The reasonableness (or otherwise) of a pre-1 April 2013 after the event (ATE) premium which a winning party seeks to recover from a losing party in litigation is often a contentious issue, particularly in lower value claims.
A robust decision last month held that such premiums must relate to the costs exposure they purport to cover. The judgment should prove helpful to those seeking to challenge what they perceive to be disproportionately high premiums.
One of the main Jackson reforms to affect civil litigation which came into force in April 2013, was the abolition of the recoverability of after the event (ATE) insurance premiums and success fees in conditional fee agreements (CFAs) from the losing (paying) party.
This applies to ATE policies and CFAs entered into after 1 April, save in relation to a few select classes of cases. Where the ATE policy or CFA was entered into before 1 April, losing parties will continue to be liable to pay what can sometimes appear to be unreasonably large premiums and success fees.
The reasonableness of the levels of ATE premiums sought to be recovered by successful claimants is a recurring theme in many payment protection insurance (PPI) mis-selling cases. The decision in one such case, Kelly v Black Horse Ltd, might provide lenders with some ammunition when challenging such premiums.
The facts of the case
In Kelly, following the trial of a fully defended PPI claim, the court made a finding of unfair relationship under s140B of the Consumer Credit Act 1974. Damages were awarded to the claimants and Black Horse was ordered to pay 70% of the claimants' costs. The costs included both a success fee and ATE insurance premium which had been entered into pre-1 April 2013.
The detailed assessment hearing was before Senior Costs Judge Master Hurst. The amount of the ATEinsurance premium was one of the main points in dispute.
The insurance policy covered adverse costs (i.e. Black Horse's costs should the claimants lose) and the claimants' own disbursements. The premium for the policy was £15,900. At the detailed assessment hearing, Black Horse's costs were said to be £5,837.10 and the claimants' disbursements were £1,406.20. The insurer's potential costs liability was therefore £7,243.30, less than half the premium paid. The premium was also significantly more than the damages recovered by the claimants, being just over £11,000.
Black Horse argued that the premium was disproportionate.
Master Hurst carefully considered a number of authorities dealing with challenges to premiums - Rogers v Merthyr Tydfil County Borough Council, Motto & Ors v Trafigura (both his own and the Court of Appeal's decision) and Redwing Construction Ltd v Wishart.
The main considerations extracted by Master Hurst from these authorities were:
- Historically, judges had been uncomfortable in accepting challenges to the reasonableness of the level of ATE premiums as it was considered, as per the decision in Rogers, that district judges and costs judges did not have the expertise to judge the reasonableness of a premium except in very broad brush terms and that the viability of the ATE market would be imperilled if they regarded themselves (without the benefit of expert evidence) as better qualified than the underwriter to rate the financial risk the insurer faced.
- However, the basic costs rules and practice about reasonableness and proportionality apply so that to the extent that the premium is unreasonable or disproportionate, it should be disallowed, at least on a standard assessment basis. The premium should also be linked to an assessment of the risks and the prospects of success in the litigation.
- A formula known as the "burn" premium (being the risk of paying out times the exposure) had been applied in calculating the ATE premium in Motto (and other cases). That method of calculation was not argued as flawed when the matter subsequently went before the Court of Appeal.
In Motto, the "burn" premium was explained as follows:
- 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 then applied to the exposure multiplicand - this risk multiplier is ascertained in the same way as a success fee, namely by dividing the chance of losing by the chance of winning.
- This basic figure therefore represents the pure "burning cost" of the insurance (i.e. the break even cost excluding the costs of overheads or any profit).
- The basic figure is then adjusted to include an allowance for overheads, marketing and brokerage costs and profit.
- That provides the overall risk multiplier which is then applied to the exposure multiplicand to derive the net premium.
- Insurance premium tax (IPT) is then applied to produce the overall figure.
The parties' arguments
Black Horse argued that the "burn" premium method of calculation should be used in this case to which 10% brokerage and 15% profit should be added. Using the figure of £7,243.30 (the insurer's potential liability) and the risk of paying out as found by Master Hurst (being 35%), the premium figure should be £3,168.95.
The claimants urged that the broad brush approach referred to in Rogers be applied.
Master Hurst found the premium to be wholly disproportionate. No evidence had been produced to show what information had been given to the ATE insurers to enable them to rate the policy. He found that the risk assessment made when calculating the success fee for the CFA (which was itself reduced from 100% to 53.85%) had been entirely meaningless and therefore he assumed that the insurers were not given accurate information from which to calculate the premium.
Master Hurst held that, at the outset, neither the claimants nor their insurer would have known of the full extent of their exposure as they would not know the defendant's costs. By applying the "burn" premium formula argued for by Black Horse to the actual premium charged of £15,000, the insurers must have been told that the anticipated costs of the defendant were in the region of £20,000. A more reasonable costs prediction would have been £7,000. Together with the claimants' own disbursements, that would produce a potential exposure of £8,406 which in turn would produce a premium of £3,677.63.
Applying the broad brush approach then as a cross check, given the absence of evidence from the claimants as to the reasonableness of the premium, Master Hurst considered it would be reasonable for the defendant to pay 25% of the premium claimed, £3,750. This figure compared favourably to the "burn" premium formula. Including IPT, Master Hurst allowed the claimants a figure of £3,975 for the premium.
This is one of relatively few authorities on the appropriate level of ATE insurance premiums. It challenges the generally held view that an ATE premium can only be challenged if the paying party can adduce expert evidence which is notoriously difficult to obtain in this field.
The decision will be helpful to those hoping to challenge the level of the premium. In the absence of compelling evidence as to how the premium was calculated, the court should be encouraged to apply the "burn" premium formula as the appropriate starting point to ensure the premium properly reflects the insurer's costs exposure.
For those on the receiving end of a challenge to the premium, the availability and production of contemporaneous evidence is essential to demonstrate that the premium was proportionate and so recoverable. This evidence needs to show what information was given to the insurer, that it was accurate and that it was reasonable for the insurer to rely upon it in calculating the premium.