BEFORE-THE-EVENT INSURANCE

Quality without compromise 79 Marlowes Hemel Hempstead Hertfordshire HP1 1LF England PO Box 764 Wellington 7654 Western Cape South Africa In association with van Wyk Fouchee Incorporated Cape Town South Africa www.underwoods-solicitors.co.uk BEFORE-THE-EVENT INSURANCE See Kerry s blog at: kerryunderwood.wordpress.com Underwoods Solicitors is a trading name of Law Abroad plc Registered in England: Number 3384650 Registered Office: 79 Marlowes, Hemel Hempstead, Hertfordshire HP1 1LF PO Box 764, Wellington 7654, Western Cape, Republic of South Africa A list of directors is open to inspection at the registered office Freephone 0800 298 4 298 info@lawabroad.co.uk Authorized and regulated by The Solicitors Regulation Authority under number 522884

2 BEFORE-THE-EVENT INSURANCE Before-the-Event insurance is a type of insurance policy taken out before the occurrence of the events which give rise to the litigation, as compared to After-the-Event insurance where the occurrence of the events giving rise to the litigation has already taken place. Of course in both instances it is, as with all insurance, a future event which is in truth being insured and that future event is the outcome of the litigation and not the event which gave rise to the litigation. Cover in respect of the legal expenses involved is sometimes provided as part of policies such as public liability, employer s liability, and, commonly, motor insurance. Cover can also be provided under a policy which stands alone and is not ancillary to any form of liability insurance. With the abolition of recoverability of After-the-Event insurance premiums enacted by Section 46 Legal Aide, Sentencing and Punishment of Offenders Act 2012 it is possible that Before-the-Event insurance, especially of the stand-alone variety, will become more important and more popular. No doubt partly in anticipation of this development the issue of the right of a client to choose his or her own solicitor has again come before the courts. In (1) Brown Quinn (2) Webster Dixon LLP v (1) Equity Syndicate Management Ltd and (2) Motorplus Ltd [2012] EWCA1633

3 the Court of Appeal examined in detail the law concerning the right to choose one s own lawyer under a legal expenses policy. Article 4 of Council Directive 87/344 EEC provides: 1. Any contract of legal expenses insurance shall expressly recognise that: a) Where recourse is had to a lawyer or other person appropriately qualified according to national law in order to defend, represent or serve the interests of the insured person in any inquiry or proceedings, that insured person shall be free to choose such lawyer or other person. b) The insured person shall be free to choose a lawyer or, if he so prefers to the extent that national law so permits, any other appropriately qualified person, to serve his interests whenever a conflict of interests arises. 2. Lawyer means any person entitled to pursue his professional activities under one of the denominations laid down in Council Directive 77/249/EEC of 22 March 1977 to facilitate the effective exercise by lawyers of freedom to provide services. This Directive has been superseded by Insurance Directive 2009/108/EEC, in which Articles 198-205 provide for legal expenses insurance in the same terms. The 1987 Directive was transposed into English Law by the Insurance Companies (Legal Expenses Insurance) Regulations 1990 and the equivalent of the old Article 4 is Regulation 6 which provides: Freedom to choose lawyer

4 6 (1) Where under a legal expenses insurance contract recourse is had to a lawyer (or other person having such qualifications as may be necessary) to defend, represent or serve the interests of the insured in any inquiry or proceedings, the insured shall be free to choose that lawyer (or other person). (2) The insured shall also be free to choose a lawyer (or other person having such qualifications as may be necessary) to serve his interests whenever a conflict of interests arises. (3) The above rights shall be expressly recognised in the policy. The insurers operated a system of panel solicitors whereby solicitors agreed to charge either a fixed hourly rate or a total fixed fee irrespective of the importance or complexity of the work or of the experience or qualifications of the person carrying out the work. The insurers also had a system of standard terms of appointment for non-panel solicitors providing for hourly rates of between 125 and 139. If an insured person wished to appoint a non-panel solicitor then the insurer would only agree to that appointment and be responsible for the fees if the solicitor agreed to the standard terms of appointment, including those hourly rates. The non-panel solicitors have sought a declaration that the insurers were bound to pay their fees at their hourly rate up to the limit of the insurance. In two of their conjoined cases the clients wished to move from the panel solicitors to the same firm of non-panel solicitors, Messrs Webster Dixon, but the insurers refused to pay them anything and they sought a declaration that the insurers were bound to continue to support their cases. The

5 solicitor at Webster Dixon had dealt with the cases all along as he had moved from the panel firm originally dealing with them. At first instance the High Court held that the non-panel rates were relevant as a comparator, but not as a starting point and that any assessment should take in to account the availability of other suitable firms of solicitors charging less than Webster Dixon and that the following should also be taken into account: (a) the location of the chosen solicitors compared to the panel solicitors; (b) their specialisation and qualification for taking on the claim; (c) the complexity of the claims; (d) the importance of the claim to the client; (e) the substance and strength of the proposed defendant to the claims; and (f) the nature of the work to be carried out, e.g. whether it was appropriate to be conducted by a senior solicitor or partner of the firm. Such an assessment would be neither an ordinary assessment taking account of those matters relevant to costs under the Civil Procedure Rules, nor an assessment adopting the non-panel rates as a starting point.

6 The judge held that a claimant who reasonably instructed a non-panel solicitor in the middle of a case was in the same position as a claimant who instructed such a solicitor from the outset. The Court of Appeal set aside the High Court order and granted a declaration that the defendants were bound to pay the non-panel rates, but no more. Thus the law is that a client has freedom of choice of solicitor, but will only recover the non-panel rates determined by the insurer. Thus the non-panel solicitor must either settle for those rates or charge the insured client the extra, that is the difference between the non-panel rate and their actual charging rate. The Court of Appeal based its decision on Paragraph 33 of the judgement of the European Court of Justice in Stark v DAS Oesterreichische Allgemeine Rechtsschutz Versichergung A.G (2011) Case c-293/10, which reads: 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 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 or administrative authority with jurisdiction to deal with a 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 representation by the insured

7 person. In any event, it is for national courts to determine whether or not there is any such restriction. The Court of Appeal held that there was no evidence that the rates offered were so insufficient as to render the insured s freedom of choice meaningless. The Guideline Rates for Summary Assessment were of no relevance. The Court of Appeal took the opportunity to launch a savage attack on the before-the-event insurers involved stating (paragraph 8) The facts of this case have revealed that the insurers exhibit an insouciance to their obligations under the Directive and the Regulations which leaves one quite breathless. The Regulations (and the Directive) make it entirely clear that the insured s freedom to have the lawyer of his choice is to be expressly stated in the contract made with the insured. What the contracts in the present case provide in General Condition 2.3 is almost the opposite At Paragraph 13 the Court of Appeal said: It is very difficult to view all this conduct as the conduct of a reasonable and responsible insurers and that it viewed the insurer s behaviour with distaste. And finally at Paragraph 33 It is quite wrong that, despite the warning shot delivered to legal expenses insurers by this court in Sarwar v Alam [2002] 1 WLR 125 para 44, insurers should many years later be issuing policies which

8 do not comply with the Regulations, General Conditions 2.3 and 5 are in breach of the Regulations in the ways I have explained and must be either deleted or comprehensively re-drafted. [Regulation 5 provided, illegally, If an appointed representative refuses to continue acting for you or if you dismiss an appointed representative, the cover we provide will end at once, unless we agree to appoint another appointed representative. Regulation 2.3 provided, illegally, If we agree to start legal proceedings and it becomes mandatory for you to be represented by a lawyer, or there is a conflict of interest, you can choose an appointed representative by sending us the suitably qualified person s name and address. We may choose not to accept the choice of representative, but only in exceptional circumstances. If there is a disagreement over the choice of appointed representative, another suitably qualified person can be appointed to decide the matter. Before you choose a lawyer, we can appoint an appointed representative. ] (a) Gaynor v Central West London Buses Ltd In Gaynor v Central London Buses Ltd [2006] EWCA Civ 1120, [2007] 1 All ER 84, [2007] 1 WLR 1045, the Court of Appeal held that conditional funding arrangements confined to initial investigations are recoverable. Ms Gaynor consulted solicitors following an injury sustained on the defendant s bus. Liability was admitted and judgment in default entered and damages were agreed and set out in a consent order

9 which provided that the defendant should pay the claimant s costs to be assessed if not agreed, on the standard basis. Costs were not agreed. The solicitors retainer letter said: If your claim is disputed by your opponent and you decide not to pursue your claim then we will not make a charge for the work we have done to date. The defendant argued that this retainer was void as it breached the Conditional Fee Agreement Regulations 2000 (the CFA Regulations 2000 SI 2000/692) (since repealed). The matter ended up in the Court of Appeal which allowed the costs saying: Advising a client as to whether he or she has a good prima facie case and writing a letter of claim are not enough to amount to litigation services. (para 17). This approach is consistent with the statutory purpose of protecting clients. A client who, having received limited pre-litigation services, decides not to pursue a claim by litigation has no need for the panoply of protection afforded by section 58(3) of the 1990 Act. In my view, it was not intended by Parliament that this statutory regime should apply to agreements to provide such limited services. Gaynor agreements are potentially useful for clients who have before-the-event (BTE) insurance but wish to instruct non-panel solicitors. Under reg 6 of the Insurance Companies (Legal Expenses) Insurance Regulations 1990, SI 1990/1159, freedom of choice kicks in where proceedings are initiated, so Gaynor agreements pre-issue, CFA with BTE thereafter.

10 (b) Hutchings v The British Transport Police Authority In this case, Hutchings v The British Transport Police Authority [2006] EWHC 90064 (Costs), the Senior Costs Judge Peter Hurst considered the extent to which a defendant can enquire of the claimant s solicitor s enquiries into the existence or otherwise of BTE insurance. The facts: The claimant injured his back when acting as a police sergeant and this necessitated his early retirement. He sued his employers for their failure to provide adequate protection from aggressive prisoners. The claimant entered into a CFA with a 75% uplift on 5 February 2001. Proceedings were issued later on but the claimant did not serve any notice of funding. The claim was eventually settled for just over 82,000.00. When the claimant submitted his bill of costs, the defendant challenged it with detailed CPR Pt 18 requests for information. The claimant objected. The District Judge refused all of the defendant s extensive Pt 18 requests on the grounds that they constituted a blatant fishing expedition of the kind previously deprecated by the Court of Appeal in Garrett v Halton Borough Council; Myatt v National Coal Board [2006] EWCA Civ 1017, [2007] 1 All ER 147, [2007] 1 WLR 554. It was generally acknowledged that the original number and range of the defendant s original requests breached the Brooke LJ s dicta on adopting a qualified approach and it also infringed his injunction against making unnecessary costs challenges set out in Hollins v Russell [2003] EWCA Civ 718, [2003] 4 All ER 590, [2003] 1 WLR 2487. By the date of the appeal seven of the 13 questions had been abandoned. The claimant s solicitors did not do themselves any favours either when they failed to serve a notice of funding in Form N251, or otherwise to comply with the CPR Practice Direction on Costs, Paragraph 19. C argued the KU v Liverpool City Council [2005] EWCA Civ 475, [2005] 1 WLR 2657, (2005) Times,

11 16 May, point i.e. that Practice Directions have no legislative force (see paragraph 35 of Hutchings). The decision: The defendant s appeal (in seeking leave to present a more limited list of six questions) was upheld in part. The defendant was permitted by the Court of Appeal to put the following three simple questions by way of CPR Pt 18: (1) Does the claimant have insurance? (2) With whom? (3) Does the claimant have any legal expense insurance? Comment: The judgment does not preclude the defendant from raising additional questions later on at detailed assessment. The requests permitted and subtly different to those prescribed by the Costs Practice Direction, paragraph 19.4(3) within Form N251. Information to be provided in Form N251 as prescribed by the Practice Direction. Where the funding arrangement is an insurance policy, the party must state the name and address of the insurer, the policy number and the date of the policy, and must identify the claim or claims to which it relates (including Part 20 claims if any). Although the claimant s CFA was covered by the CFA Regulations 2000, certain obiter inferences can also be gleaned (e.g. at para 47) which are of relevance to the new CFA regime (post-dating November 2005), namely that the defendant is still entitled to put reasonable and proportionate

12 questions about the funding arrangements but that a successful challenge will only be relevant to the success fee and insurance premium, not the claimant s entitlement to any costs, as under the old regime. In a fixed success fee case, it will only be the insurance premium which is at risk see Wetzel v KBC Fidea [2007] EWHC 90079 (Costs). (i) Further observations on Hutchings Further observations on Hutchings: A defendant is entitled to the funding information provided by the protocol and will secure a Part 18 request for that information and may even succeed with additional requests, provided they are reasonable and proportionate. Claimant practitioners should stick to their guns and resist fishing expeditions designed to trap them into divulging breaches of the rules or the CFA Regulations 2000. Arguably this ruling is confined to those cases where C has failed to serve a Form N251. It reveals the likely reasoning of an influential costs judge in future costs challenges featuring post November 2005 CFAs. (c) Lewis James White v Mark Peter Revell In Lewis James White v Mark Peter Revell (8 September 2006, unreported), QBD, Master Wright, costs judge, held that a verbal inquiry of an articulate professional as to the existence of BTE insurance was sufficient to discharge the duty under the CFA Regulations 2000, reg 4(1) and 4(2)(c). The defendant challenged the enforceability of the claimant s costs under the old CFA Regulations (now repealed but still applying to old cases) on the basis that the claimant s solicitors had merely asked the claimant whether he had BTE insurance and made no further enquiry before entering into

13 a CFA. The claimant said that he did not have such insurance but it was established that he had previously undertaken other litigation using his BTE policy. The court held that the steps that a solicitor need take to discharge the duty under reg 4(2)(c) were neither rigid nor exhaustive. On the facts of this case, the claimant s solicitors had discharged his duty by simply asking the claimant whether he had any pre-existing legal costs insurance. The fact that the claimant was a well-educated professional was relevant. Each case would depend upon its facts. (d) Puksis v Brumby and Woolley v Haden Building Services Ltd In Puksis, [2008] [2008] EWHC 90095 (Costs), v Brumby and Woolley v Haden Building Services Ltd, [2008] EWHC 90097 (Costs), the courts again had cases before them relating to alleged material breaches of reg 4(2)(c) and (e) of the CFA Regulations 2000. Regulation 4(2)(c) requires a solicitor to make adequate inquiries as to the existence of BTE insurance, and reg 4(2)(e) requires a solicitor to inform his client if he has an interest in recommending a particular insurance policy. In both cases the judges held that the solicitors had done enough to avoid a material breach of the regulations even though there was no attendance note recording any conversation about the solicitor s interest in the insurance policy he recommended in Puksis, and in spite of the solicitor s decision in Woolley not to check the client s household policy for legal expenses insurance but to rely on the client checking it. (e) Bray Walker Solicitor (a firm) v Silvera In Bray Walker Solicitor (a firm) v Silvera [2008] EWHC 3147 (QB), [2008] All ER (D) 210 (Dec), the High Court held that solicitors were not under a duty to investigate legal expenses insurance as an

14 alternative to conditional fees in a claim brought by an experienced businessman. Here, Mr Silvera claimed that he was not liable to pay the law firm s fees as they had failed to explore legal expenses insurance as an alternative to conditional fees in breach of the regulations. The court said that there was no reason to believe that the costs of the litigation could be met under an existing contract of insurance and that the law: does not require detailed inquiry into something that there is good reason to believe does not exist, particularly in the cases of an experienced businessman who approaches the solicitor for a conditional fee agreement because he takes the view that there is no other way of funding future legal costs after he has litigated a substantive claim in the UK without the benefit of insurance and that is the source of his predicament. This was not a case of purchase of a product by credit card, or a dispute arising out of risks that are normally or regularly insured such as motor accidents or home contents insurance. There was no membership of a trade association or union that might have proved a relevant avenue to explore. If the client or context suggests that the litigation costs might be covered by a pre-existing policy of insurance entered into directly or indirectly there is a clear duty to investigate the matter with appropriate scrutiny. Law firms did not necessarily breach the CFA Regulations 2000 by failing to advise on legal expenses cover, nor need they advise on after-the-event insurance. The case is also noteworthy for its comments on defendant insurance companies (paragraph 43):

15 Defendants often resist the payment of any legal costs let alone a success fee by reference to some breach of the requirements of the regulations, even though there has been honest, competent and successful conduct of a claimant s case under a CFA. At paragraph 68 the court, quoting from Hollins v Russell [2003] EWCA Civ 718, [2003] 4 All ER 590, [2003] 1 WLR 2487, thought it necessary to remind everyone that: The court should be watchful when it considers allegations that there have been breaches of the regulations. The parliamentary purpose is to enhance access to justice and not to impede it, and to create better ways of delivering litigation services, not worse ones. These purposes will be thwarted if those who render good service to their clients under the CFAs are at risk of going unremunerated at the culmination of the bitter trench warfare that has been such an unhappy feature of the current litigation scene. This decision has been upheld by the Court of Appeal and is reported at Silvera v Bray Walker Solicitors and Others [2010] EWCA Civ 332. In Rita Tranter v Hansons (Wordsley) Limited [2009] EWHC 90145 (Costs) the claimant was injured in a bus accident and the solicitors were unaware of the possibility of the bus company having beforethe-event insurance for its passengers, and so failed to enquire or advise in relation to it. In fact bus companies normally have such insurance. The court held that the conditional fee agreement was unenforceable as the failure to enquire or advise was a material breach of Regulation 4(2)(c) of the now-repealed Conditional Fee Agreement Regulations 2000.

16 (f) Trade union members and BTE insurance In Peel v Beasley [2007] EWHC 90094 (Costs), the court considered whether it was reasonable for a trade union member to instruct solicitors acting for union members under a collective CFA where the union member also had BTE insurance. The court was a powerful one at this level, consisting of the Designated Civil Judge for Leeds, a Regional Costs Judge and an assessor. The court noted that it would be cheaper for the defendant if the claimant used the BTE insurance as there would be no success fee and no section 30 national insurance premium. It also noted that as the claimant would not have to pay anything either way in purely financial terms, it was equally advantageous to her to use the union or the BTE insurers. It then said (paragraph 66): In the broader scheme of things, the question is whether it was reasonable to seek the assistance of the union rather than take the BTE route (which would cost the paying party less). The court s emphatic answer was that it is always reasonable for a union member to seek the assistance of the union. The reasons, and the strong language used, are significant. In the broader scheme of things, it is generally more advantageous that the claimant should proceed with the assistance of her union, it can help finance less satisfactory cases; but the point made by Mr Bare [solicitor for the claimant] is that the use of the union-funded personal injury claims is immensely advantageous to claimants and has been held to be so since as long ago as the 1920s. Generally speaking, the union-funded arrangement is advantageous to a claimant. It is entirely reasonable for the claimant to avail herself of the union s assistance in this type of case for the simple reason that she was not bound to take too much account of costs to the defendant,

17 and it was reasonable in the first instance for her to seek the assistance of her union and the solicitor regularly used by the union. It was, in short, entirely reasonable to take that course. I would find it difficult to envisage any circumstances where a union member would be regarded as unreasonable to have gone to the union. Just because it is cheaper to the paying party does not make it the only choice and I have no doubt that the claimant made a reasonable choice. BEFORE-THE-EVENT INSURANCE AND WASTED COSTS The abolition of recoverability of the success fee and After-the-Event insurance premia and the abolition of legal aid may lead to an increase in before-the-event insurance, and therefore an increase in applications under section 51 of the Senior Courts Act 1981 for wasted costs orders against legal expense insurers. Such cases are generally fact sensitive, but three leading Court of Appeal cases given guidance on the topic. In Murphy v Youngs Brewery [1997] 1 WLR 1591 the BTE insurers provided over up to 25,000 in favour of an unsuccessful claimant in a wrongful dismissal claim. The successful defendants were refused a wasted costs order for the costs of the action over and above that limit of 25,000. The Court of Appeal relied on the fact that the insurers had exercised

18 no control over the litigation and also referred to public policy considerations in not making insurers liable in excess of their contractual liability. In Chapman v Christopher [1998] 1 WLR 12 the insurers were primary liability insurers rather than just legal expenses insurers and had the sole conduct and direction of the defence and knew from the outset that the claimant s claim exceeded the limit of their indemnity. The indemnity limit of 1 million was used up in settlement of the claimant s successful damages claim. The Court of Appeal ordered the insurers to pay the claimant s costs, holding that the test was whether the features of the case were extraordinary in the entire range of litigation that comes to the courts. Here the court found that the features were extraordinary, the key point being the total control of all aspects of the litigation by the insurers. In Cormack v Excess [2002] Lloyd s Rep IR 398 the Court of Appeal summarized the law and said that the concept of exceptionality was fixed by the two Court of Appeal cases referred to above, but expanded on what circumstances are likely to constitute such exceptionality. The Court of Appeal said that key point is whether the insurers conduct of the action was sufficiently self-motivated to the exclusion of the defendants interests to justify a section 51 order, but that that was not the only indicator of exceptional circumstances.

19 It was also necessary to have regard to the reasonableness and good faith of the insurer in its involvement of the insured and its responsiveness to his interest and concerns.