4.1 The new funding regime for civil litigation involving the use of conditional fees and after-the-event insurance is still at an early stage of development with many uncertainties unresolved. These uncertainties have sparked litigation concerning issues such as the reasonableness and recoverability of success fees and insurance premiums, problems posed by the costs indemnity rule and the position of other forms of event-triggered fees at common law. These will each be examined in turn in this chapter.

Litigation on the recoverability of success fees and insurance premiums

Callery v Gray

4.2 The case of Callery v Gray,[1] decided by the House of Lords in 2002, is illustrative of the uncertainties encountered even in a straightforward personal injury claim arising from a traffic accident.

4.3 On 2 April 2000, Mr Callery was a passenger in a car driven by Mr Wilson, which was struck side-on by a vehicle driven by Mr Gray, who was insured by the Norwich Union. Mr Callery sustained minor injuries and instructed Amelans, solicitors who specialised entirely in personal injury litigation and processed such claims on a large scale. On 28 April 2000 he signed a conditional fee agreement (CFA) which provided for a success fee of 60%. On 4 May 2000 he took out an ATE insurance policy with Temple Legal Protection Ltd (“Temple”) for a premium of £367.50 inclusive of insurance premium tax. On the same day, Amelans wrote a standard letter of claim to Mr Gray, which he passed on to his insurers. On 19 May 2000, Norwich Union wrote back admitting liability. A medical report was obtained and on 12 July 2000 Amelans made a Part 36 offer to accept £3,010 and costs. On 24 July 2000, the Norwich Union made a counter-offer of £1,200. On instructions from Mr Callery, Amelans telephoned Norwich Union and agreed to accept £1,500 and reasonable costs. This was confirmed on 7 August 2000.

4.4 Amelans submitted a bill for £4,709.35 as legal costs and £350 for the ATE insurance premium. The parties were unable to agree on what constituted reasonable costs. The parties accordingly commenced costs-only proceedings pursuant to Civil Procedure Rules, rule 44.12A. The judge ruled that a success fee of 40% (instead of 60%) was reasonable and that both the success fee and the insurance premium were recoverable in costs-only proceedings.

4.5 The defendant’s insurers took the view that important points of principle were at stake with implications for personal injury litigants and insurers generally. Leave was obtained to argue the case before the Court of Appeal which dealt with the issues in two judgments.

4.6 The Court of Appeal[2] identified three main issues on the appeals: first, whether an ATE premium could be recovered in costs-only proceedings under rule 44.12A of the Civil Procedure Rules (“the jurisdiction issue”); second, the stage of a dispute at which it was appropriate to enter into (a) a conditional fee agreement and (b) an ATE policy (“the prematurity issue”); and third, the reasonableness of the claimant’s (a) success fee and (b) ATE premium (“the reasonableness issue”).

The jurisdiction issue

4.7 In relation to the jurisdiction issue, the Court of Appeal held that on a proper construction of section 29 of the Access to Justice Act 1999 and the Civil Procedure Rules, rule 44.12A, the ATE premium could, in principle, be recovered as part of a claimant’s costs, even where the claim had settled without the need for substantive proceedings. This point was not raised in the appeal to the House of Lords.

The prematurity issue

4.8 Given that both the success fee charged by the claimant’s solicitors and the ATE premium charged by the claimant’s insurers were to be paid by the defendant and/or his insurer, the defendant argued that the success fee and the cost of taking out ATE insurance should only be recoverable where sufficient information was available to form a reasonable prognosis of the risk involved in a claim. The defendant further argued that a claimant could not reasonably incur these liabilities until the reaction of the defendant to a claim was known and the merits of any defence raised had been considered. At that point, so the defendants argued, it would be apparent whether there was a risk that the claim might fail, which would make it reasonable to enter into a conditional fee agreement and take out ATE insurance, and then to assess the appropriate uplift and insurance premium having regard to an informed appraisal of the extent of the risk that the claim might fail. The defendant maintained that the appropriate time to obtain ATE insurance was at the end of the protocol period, (ie three months from the notification of the claim). The defendant pointed out that since over 90% of cases could be expected to settle (and might well settle) in the protocol period, the defendant should be given a fair chance to settle the case without incurring liability for additional costs.[3]

4.9 The claimants, on the other hand, contended that it was reasonable for a claimant to take out ATE insurance and enter into a conditional fee agreement when the claimant first instructed a solicitor to pursue his claim, so that the claimant need not be concerned that by giving instructions to the solicitor, he was exposing himself to liability for costs.[4]

Court of Appeal decision

4.10 The Court of Appeal held that, in modest and straightforward damages claims following road traffic accidents, it would normally be reasonable for a claimant to enter into a conditional fee agreement and take out ATE insurance cover when he first instructed his solicitor.[5]

Government policy

4.11 The Court of Appeal pointed out that the purposes of the new regime were: first, to facilitate access to justice on the part of those who could not afford the costs of litigation; and second, to reduce the burden of legal aid in relation to certain categories of case where it had previously been available.[6] It was an inevitable consequence of Government policy that unsuccessful defendants should be subjected to an additional costs burden. The Court of Appeal accepted that the new regime tended to remove from claimants the incentive to control costs, and hence the role of the court in administering the new regime was particularly important.[7]

Policy and practical considerations

4.12 The Court of Appeal further said that, although they saw the force of the defendant’s submission, the prejudice to the defendants was not as clear as was suggested and that it was outweighed by the legislative policy and by the following practical considerations:

“(i) If the new regime is to achieve its object, the legal costs of claimants whose claims fail should fall to be borne by unsuccessful defendants …. On these appeals the court has to decide whether to permit liability for success fees to be apportioned in relatively small amounts among many unsuccessful defendants, or to insist on an approach under which they will be borne in much larger amounts by those unsuccessful defendants who persist in contesting liability.

(ii) If the latter alternative is adopted, the defendants who contest liability will not share liability for costs in a manner which is equitable. Where there is a strong defence which it is reasonable to advance, a larger uplift will be appropriate than where a defendant unreasonably persists in contesting liability despite the fact that the defence is weak. Thus the more reasonable the conduct of the defendant, the larger the uplift that he will have to pay if his defence fails.

(iii) In relation to claims arising out of road accidents, where defendants will be insured, the same insurers will often be sharing the costs involved, whether in the form of many uniform small uplifts or fewer large uplifts.

(iv) So far as insurance premiums are concerned, these will produce cover which benefits the defendants, for they will ensure that costs are awarded against unsuccessful claimants and that such awards are satisfied.

(v) Defendant interests, with the assistance of the court, should be able to restrict uplifts and insurance premiums to amounts which are reasonable having regard to overall requirements of the scheme. In saying this we are contemplating a position where there will be adequate data to enable informed judgment of the amount of uplift and the size of insurance premiums that are reasonable in circumstances such as those before the court. We are well aware that that position has not yet been reached and that, on these appeals, we are faced with doing our best on very sketchy data. We have had particular regard to the fact that the representations and evidence submitted after the hearing have not been tested or analysed in the course of oral argument.

(vi) Claimants naturally want to know at the outset that a satisfactory arrangement to cover the costs of litigation has been made which provides sufficient protection for them, no matter what the outcome.

(vii) Claimants incur liabilities for costs to their legal advisers as soon as they give them instructions. Once a defendant starts to incur costs in complying with a protocol, the claimant will be exposed to liability for those costs if proceedings are commenced.

(viii) Solicitors and claims managers are anxious to be able to offer legal services on terms that the claimant will not be required to pay costs in any circumstances. This will assist access to justice.

(ix) There is the overwhelming evidence from those engaged in the provision of ATE insurance that unless the policy is taken out before it is known whether a defendant is going to contest liability, the premium is going to rise substantially. Indeed the evidence suggests that cover may not be available in such circumstances.”[8]

4.13 For these reasons, the Court of Appeal concluded that where, at the outset, a reasonable uplift had been agreed and ATE insurance at a reasonable premium had been taken out, these costs would be recoverable from the defendant if the claim succeeded, or if it was settled on terms that the defendant pay the claimant’s costs.

The House of Lords decision

4.14 Dissatisfied with the Court of Appeal’s decision, the defendant took the case before the House of Lords, whose decision was delivered in June 2002.[9] The House of Lords declined to interfere with the Court of Appeal’s ruling because it was pre-eminently the responsibility of the Court of Appeal, not the House of Lords, to supervise the developing practice of funding litigation by conditional fee agreements and ATE insurance. Since the House of Lords could not respond to changes in practice with the speed and sensitivity of the Court of Appeal, it should in general be slow to intervene in such a case, especially given the early stage in the practical development of the new regime, the sparsity of reliable factual material, the meagre experience of the market, the difficulty of discerning trends and the provisional nature of the Court of Appeal’s guidance to be reviewed in the light of increased knowledge and experience. It may be useful to set out some of the observations made by the House of Lords.

4.15 In relation to the prematurity issue, Lord Scott agreed:

“… with the Court of Appeal’s proposition that it is reasonable for a claimant to enter into a CFA with his solicitor at their first meeting and before the defendant’s reaction to the claim is known. … After all, the fees clock begins ticking as soon as a solicitor is instructed.”[10]

However, Lord Scott (dissenting on the prematurity issue) commented that it was not reasonable, in a cost assessment context, for a claimant to take out an ATE policy at a time when litigation was highly unlikely.[11]

4.16 Lord Scott said the Court of Appeal’s decision on the issue seemed to have been:

“based on the evidence placed before the court about the ATE insurance market and the Court of Appeal’s concern that unless premium recovery under costs orders were allowed in such commonplace, minimal risk cases as Mr Callery’s, the market in ATE insurance policies might wither.”[12]

Lord Scott said that whilst he would accept that the size of the premiums might rise if recovery of premiums was restricted to cases where there was a fair likelihood of litigation, he would certainly not be prepared to accept that cover would be unavailable.[13]

4.17 In fact, Lord Scott opined that the prematurity issue should not be judged by reference to arguments about the impact on the ATE insurance market. He said that:

“The correct approach for costs assessment purposes to the question whether an item of expenditure by the receiving party has been reasonably incurred is to look at the circumstances of the particular case. The question whether the paying party should be required to meet a particular item of expenditure is a case specific question. It is not a question to which the macro economics of the ATE insurance market has any relevance. If the expenditure was not reasonably required for the purposes of the claim, it would, in my opinion, be contrary to long-established costs recovery principles to require the paying party to pay it.”[14]

4.18 Lord Scott disagreed with the Lord Chancellor’s Department’s submission that “access to justice would be restricted if claimants could not insure against liability for costs from the point they instructed a solicitor.”[15] Lord Scott pointed out that there was “nothing to prevent claimants from taking out ATE policies as soon as they instruct a solicitor … he can do so but cannot then reasonably expect the defendant to pay for it.”[16]

4.19 Zander in his article[17] examined the case and pointed out that Lord Scott had a powerful argument. He also pointed out that in the subsequent Claims Direct Test Cases[18] Lord Scott’s dissenting view on the prematurity issue seemed to have been followed by Chief Costs Judge Master Hurst who said obiter that:

“Where an incident occurs, particularly a minor road traffic accident causing slight injury and where the liability insurer has from the outset accepted liability for the occurrence, it will generally be disproportionate and unreasonable to take out an ATE policy."[19]

Master Hurst, however, did not give reasons for apparently rejecting the “macroeconomic” considerations about the ATE insurance market in favour of Lord Scott’s views. Therefore, Zander believed it was difficult to be certain as to the significance of Master Hurst’s dictum and, until doubts were clarified by the higher courts, there would be continuing uncertainty. Another author[20] commented that Master Hurst’s obiter opinion was subsidiary to Callery, especially since no evidence on the issue was heard.

Reasonableness of the success fee

Court of Appeal decision

4.20 With regard to the issue of whether the amounts of the success fee and the ATE premium were reasonable, the Court of Appeal pointed out that there had not been any authoritative guidance from the higher courts as to the level of success fee which would be considered reasonable on an assessment of costs in litigation supported by a conditional fee agreement.[21] The difficulty is summarised by the Association of Personal Injury Lawyers (“APIL”):

“The court is faced with a difficult balancing exercise in setting guidelines for a new regime where there is little experience or published data to rely upon. Allowing success fees to be set too high compared to the risk being run will lead to inflation of fees paid to lawyers by the public who pay insurance premiums. But allowing them to be fixed too low compared to the risk being run will lead to lawyers only being able to take on the most certain cases and a denial of access to justice to some of the most vulnerable people in society.”[22]

4.21 The Court of Appeal stressed that any general guidance provided in the Callery v Gray case was given in the context of modest and straightforward claims for compensation for personal injuries resulting from traffic cases. The Court believed that it was reasonable to proceed on the premise that at least 90% of such claims would settle without the need for proceedings, or would succeed after proceedings had been commenced. After careful consideration the Court concluded that, where a CFA was agreed at the outset in such cases, 20% was the maximum uplift that could reasonably be agreed.

Two-stage success fee

4.22 Though the issue was not of direct relevance to the case, the Court of Appeal suggested that a two-stage success fee could be considered, so that a higher success fee would be applicable if the case did not settle. This would be subject to a rebate, however, if the case did in fact settle before the end of the protocol period. The Court of Appeal said that:

“a two-stage success fee would have the advantage that the uplift would more nearly reflect the risks of the individual case, so that where a claimant’s solicitor had to pursue legal proceedings, this would be in the knowledge that, although a significant risk of failure existed, the reward of success would be that much the greater. Where, on the other hand, the claim settled as a consequence of an offer by the defendant, he or his insurer would have the satisfaction of knowing that he had ensured that the success fee would be reduced to a modest proportion of the costs.”[23]

4.23 With regard to the risk that a two-stage success fee would encourage claimants’ solicitors to take claims beyond the protocol stage in order to benefit from the higher success fee, the Court of Appeal pointed out that such conduct would be prevented if the defendant had made a formal settlement offer, thus putting the claimant at risk as to costs.[24]

House of Lords decision

4.24 Lord Bingham observed that there was “obvious force in the appellant’s contention that even a 20% success uplift provided a generous level of reward for Mr Callery’s solicitors given the minuscule risk of failure.”[25] However, he believed that the House should not intervene because: first, the Court of Appeal had the responsibility for monitoring the developing practice on the issue and the House should ordinarily be slow to intervene; and second, the issue was at a very early stage in the practical development of the new funding regime, when reliable factual material was sparse, market experience was meagre and trends were hard to discern.[26]

4.25 Lord Nicholls agreed with the two reasons given by Lord Bingham and dismissed the appeal. However, he criticised the present state of the new funding arrangements for personal injuries claims as being unbalanced and unfairly prejudicial to liability insurers and motorists generally.[27]

4.26 Lord Hope and Lord Scott observed that the 20% success fee seemed unduly high for a low risk case, but declined to interfere.

4.27 Lord Hoffmann also declined to interfere, but made some telling observations on the issue of reasonableness of the success fee. He said that what in fact determined the success fee was what costs judges had been willing to allow in comparable cases. However, he doubted whether the courts had, or could have, the material on which to make sensible decisions. He further said that:

“ … The traditional function of the costs judge, or taxing master, as he used to be called, was to decide what fees were reasonable by reference to his experience of the general level of fees being charged for comparable work. But this approach only makes sense if the general level of fees is itself directly or indirectly determined by market forces. Otherwise the exercise becomes circular and costs judges will be deciding what is reasonable according to general levels which costs judges themselves have determined. In such circumstances there is no restraint upon a ratchet effect whereby the highest success fees obtainable from a costs judge are relied upon in subsequent assessments.

The matter becomes even more difficult when a solicitor ‘carrying on litigation business on a large scale’ is entitled, as the Court of Appeal have said, at p 2131, para 83, to fix success fees to ensure ‘that the uplifts agreed result in a reasonable return overall, having regard to his experience of the work done and the likelihood of success or failure of the particular class of litigation’. The costs judge has simply no way of knowing whether the solicitor is carrying on business on a large enough scale to justify such an approach, still less what level of success fees would give him a ‘reasonable return overall’. Such matters are traditionally outside the consideration of costs judges.”

4.28 Lord Hoffmann said that once a global approach designed to produce a reasonable overall return for solicitors was invoked, the court had moved away from its judicial function and into the territory of legislative or administrative decisions. Lord Hoffmann’s view was that it would be more rational to have levels of costs fixed by legislation.

4.29 Zander commented that:

“Lord Hoffmann’s speech exposed to public gaze the complete intellectual emptiness of the Court of Appeal’s approach to the fixing of success fees which has now been endorsed by the House of Lords. The whole business is based on strings and mirrors. There is nothing solid there at all.” [28]

It is small wonder, therefore, that the issue of the reasonableness of success fees in small straightforward claims was subject to review again shortly afterwards in Halloran v Delaney,[29] which will be discussed later in this chapter.

Reasonableness of the ATE premium

Court of Appeal decision

4.30 After considering a report by Master O’Hare on ATE premiums, the Court of Appeal in a later judgment, in Callery v Gray (No 2),[30] considered the defendant’s appeal against the amount of the insurance premium. The Court of Appeal dismissed the defendant’s contention that the insurance premium was unreasonably high for a simple passenger claim and gave the following opinion:

“When considering whether a premium is reasonable, the court must have regard to such evidence as there is, or knowledge that experience has provided, of the relationship between the premium and the risk and also the cost of alternative cover available. As time progresses this task should become easier. In the present case it is not easy as both data and experience are sparse … . In the circumstances, the amount of the premium does not strike us as manifestly disproportionate to the risk. We do not find it possible to be more precise than this. … The premium was one tailored to the risk and the cover was suitable for Mr Callery’s needs. The policy terms also had the attractive feature that they gave his solicitors control over the conduct of the proceedings on his behalf, without any involvement by a claims manager until a settlement offer was made. We have concluded that the court below was right to find that the premium was reasonable.”[31]

4.31 However, the Court of Appeal stressed that the judgment should not be treated as determining once and for all that a premium of £350 was reasonable in similar cases. The court said that as further information and experience about the market became available, then it would be possible to determine the reasonableness of insurance premiums on a sounder basis.[32]

House of Lords decision

4.32 Lords Bingham, Nicholls and Hope did not address the issue of the reasonableness of the ATE premium. Lord Hoffmann applied the same analysis as he had already directed to success fees. He referred to the ATE insurers’ claim that they could not obtain a reasonable premium income unless everyone took out insurance when they first instructed solicitors. This was the principle upon which some insurers delegated to solicitors the authority to issue policies. The Court of Appeal accepted these arguments and stated that “it is hardly surprising that delegated authority arrangements will only work successfully if the solicitor does not ‘cherry-pick’ by taking out ATE insurance only in risky cases.”[33] Lord Hoffmann, however, pointed out that when ATE insurance first made its appearance, the premiums had been much lower than current rates. With the present much higher premiums, it was an open question whether it was necessary to insist that all claimants take out policies in order to keep insurers in business.

4.33 Lord Hoffmann said that ATE insurers did not compete on the premiums charged; instead, they competed for solicitors who would sell or recommend their product by offering the most profitable arrangements. The only restraining force on the premium charged was the amount that the costs judge would allow on an assessment. Lord Hoffmann believed:

“… the costs judge has absolutely no criteria to enable him to decide whether any given premium is reasonable. On the contrary, the likelihood is that whatever costs judges are prepared to allow will constitute the benchmark around which ATE insurers will tacitly collude in fixing their premiums.”[34]

As the premiums were not paid either by the claimants who took out the insurance or by the solicitors who advised or required them to do so, market forces were insufficient to produce an efficient use of resources. Hence, regulation should be considered necessary.[35]

Comments on Callery v Gray

4.34 Zander has pointed out[36] that there was widespread agreement amongst the senior judiciary that the determination of costs was an area in total chaos. Despite that widespread concern, Zander believed that it was not likely that the Lord Chancellor would accept Lord Hoffmann’s suggestion that the Government should intervene to regulate success fees and ATE premiums.

Halloran v Delaney – from 20% success fee to 5%

4.35 This case[37] concerned a straightforward traffic accident in which the claimant entered into a Law Society model conditional fee agreement. The success fee was set at 40% of the basic charges, and ATE insurance was taken out at a premium of £840. The claim was settled save for costs, and costs-only proceedings were taken out. The parties subsequently agreed that the amount of the success fee and the ATE premium were recoverable. The sole item in dispute was the costs of the costs-only proceedings. The Court of Appeal held that on the true construction of the Law Society model conditional fee agreement, the “claim” for which it provided coverage included costs-only proceedings.

4.36 The Court of Appeal then went on to express its views on success fees. Lord Justice Brooke observed that in Callery v Gray,[38] the Court of Appeal had held that in a modest and straightforward claim for compensation for personal injuries resulting from a traffic accident 20% was the maximum uplift that could reasonably be agreed, unless there was any special factor that raised apprehension that the claim might not prove to be sound. Lord Justice Brooke believed it was time to reappraise the appropriate level of success fee and said that:

“… in simple claims settled without the need to commence proceedings, an uplift of five per cent on the claimant’s lawyers’ costs should be allowed (including the costs of any costs only proceedings which are awarded to them) unless a higher uplift was appropriate in the particular circumstances of the case. That policy should be adopted in relation to all [conditional fee agreements], however structured, which were entered into on and after 1 August 2001, when both Callery v Gray judgments had been published and the main uncertainties about costs recovery had been removed.”

4.37 Lord Justice Brooke recommended the development of the two-stage approach to success fees which had been discussed obiter in Callery v Gray. He said that:

“A success fee can be agreed which assumes the case will not settle, at least until after the end of the protocol period, if at all, but which is subject to a rebate if it does in fact settle before the end of that period. Thus, by way of example, the uplift might be agreed at 100%, subject to a reduction to 5% should the claim settle before the end of the protocol period.”[39]

Comments on Halloran v Delaney

4.38 There are uncertainties as to how the cases of Callery and Halloran can be reconciled. On the one hand, Halloran represents the latest decision on the level at which success fees should be fixed, bearing in mind that the Court of Appeal in Callery had stressed earlier that the figure of 20% was based on very limited data and that it would be desirable to review that figure when more data became available.[40] On the other hand, the 20% figure in Callery was approved by the House of Lords. The comments in Halloran were made without hearing evidence or receiving submissions on the level of success fees, and the court did not seek to distinguish Callery v Gray.

4.39 Mark Harvey[41] has suggested that the comments on the rebated 5% success fee should be treated as obiter, and not as forming part of the judgment.[42] He believed that Halloran was at best persuasive, and that Callery remained good law. He suggested that law firms should resist the imposition of a 5% rebated success fee. The courts would impose such a figure regardless of what was written in the conditional fee agreement if the courts wished to do so. However, he recommended that firms should seriously consider adopting a two-stage success fee, given that Halloran added support to the proposal put forward in Callery.

4.40 Greenslade[43] has observed, however, that Callery has not provided the hoped for general guidance and that further developments, perhaps including statutory intervention, can be expected in this field.

The effect of BTE insurance on the recoverability of ATE premiums

Sarwar v Alam – 2001

4.41 The Court of Appeal case of Sarwar v Alam[44] has highlighted the uncertainty as to whether an ATE premium would be recoverable from the paying party where there was “before-the-event” (BTE) legal expenses insurance which would have covered the liability for legal expenses.

4.42 Like Callery v Gray, the case concerned a claim by a passenger who had suffered minor personal injuries in a road traffic accident. However, the claimant, Mr Sarwar, was claiming against the driver of the car in which he was travelling as a passenger, and not against the driver of another car. The claim was settled for a comparatively small sum at an early stage without the need to institute legal proceedings. In costs-only proceedings under Civil Procedure Rules, rule 44.12A, the defendant’s insurer argued that the defendant’s motor insurance policy contained a provision for legal expenses insurance which might have covered a claim made by a passenger in the insured’s car against an insured driver. It was therefore unreasonable for the claimant to recover the £350 premium for ATE insurance from the defendant.

4.43 The case is of importance to insurers generally. BTE insurers believe that if BTE is available for small motor accident claims, the claimants should use it instead of incurring the extra cost of an ATE premium. ATE insurers, however, are worried that if they lose business to BTE insurers, their premiums may have to rise, or they may go out of business altogether.[45]

4.44 Both the district judge and the judge on appeal held that the BTE insurance was available to the claimant, Mr Sarwar, and disallowed the cost of his ATE premium. The Court of Appeal, however, allowed the claimant’s appeal. Lord Phillips of Worth Matravers MR observed that for a relatively minor personal injuries claim arising out of a road traffic accident:

“if a claimant possesses pre-existing BTE cover which appears to be satisfactory for a claim of that size, then in the ordinary course of things that claimant should be referred to the relevant BTE insurer.”[46]

On the other hand:

“in larger cases, or those which raised unusual or difficult issues, it would usually be appropriate for a claimant to elect to purchase an ATE – based funding arrangement in preference to invoking a BTE policy, unless it could be shown that the latter was capable from the outset of providing what they described as a bespoke service adequate to the nature of the claim.”[47]

4.45 The Court of Appeal noted that the terms of the BTE policy entitled the insurers to the full conduct and control of the claim or legal proceedings, and that they were entitled to appoint a legal representative where they regarded it as necessary. The insured person could choose an alternative legal representative only where he decided to commence legal proceedings or where there was a conflict of interest. In that event, any dispute as to the choice of legal representative or the handling of a claim would be referred to an independent arbitrator.

4.46 The Court of Appeal disagreed with the judge and considered that it was not incumbent on a passenger to rely on a defendant driver’s BTE cover. The Court of Appeal accepted the submission of the Motor Accident Solicitors’ Society which observed that a claimant could not be expected to rely on a BTE policy held by his opponent to fund his litigation. The Society added:

“… there are obvious concerns as to conflict of interest in any case where a defendant is being sued via his own policy of insurance. … Where liability is disputed, the defendant may very well have a strong personal motivation in resisting the claim (payment of an excess; loss of no-claims bonus; a stiff-necked refusal to accept the possibility that he drove carelessly …). Moreover, it is probable that many claimants would feel uneasy in entrusting the conduct of their claim to the insurer of the opposing party, and would distrust its advice where adverse to their private expectations. Justice should be seen to be done, and the rules of court should support a claimant who elects to fund his claim from a source which is not only neutral and objective, but is seen to be so.”[48]

4.47 It was held that representation arranged by the insurer of the opposing party, pursuant to a policy to which the claimant had never been a party, and of which the claimant had no knowledge at the time it was entered into, was not a reasonable alternative where the opposing insurer reserved to itself the full conduct and control of the claim.[49] Hence, the ATE premium was held to be recoverable from the defendant in this case.

Sarwar v Alam – 2003

4.48 The case was brought before the court again in 2003[50] and was heard by a Costs Judge, Master Rogers. The claimant was prepared to settle for £2,250 damages, but the claimant’s bill of costs for £255,745.30 was disputed by the defendant. The Costs Judge decided in favour of the defendants that the costs appeared on their face to be disproportionate and the “necessary test” laid down by Lord Woolf LCJ in Home Office v Lownds[51] had to be applied. The issues raised at the further hearing included:

(a) whether the ATE premium of £62,500 for £125,000 cover was a reasonable sum, and

(b) whether the claimant’s success fee of 100% was reasonable.

4.49 The court considered Times Newspapers Ltd v Keith Burstein,[52] Ashworth v Peterborough United Football Club Ltd[53] and other cases, and came to the conclusion that, although the premium was high, it was unlikely that the claimant’s advisors could have obtained an alternative lower rate. The claimant’s solicitors adduced to the court the correspondence which showed the difficulties of obtaining insurance cover, and a “tailor-made” insurance policy was likely to attract a substantially higher premium than a standard policy. Master Rogers remarked that “Law and practice were in a state of flux and insurers were understandably reluctant to commit themselves to a large potential liability.” Hence, Master Rogers held that the full amount of the insurance premium was recoverable.

4.50