Insurance in Litigation
We have tried to demonstrate throughout this book the pervasive nature of insurance both in commercial life and in the development of the substantive law of obligations. In this chapter we turn to the effects of insurance on litigation and the enforcement of rights. Although the issues here might be thought to be exclusively procedural, they are far from that; inevitably, procedure spills over into substance and affects the way in which claims are framed and how they are defended.1 Here, insurance has the capacity to influence the development of private law across a very broad spectrum. Our goal is to use an examination of legal provisions and reforms which govern, enable, and respond to the role of insurers in litigation, to indicate quite how deep and wide the influence of insurance is in shaping the process of claiming both in detail, and in general terms.
We begin by analysing the role played by insurance in assisting the claimant in financing a claim, through the mechanisms of Before the Event (BTE) and After the Event (ATE) insurance. Insurance will feature at the earliest stage in the consultation between claimant and solicitor: the Solicitors Regulation Authority Code of Conduct 2011, General Principle IB1.1.6, demands that a solicitor discusses ‘how the client will pay, including … whether the client has insurance that might cover the fees’. BTE insurance is long-standing, and provides cover against the risk that the assured will become engaged in litigation during the currency of the policy and incur costs in doing so. ATE insurance developed comparatively recently, and provides cover for the costs of bringing (and, less commonly, defending) a specific claim. ATE insurance was given a significant boost when it was included in the scheme for the private market replacement for the removal of legal aid from the majority of cases under the Access to Justice Act 1999. Under the 1999 Act ATE insurance worked in tandem with the modification of the laws of champerty, by allowing lawyers to take cases on a ‘no win, no fee’ conditional fee basis and allowing them to uplift fees in the event of success (conditional fee agreements, or CFAs). The new structure fed existing fears that a ‘Compensation Culture’ was developing fuelled by lawyers paid by results and by insurance companies funding actions ranging from strong to hopeless, leading to a dramatic increase in both litigation and its cost. Jackson LJ addressed the question of legal costs in his Review of Civil Litigation Costs published in December 2009,2 as subsequently implemented in part by the Legal Aid, Sentencing, and Punishment of Offenders Act 2012 to remove the worst excesses. Since the implementation of the Jackson recommendations, certain objectionable aspects of BTE insurance are removed and the use of ATE will inevitably diminish significantly.3
We then turn to the impact of the defendant’s liability insurance upon the manner in which the claim is made and its defence. This involves some explanation of the role of insurers in defending or funding the defence of claims brought against the assured.
Finally, we explain the operation of the Third Parties (Rights against Insurers) Act 1930, which converts liability insurance into a mechanism for the enforcement of judgments and which plays a vital role in the enforcement of judgments by transferring claims under the policy to the victim in the event of the assured’s insolvency.
The inevitable point from all of this is that insurance can be seen to have a profound influence not just on the nature and limits of the defendant’s liability, but also on the way in which that liability is established and, ultimately, satisfied.
13.1.2 Impact of insurance on litigation planning
Any decision to initiate judicial or other proceedings against a defendant rests upon two variables: is there a cause of action against the defendant; and is the defendant good for any damages that may be awarded? The second question may to some extent be discounted where the defendant is either of substantial means or is required to insure, but outside those situations the defendant’s insurance position is frequently the starting point of the inquiry. There is, after all, no point in undertaking expensive inquiries into the circumstances giving rise to a loss if a fruitless outcome is inevitable. Obtaining insurance information from a potential defendant is not, however, a possibility recognized by English procedural law. CPR 31.17 permits a party to litigation to seek disclosure from a third party, but only where such disclosure ‘is necessary in order to dispose fairly of the claim or to save costs’. In a preliminary skirmish to the Buncefield litigation, West London Pipeline and Storage Ltd v Total UK Ltd,4 David Steel J held that this formulation did not extend to obtaining insurance information to determine whether or not a claim should be brought. An earlier decision to the contrary, Harcourt v FEF Griffin,5 was disapproved, and it is now generally assumed that the restrictive interpretation of CPR 31.17 is the correct one. Insurance information is available only once the wrongdoer has become insolvent and a claim can be made against the insurers under the 1930 Act, which is typically after proceedings have been commenced against the wrongdoer.
Awareness that the wrongdoer does possess insurance is only of partial assistance to the victim. A number of other considerations are relevant here.
First, the insurers may have one or more defences under the policy, any of which may deprive the assured of an indemnity and thus the victim of a source of funds, a possibility which may not become apparent until the victim has incurred a good deal of expenditure in pressing the claim. Even if the wrongdoer has become insolvent, the victim has no basis for a claim against the insurers under the 1930 Act.
Second, the wrongdoer’s liability policy will make provision not just for the payment of damages but also for the payment of the costs incurred by the wrongdoer in conducting his defence of the proceedings, and if there is a single combined aggregate limit of indemnity rather than separate sub-limits for each head, the victim may find that the policy has been exhausted by legal costs by the time that a judgment is obtained.
Third, the victim must take care to frame the cause of action in terms which are covered by the class of policy that the wrongdoer is likely to possess. There is conflicting authority on the question whether a victim, who has obtained judgment against an assured by pleading a cause of action which ultimately proves to be excluded from the assured’s cover, is estopped in a claim against the insurers under the 1930 Act from putting forward an alternative—and insured—cause of action on which judgment could have been given had it been raised at the outset.6 Particular danger arises where the victim satisfies a court of illegal conduct or fraud on the part of the wrongdoer, as that will be fatal to indemnity under the policy,7 and it will not be open to the victim to assert in subsequent proceedings against the insurers under the 1930 Act that judgment could have been obtained against the wrongdoer on other grounds and that the finding of fraud was erroneous.8 So arguing fraud against a defendant whose only real asset is liability insurance is a self-defeating exercise.9
13.2.1 Legal expenses (BTE) insurance
Before the Event (BTE) insurance (also referred to as LEI) provides cover against the costs which may be incurred in bringing legal proceedings.10 Those costs may be substantial. A successful claimant will generally be granted an order requiring the defendant to bear its own costs and to pay those of the claimant, but it is almost inevitable that the claimant will still be out of pocket to some extent where, as is almost always the case, standard rather than indemnity costs are awarded.11 An unsuccessful claimant will be required to bear his or her own costs and those of the defendant, a possibility which is a clear deterrent to engaging in litigation. Jackson LJ undertook detailed research into BTE insurance, and his May 2009 Preliminary Report and December 2009 Final Report contain invaluable information on its scope, practicalities, and potential defects.12
Unlike After the Event (ATE) insurance, BTE insurance does not relate to known existing disputes, but rather applies to claims which may arise in the future. This type of cover is available to businesses as a stand-alone product where it may be wide ranging or confined to particular matters (for example, tax and employment), although the take-up rate, particularly by small businesses, is low. That contrasts dramatically with the domestic market. BTE insurance is generally included as an add-on to domestic householder and motor policies, increasingly is offered as one of the packaged benefits attached to bank accounts, and is a traditional benefit of trade union membership. Post-Jackson research by Consumer Focus13 has shown that some 36 million BTE policies were written in 2008, with a premium value of £447 million, and that 25 million households were insured, 15 million by way of add-on to household cover. Some 18 million people also had BTE cover under their motor policies. This plethora of different sources, and particularly packaging with other products, makes value comparisons somewhat difficult. BTE insurance is however relatively cheap, and a premium of around £25 can purchase cover of up to £100,000, although there may be lower limits for particular classes of claim. BTE typically supports actions against motorists, employers, suppliers, medical practitioners, and neighbours, although matrimonial and mental health disputes are normally excluded.
BTE insurance appears to be underutilized, and the research by Consumer Focus has shown that many domestic holders are unaware of its existence. However, the importance of BTE insurance where it is utilized is undoubted. Some 53 per cent of successful claimants studied indicated that, but for BTE, they would not have proceeded at all. BTE insurance facilitates claims that would not otherwise be possible. Looking forward, it has been argued that it could offer the key to access to justice for many potential litigants.14 This underlines that in the shift from public to private funding of litigation, insurers hold the key.
Coverage disputes under BTE policies are comparatively rare. Typical wording triggers liability where the claim by the assured has ‘reasonable prospects of success’, and in case of doubt there is generally a mechanism for a definitive opinion to be obtained from counsel. The real problem with BTE insurance is the inherent conflict of interest where the insurer is both the BTE provider for the claimant and the liability insurer of the defendant. To overcome this problem, the EU’s Legal Expenses Directive 1987,15 implemented in the UK by the Insurance Companies (Legal Expenses) Regulations 1990,16 requires a BTE insurer to allow the assured to appoint his or her own lawyer17 whenever a conflict of interest arises and in any event as soon as proceedings have been commenced. BTE insurers generally have their own panel of solicitors, charging fees negotiated with the insurers, but the assured cannot be forced to appoint a member of the panel and has an absolute entitlement to go elsewhere. The overriding nature of that right was emphasized by the CJEU in Eschig v UNIQA Sachversicherung AG,18 where the assured was one of several thousand policyholders who wished to initiate proceedings against the same defendants for losses arising from investments, and was held to be entitled to appoint his own lawyers even though insurers had unsurprisingly insisted upon the consolidation of legal representation.
A distinction is nevertheless to be drawn between restriction on free choice of lawyer and limitations on the amount payable under the policy if the assured opted for a nonpanel lawyer. As to the former, in Brown-Quinn v Equity Syndicate Management Ltd19 the Court of Appeal struck down, as inconsistent with the Regulations, policy terms which: (a) reserved the right of the insurers to refuse (albeit only in exceptional circumstances) the assured’s initial choice of solicitor; and (b) automatically terminated cover if the assured, having initially appointed a panel solicitor, chose to transfer the case to another solicitor. The insurers were indeed condemned for using terms which were plainly at odds with the Regulations. The Court of Appeal did, however, accept that insurers were entitled to cap their liability for legal fees at the hourly rates charged by panel solicitors, unless the assured could produce evidence that the rates were inadequate to the extent that it rendered the right of free choice of solicitor meaningless.
The Jackson Preliminary Report of May 2009 identified two forms of BTE cover: the most common form, BTE1, where the insurers pay solicitors to act for the assured when a claim arises; and BTE2, where insurers will ‘sell’ to solicitors any claims which arise, the solicitors paying referral fees and handling the claim on some form of CFA. The conclusion in Chapter 8 of the Jackson Final Report was that BTE insurance was on balance beneficial, given its ability to promote access to justice at a comparatively low cost to the assured, and that costs tended to be lower than in claims supported by ATE and CFAs. Accordingly, positive efforts should be made to encourage the take-up of BTE insurance as an add-on to householder’s policies and also by small and mediumsized enterprises. Jackson did not recommend any restriction on BTE2 itself, but effectively sounded its death knell by recommending a prohibition on the payment of referral fees by insurers and rendering success fees charged by solicitors as part of CFAs irrecoverable by way of costs. Those recommendations were implemented by the Legal Aid, Sentencing and Punishing of Offenders Act 2012, ss 56-60 (as regards referral fees for death and personal injury claims) and s 44 (as regards success fees).
13.2.2 After the event (ATE) insurance
126.96.36.199 Rise and fall
ATE insurance provides ad hoc funding for individual claims as and when they arise. It is most commonly used in personal injury cases, but in principle it is available for any case in which damages may be awarded to the claimant: that qualification is essential, because ATE insurance is ultimately funded by defendants by way of costs. In essence, payment of the ATE premium is deferred until the outcome of the proceedings. The policy will meet a costs order against the assured if the claim is lost, and if the claim is won then the premium for the ATE policy is paid by the defendant by way of costs. So ATE has the advantage for the assured that it is costless. When it is coupled with a CFA between the assured and his or her solicitors, under which they agree to act on a ‘no win, no fee’ basis but with an uplift in the form of a success fee which will ultimately be payable by the defendant if the assured is successful, then the assured has no concerns about having to meet even his or her own costs.
An ATE insurer will enter into an agreement with a solicitor, generally in terms of a floating facility, under which the solicitor may apply for ATE insurance cover in respect of any claim referred by a client. There will typically be two criteria for the provision of assistance: that damages of a specified minimum amount are awardable; and that there is a better than evens chance that the claim will succeed. If the solicitor confirms that these criteria are satisfied,20 the assured will enter into an ATE contract with the insurers. Credit is granted for the premium. At the same time the assured will, almost inevitably, enter into a CFA with the solicitors. Those solicitors may well have their own insurance covering lost fees in the event that the claim is defeated. The solicitors may also provide the assured with a guarantee that he or she will not face any liability for costs, covering the possibilities that the ATE insurers may withdraw cover, deny liability, or avoid the policy. If the guarantee is called in and the insurers’ actions are found to have been unjustified then the solicitors will have a restitutionary claim against the insurers on the basis that they have under legal obligation satisfied the debt owed by the insurers.21 Once the policy has been issued, the insurers are not concerned with the day-to-day running of the case, although there are generally policy provisions which require them to be informed of any significant developments in the case.22
The key to ATE is the recoverability of the premium by way of costs. The Access to Justice Act 1999, s 29, conferred statutory authority for judicial discretion to include in any costs order ‘an amount in respect of the premium’23 of a policy taken out in ‘those proceedings’.24 In every case the test for recovery is whether the premium was reasonably incurred, which requires the court to consider: whether the case was one appropriate for ATE funding;25 whether the claimant had cheaper BTE insurance available to him;26 whether the policy was taken out at an appropriate time in the course of the proceedings;27 and whether the amount of the premium was reasonable in the sense that it was individually calculated by reference to the risk faced by the insurers.28 If the reasonableness criteria are satisfied, there is no automatic bar to recovery simply because the ATE premium is large in comparison to the amount sought.29
Unsurprisingly, much of the Jackson Report is devoted to the combined effect of ATE insurance and CFAs. There was conflicting evidence on the impact of ATE insurance on unmeritorious claims: some suggested that they were promoted, others argued that ATE insurance acted as a filter. Jackson LJ accepted that there were instances of tactical use of ATE as a means of pressurizing the defendant to settle,30 although he found others where the amount of the ATE premium paid by the claimant inhibited a settlement.31 Evidence was also given of cases where the ATE premium was close to the amount of the claim itself, and, given that the premium typically ranged between 30 per cent and 50 per cent of the level of costs insured, a high ATE premium can lead to costs becoming far higher than the claim. The Report concluded that costs had become disproportionate and excessive, and that both ATE premiums and CFA success fees should no longer be recoverable from defendants by way of costs. The clinching factor was expressed as follows:32
The flaw in the present regime is that it is not targeted upon those who merit such protection. Any person who finds a willing insurer can take out ATE insurance, whether that person is rich or poor, human or corporate, deserving or undeserving. Furthermore, the protection which a claimant derives from ATE insurance is total. The claimant is not required to make a modest contribution towards adverse costs . . . even if he can afford to do so.
The Jackson Report’s preferred approach to protecting claimants against adverse costs orders was the adoption of ‘one-way costs shifting’, under which an unsuccessful claimant would generally not be ordered to pay the costs of the defendant, although the system would be qualified in a number of respects: (a) a costs order could be enforced if the claimant proved to be the wealthier party; (b) costs might be awarded against a claimant who refused to accept an offer of settlement33 and failed to beat it in the proceedings; (c) the principle would not extend to commercial, construction, and similar litigation, given that the parties would generally be in a contractual relationship the symmetry of which should not be upset; (d) professional negligence and householder claims should be excluded, as claimants can protect themselves against adverse costs orders by way of BTE insurance. Qualified one-way costs shifting (QOCS) would thus be confined to personal injury cases and to other situations in which there was some asymmetry in the parties’ relationship, such as ‘claimants in housing disrepair cases, claimants in actions against the police, claimants seeking judicial review and individuals making claims for defamation or breach of privacy against the media’.34
188.8.131.52 ATE insurance post-Jackson
The government accepted the Jackson proposals. Reform came into effect on 1 April 2013. The Legal Aid, Sentencing and Punishment of Offenders Act 2012, s 46, modifies the Access to Justice Act 1999, s 29, by removing the reference to ATE premiums, so that they are rendered irrecoverable other than in two exceptional cases. The first is where the proceedings are for clinical negligence and the claim is for more than £1,000, the insurance covers the risk of liability to pay for an expert medical report, and the premium does not exceed that part of the premium which relates to the risk of