20 November 2007 a Defence was served admitting liability. The second stage premium of £9,555.00 thus became payable on service of the Defence, notwithstanding the Defence admitted liability.
The insurance policy in question was individually assessed and underwritten and the premiums were staged (rather than the premium being payable all at once) to reflect Mr Parker's exposure to litigation risk at any given time. Thus the premium was said to be calculated on the basis of bespoke individual risk underwriting.
Mr Seixo's insurers argued that the premium was "excessive, unreasonable and disproportionate". They pointed particularly to the discrepancy between the stage 1 premium and the stage 2 premium. The stage 2 premium was seventeen times as much as the stage 1 premium, in a case in which liability had been admitted. Mr Seixo's lawyers also referred to cases where the premiums had been much lower.
Master Wright decided that the Defendant's submissions were misconceived. It was not a case where the Court should (without the assistance of expert evidence) regard itself as better qualified than the underwriter to rate the financial risk the insurer faces. This was a high value claim where the premiums were individually rated and staged (quite properly). The claimant's solicitors had made the perfectly valid point that the claimant's risk of succeeding or failing to beat the defendant's offer of £75,000.00 during stage 2 was finely balanced because the claimant was still undergoing medical treatment and medical investigations when the offer was made and when the second stage premium was calculated.
The case shows the difficulty of challenging premiums which are individually calculated without the assistance of expert evidence. How likely is it that a paying party will be able to show that a premium set by an underwriter for a specific case was unreasonable? In this case, as was noted, Norwich Union had the resources and access to obtain such evidence had it chosen to do so. In other cases an uninsured defendant will have to pay for the expert evidence itself and in many cases the cost of expert evidence may be disproportionate. By contrast, legal expenses insurers will sometimes take on the risk and burden of recovering the premium themselves if contested rather than leave it to their insured. In addition, policies are now available which "wrap up" the premium so the claimant never actually pays the premium. The opponent pays it if the claim is successful. The legal expenses insurer pays if the case is lost. The premium is in effect self-insured.
Whilst personal injury cases can no doubt be complex, liability in commercial litigation is rarely as straightforward as a driver reversing into someone in a petrol station, possibly recorded on CCTV. In commercial disputes there is often a lack of independent witnesses and the issues can be complex. Despite Pre-Action Protocols encouraging early settlement, early admissions of liability in commercial disputes are relatively scarce with liability remaining in dispute as a bargaining chip until actual settlement. Defendants in commercial disputes are less likely to be insured than in road traffic / workplace accidents where liability insurance is mandatory.
Parker makes clear that nonetheless for Claimants who have strong cases, "after the event" legal expenses insurance is a very attractive option. Legal expenses insurers will generally only insure cases with good prospects of success (60% upwards), higher value cases where the costs are proportionate to the likely damages and a high degree of certainty that the defendant can afford to pay any award of damages and/or costs awarded against it at the end of the litigation and cases where the solicitors are also wiling to act on a conditional fee arrangement. Plans afoot to reform the costs system may abolish the recoverability of "after the event" insurance. There is no certainty that that will happen, but a sensible Claimant with a strong enough case should consider taking advantage of the "after the event" insurance market now available.If you have any questions about commercial litigation funding please contact John Mackle who is a senior associate in the Commercial Litigation Department at Clarion on 0113 336 3336 or at email@example.com or Clarion's head of costs Andrew McAulay on 0113 336 3334 or at firstname.lastname@example.org
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