1. Standard terms in liability insurance policies
1.1 Co-operation clauses
It was commented in Chapter 10 that liability policies generally contain co-operation clauses whereby the insured undertakes, inter alia, not to admit liability or to offer settlement of a claim without first obtaining the insurers’ consent. Such a clause will also commonly go on to reserve to the insurer the right to take over and conduct in the name of the insured the defence or settlement of a claim. The nature of this type of term was considered in Terry v Trafalgar Insurance Co Ltd.31 The claimant, who was involved in a motor collision with a third party, apologised to him at the scene of the accident and later that day wrote admitting liability. The claimant’s policy with the defendant insurers contained the following clause: ‘No liability shall be admitted or legal expenses incurred nor any offer promise or payment made to Third Parties without the Company’s written consent.’ This was described in the policy as a condition precedent to the liability of the insurers. Initially, the claimant sought to settle with the third party but upon being informed that the damage to the vehicle was more severe than was first appreciated, he sought to claim on his insurance. The insurers denied liability. The claimant argued first, that the policy condition was contrary to public policy insofar as it tended to cause the insured to lie about what happened, or at least conceal the truth; and secondly, that the condition was subject to the implication that no liability should be admitted if it was to the prejudice of the insurers.
[T]his is a fanciful argument; the condition does not require the insured to lie, but to refrain from admissions of liability. There is a world of difference between giving a factual account of what happened, without giving any expression of opinion as to blame, and an admission of liability. This is and has been for many years a standard condition of motor insurance policies, and in my view it is clearly a necessary and proper one for the protection of insurance companies.32
With respect to the claimant’s second contention, the judge held that whether the condition should be read as being subject to any proviso as to prejudice, the insurers were, in any case, certainly prejudiced by the claimant’s admission of blame: ‘[B]y his letter, written within hours of the accident, the defendants were shut out from any negotiations, and deprived of a possible chance of a favourable settlement.’33
Where the insurers choose to exercise the right to defend or settle a claim,34 they can dictate the way in which the action will be pursued provided they act bona fide in ‘the common interest of themselves and the insured’.35 Thus, although the solicitor appointed to conduct the case owes a duty of care to the insured,36 nevertheless where, in accordance with the terms of the policy, the insurers give tactical instructions to the solicitor, the insured cannot complain.37
Liability policies can also contain co-operation clauses in relation to the provision of information.38 If the clause fails to specify a time limit for the insured to provide information, it is an implied term that the information will be provided within a reasonable time. The issue that has been litigated is that of what constitutes a reasonable time.
In Shinedean Ltd v Alldown Demolition (London) Ltd and Axa Insurance plc,39 ADL was employed as contractors by Shinedean to carry out demolition and excavation work at a residential property in 2002. In doing so, a neighbour’s wall partially collapsed. Shinedean satisfied the claim for damages from the neighbour and then brought proceedings against ADL for the increased costs of their development. Shinedean obtained a default judgment against ADL, who had gone into liquidation, in 2004. In the same proceedings the claimants also claimed against the contractors’ insurers a declaration that they were entitled to an indemnity under the contractors’ indemnity insurance policy pursuant to the Third Parties (Rights Against Insurers) Act 1930. There was a requirement, in ADL’s insurance policy with Axa, that the insured must deliver to them all such proofs and information relating to the claim as might reasonably be required and to tender all necessary information and assistance to enable Axa to settle or resist a claim. It took more than two years for the contractors to supply Axa with the relevant information. The question for the courts was whether the insurers were entitled to deny that indemnity, on the basis that the contractors had failed to provide them with information within a reasonable time.
At first instance40 it was held that since the insurers had not suffered any material prejudice on account of the delay, then it could be regarded that the information was given within a reasonable time, therefore meaning that the insurers were obliged to indemnify. On appeal, May LJ, in upholding the insurers’ appeal, stated that there was no absolute principle which included or excluded material prejudice as a consideration that was relevant to the determination of a ‘reasonable time’. Instead, he advocated a broader test:
[E]ach case turns on its own facts but there is no determinative principle that a duty on the insured to provide relevant information within a reasonable time will not be broken if, in the end, it turns out there is no prejudice to insurers. Insurers are entitled to know where they stand, and under this policy Axa were entitled to receive the information in good time, whether they were in the end prejudiced by failure to achieve this or not.41
Thus it was easy for May LJ to conclude that to have provided the relevant information nearly two and a half years late, particularly when it was available much earlier was ‘obviously unreasonably late’.42 There has also been litigation in relation to the effect of an arbitration clause in a policy which provided that any dispute between the insured and the insurer in respect of the insurer’s liability in respect of a claim was to be referred to arbitration within nine months of the dispute arising and, that if it was not referred to arbitration within that period, then the claim was deemed to have been abandoned. In William McIlroy Swindon Ltd v Quinn Insurance Ltd,43 the claims arose under a liability policy issued by the defendant insurer, Quinn, to a building and roofing contractor called A Lenihan Limited. By judgments dated 12 August and 17 December 2009, Lenihan was held liable to indemnify the claimants (WMS) for causing a fire at a building in 2006. Lenihan sought indemnity for the claim under its liability policy but Quinn denied coverage on the ground that Lenihan had breached certain policy conditions and therefore took no part in the actions brought against Lenihan. Accordingly, the judgment against Lenihan was not satisfied and shortly afterwards it went into voluntary liquidation. WMS subsequently brought a claim directly against Quinn, pursuant to the Third Parties (Rights Against Insurers) Act 1930. Quinn contended that by virtue of the requirement in the arbitration clause that all disputes were to be referred to arbitration within nine months of a dispute arising. This nine-month clock started to tick from the time it informed Lenihan that coverage was denied, and as no proceedings had commenced within that time frame, there was a contractual time bar and WMS’s claim was bound to fail. On the contrary, WMS argued that a person insured under a liability policy such as this one has no right of action against his insurer unless and until his liability to a third party has been established. Accordingly, they submitted that no dispute can arise within the meaning of the arbitration clause until this has happened. If this submission was correct, then the nine-month time bar had no application and WMS was entitled to pursue its claims against Quinn.
After dealing with the preliminary issues that the clause was intended to provide an exclusive remedy44 and it had been effectively incorporated into the policy,45 Edwards-Stuart J turned his attention to the contentious issue of when the dispute arose within the meaning of the arbitration clause. After considering the arguments of all the parties, he stated that:
[A]s a matter of ordinary language, once Lenihan had notified Quinn of a claim under the policy in respect of a potential liability to any third party and Quinn had notified Lenihan that it was refusing indemnity, there was a dispute between Lenihan and Quinn in relation to Quinn’s liability to indemnify Lenihan within the meaning of General Condition 16 [the arbitration clause].46
Edwards-Stuart J recognised that while the Post Office47 case cited by the claimants established that until the liability of the insured has been established, and the amount of that liability ascertained, the insured cannot sue the insurer for a particular sum of money by way of indemnity, this does not prevent the insured from seeking declaratory relief where it alleges that the insurer is in breach of contract. Here, Lenihan considered that it was entitled to indemnification in respect of any liability it might incur and, when it discovered that Quinn had no intention of granting such indemnity because Lenihan had been in breach of certain policy conditions, it had the right to refer that dispute to arbitration under the arbitration clause.48 Edwards-Stuart J went on to say that the liability under the policy arose at the latest by the end of February 2009, so that any arbitration should have commenced before the end of November 2009; as no such dispute had been referred to arbitration, it was no longer open to Lenihan, and therefore the claimants under the 1930 Act, to pursue any claim against Quinn.
1.2 The insurer’s duty of good faith in the settlement process
The respective interests of the insured and the insurer with respect to the settlement of third party claims was considered in Distillers-Bio-Chemicals (Australia) Property Ltd v Ajax Insurance Co Ltd.49 The case arose out of the thalidomide scandal of the 1970s in which drugs prescribed to pregnant women containing thalidomide caused severe physical damage to their unborn foetuses. It was alleged that Distillers were negligent in their failure to detect the side effects of the drug before releasing it for prescription. Distillers, who had public liability insurance with Ajax, wished to settle with the third parties who had commenced an action against the company in negligence. Ajax, however, refused to consent to this and also declined to conduct the company’s defence. It was held by the High Court of Australia that Ajax could refuse its consent without incurring liability.
Stephen J observed that in relation to the question of whether to settle with a third party, the interests of the insured and the insurer are often tangentially opposed. While the insured will wish to settle the claim at any figure provided it is within the policy limits, the insurer may wish to use the deterrent of protracted litigation in order to negotiate a relatively low settlement figure. Where the third party’s case is strong and a damage award above the sum insured is likely, the urgency of settlement will become a matter of paramount concern to the insured. Against this, the insurer’s financial interest will be best served by seeking to avoid liability to indemnify altogether. In this situation it will not wish to exercise the right to defend the claim and by withholding its consent to a settlement, the insurer may well procure a breach of condition should the insured go ahead and settle without first obtaining the insurer’s consent. Given the vulnerable position of the insured, the judge stressed that the insurer’s power to prevent a settlement cannot be used arbitrarily but must be ‘exercised in good faith having regard to the interests of the insured as well as to its interests and in the exercise of its power to withhold consent the insurer must not have regard to considerations extraneous to the policy of indemnity’.50
Thus, if the third party’s case is strong and it is likely to succeed in any ensuing litigation, the insurer should not unreasonably withhold its consent to a settlement within the policy limits. Where consent is refused but the insured nevertheless negotiates a reasonable settlement figure with the third party, the insurer will be liable to indemnify him. But if the third party’s case is weak and the insured seeks to settle in order, for example, to avoid damaging publicity, the insurer’s refusal to grant its consent may, in the circumstances, be justified.
Subject to the requirement of good faith, an insurer can settle a claim without the insured’s approval.51 As far as is possible, the insurer should seek to settle within the limits of the sum insured and, in any case, should not reject an offer of settlement which falls within the policy limits. So far, the English courts have not been called upon to consider the position where an insurer has refused to settle for a sum within the policy limits and the third party has gone on to recover damages greater than the sum insured. It has been argued that the insurer would be in breach of its duty of good faith and so would, in any case, be liable to indemnify the insured for the full amount.52 Against this, it may be countered that on a strict view of the typical policy, an insurer is not bound to settle or take over the insured’s defence and so its maximum liability should be limited to the sum insured.
1.3 Waiver and estoppel
Where an insurer decides to exercise its right to take over and conduct the defence or settlement of a claim on behalf of the insured, it does not necessarily follow that it will be estopped from subsequently avoiding liability because, for example, it discovers that the insured is in breach of warranty or has failed to disclose a mateial fact.53 In order for estoppel to operate in this context two conditions must be satisfied: first, that the insurer’s conduct in taking over the defence of the claim amounted to an unequivocal representation that it was liable on the policy; and secondly, it must be shown that the insured acted upon the insurer’s representation. There is dicta to the effect that simply defending the insured does not necessarily estop the insurer from subsequently denying liability, the reason being that the insurer’s conduct is not in itself unequivocal. In Soole v Royal Insurance Co Ltd,54 Shaw J stated that:
[T]he assumption of control of the proceedings is equivocal. It does not necessarily imply a representation by the insurers that they regard the claim which is the subject matter of those proceedings as one which must give rise to a liability to indemnify the insured. It indicates no more that it appears that it may give rise to such liability. Hence the insurers would not be estopped from asserting that the particular claim was, in the event, never within the ambit of the policy.55
But if, on the other hand, the insurer has knowledge of the insured’s breach prior to defending him, the insured may be able to assume that the insurer has waived the breach.56
2. After the event (ATE) Insurance
As is well known, legal aid was withdrawn from many personal injury cases in the 1990s, and it was replaced by two alternative mechanisms. Firstly, section 58 of the Courts and Legal Services Act 1990, under which it became lawful for the first time for lawyers to enter into conditional fee arrangements with clients, allowing for an uplift in fees in the event of success; and secondly, section 29 of the Access to Justice Act 1999,57 under which an insurance premium paid by the claimant to insurers for the purchase of cover to indemnify him for his own costs and the cost of the defendant in the event that his claim against the defendant was not successful become recoverable by way of costs from the defendant if the case was won—this is known as ATE insurance.
The essential elements of the funding of personal injury claims in relation to ATE insurance are as follows. ATE insurers enter into an arrangement with panel solicitors under which a potential claimant would have his claim vetted and, if it were deemed likely that the claimant’s action would succeed, the insurer would then administer an ATE policy. The claimant enters into a conditional fee agreement with his lawyer, under which no fee is paid unless the claim is successful—hence the term ‘no win no fee’. The claimant does not have to pay out for the premium on the ATE policy but rather he is given a bank loan to pay it—if the claimant wins his action, the policy will not be triggered and the losing defendant will be required to pay the claimant’s costs, including the cost of the premium.58 However, if the claimant loses the action, then the policy will be triggered and the insurers will pay any costs in favour of the defendant as well as the claimant’s disbursements and the amount of the premium for the policy. Thus, the effect of the insurance is that the loan is repaid should the claimant’s action not succeed.
The growth in these policies has generated a mass of complex litigation relating to a range of things including the reasonableness of the premium, the conduct of solicitors, and the role of insurance in providing a fund to indemnify an unsuccessful claimant against litigation.
2.1 The reasonableness of the premium
As has been mentioned above, section 29 of the Access to Justice Act 1999 permits the court to award the amount of an ATE premium to a successful claimant. In addition to this, parts 43.2 and 44.3B of the Civil Procedure Rules (in conjunction with section 11 of the Costs Practice Direction) provide, in general, that insurance premiums are recoverable by way of costs in so far as they are reasonable.
One issue that has been litigated on is whether it is legitimate for the amount payable by way of the premium to include an amount for the risk of being unable to recover the premium as a consequence of losing the action. It was held in Callery v Gray (No 2)59 that there is ‘no reason, in principle, why this should not form part of the cover provided under insurance that falls within section 29, provided always that any part of the premium attributable to it is reasonable in amount’.60
In Rogers v Merthyr Tydfil County Borough Council,61 the Court of Appeal considered the issue of whether a three-stage premium could be regarded as reasonable. Here, the 11-year-old claimant was injured when he fell over in a local park in Merthyr Tydfil, and was cut by shards of glass embedded in the timber edging of the play area. The district judge found the defendants liable and awarded the claimant £3,105 plus interest. In relation to costs the sum of £16,821.30 was ordered to be paid, which included an ATE premium of £5,103, being £4,860 premium plus insurance premium tax (IPT). The defendants appealed against that order and the judge reduced the costs to £12,628.30, including a reduction of the recoverable ATE premium to £900. It appears that the judge was influenced by the fact that the insurer was using an ATE policy with a three-stage premium: £450 was payable at the start, a further £900 when proceedings were issued, and a further £3,510.60, days before the trial. The judge found that the staged premium could not justify the wholly excessive charge that was made, particularly given the fact that other companies in the market were charging much less than £1,800 for the whole proceedings.
The questions on appeal to the Court of Appeal included:
(i) What is the proper approach to proportionality in a small personal injury case where the ATE premium may appear large in comparison with the amount of damages reasonably claimed?
(ii) What is the proper approach to evidence of reasonableness of the choice and of the amount of the ATE premium in such cases?
(iii) Are both staged (or stepped) premiums and single premiums for ATE insurance legitimate for the purposes of the recoverability of an ATE premium by a successful claimant, and is it reasonable that such premiums should be wholly or partially block-rated?62
The Court of Appeal reinstated the original costs awarded by the district judge and the points of principle were answered as follows. In relation to the proportionality of the costs compared to the damages awarded, Brooke LJ stated that, ‘If the court concludes that it was necessary to incur the staged premium, then … it should be adjudged a proportionate expense.’63 Thus it can be concluded that the fact that the premium is large when compared to the amount of damages awarded will not necessarily render the premium disproportionate. On the issue of whether the premium was necessary, Brooke LJ first held that there was no objection in principle to the existence of a staged premium,64 and secondly that, as compared to policies of a similar nature, the amount of the premium was not unreasonable in the present case. In conclusion, Brooke LJ stated that ‘it is quite impossible to say that a total premium of £4,860 was unreasonable’,65 particularly given the fact that the insurers were at risk of having to pay out £6,500, and even more so because ‘it was not fixed at a sufficiently high level to … provide a contribution to the insurer’s reasonable overheads and profit’.66
Despite the apparent success for the insurers in this case, in an annex, Smith LJ expressed her concerns about the operation of this system, particularly the fact that it means that ‘there is very little incentive for solicitors to look for the best value in ATE insurance’ because the ‘client will never have to pay the premium regardless of the outcome’.67 Furthermore, she expressed worry over the fact that ATE premiums are set on the basis of a high expected failure rate at trial, and concluded: ‘I do not think it was the intention of Parliament that would-be claimants should be able to litigate weak cases without any risk whatsoever to themselves.’68
In Redwing Construction Ltd v Wishart,69 Akenhead J made it clear that the key consideration to take into account when looking at whether ATE insurance premiums are reasonable, and therefore recoverable, is the level of risk facing the parties when such arrangements are entered into:
It must be a reasonable presumption that premiums are linked to an assessment of risks and the prospects of success in the litigation. The premium which can be allowed on a costs assessment can be adjusted downwards to reflect the fact that at the time when the insurance was entered into the prospects of success were good or high.70
On the facts of the case, which involved a summary assessment of costs, Akenhead J stated that, on the face of it, the premium for the ATE insurance ‘was very high for a case which at the time it was arranged … Redwing was likely to be a substantial winner.’ Furthermore he stated that a premium of £8,480 for cover of £20,000 appeared ‘substantially excessive’.71 Accordingly, he concluded that, whilst one can understand why a claimant might well want the safety net of such insurance, the risk of losing was sufficiently low to undermine the reasonableness of imposing anything near 100% of it to the paying party in the case; thus he took the view that it would only be reasonable to make the other party pay 20% of the premium. He added that ‘a wholly unrealistic assessment of risk was made to justify the imposition of a premium of some 42% of the insured amount’.72 The judgment makes it clear that in future the court will ‘think long and hard’ about the actual risk involved in such litigation and will seek to guard against claimants using ATE insurance as a ‘commercial threat to defendants’.
2.2 Do solicitors owe a duty of care to insurers?
In Greene Wood McLean LLP v Templeton Insurance Ltd (No 2),73 Cooke J explored the relationship between ATE insurers and the solicitors appointed by the assured to bring the claim, and held that solicitors do not owe any duty of care to the insurers. Here, Templeton issued ATE policies to the clients of GWM—miners, who were taking action against the Department of Trade and Industry for compensation for respiratory diseases and vibration white finger. GWM decided to make an application to the court for a group litigation order but it was unsuccessful and the miners were ordered to pay the costs of the application. GWM agreed to indemnify the clients in respect of legal costs so they sought to recover these costs under the ATE policy.
One of the issues raised by Templeton in defence was that GWM had negligently advised the pursuit of the group litigation order and had therefore failed in their duty of care. Specifically, they claimed that GWM owed a duty to them ‘to advise upon the form and nature of any proposed proceedings which were to be the subject of ATE insurance and to conduct such proceedings with the care and skill to be expected of a reasonably competent solicitor and/or in accordance with the express terms of the policy’.74 Cooke, J, however, was quite firm in holding that ‘There can be and is no doubt about the existence of a duty on the part of GWM and Counsel to the GLO Applicants but it is denied that any similar duties of the kind alleged by Templeton was owed to it.’75 Furthermore, he held that even if GWM did owe a duty to the insures, they had not been negligent because ‘competent solicitors and competent Counsel experienced in the area of group litigation could justifiably take the view that a GLO was an appropriate way of proceeding and indeed was the only way in which the miners’ claims could reasonably and properly be dealt with by the courts’.76
2.3 The position where the loan between a bank and a claimant is unenforceable
In Bank of Scotland v Euclidian (No 1) Ltd,77 one of the issues regarded the ability of a lending bank to recover from ATE insurers sums loaned to claimants to purchase ATE insurance in circumstances where claimants failed in their actions.
The scheme under consideration here had been operated by CBUK from 2000 to 2004. The loans to the claimants to pay for ATE insurance policies in the pursuit of personal injury claims had been provided by the Bank of Scotland and the policies had been issued by Lloyd’s underwriters. The insurance certificates incorporated the terms of a master certificate, the key provision being clause 2(c), the effect of which being that if the underwriter refused to pay a claim to the claimant, they would nevertheless indemnify the bank for the amount of the loan plus interest. The bank asserted that it was owed £11.3 million by the underwriters for loans to support 5,500 unsuccessful claims. The dispute concerned polices that were in some way tainted, eg where the claimant did not exist or his signature had been forged, where the loan agreement was unenforceable because of some contravention of the Consumer Credit Act 1974, or where the claimant had not actually suffered any personal injury at all or had failed to adhere to the terms of the loan agreement, to name a few.
In interpreting the wording of the clause in question, Field J, finding in favour of the bank, held that the context was that the bank had advanced the loans on the basis either that it would recover the sums from the proceeds of the costs awarded to the claimant, or if the claim failed, it would have a claim against the underwriters as assignee—it was immaterial whether or not that agreement was enforceable by the bank against the claimant.
2.4 The relationship between security for costs and ATE insurance
Under the Civil Procedure Rules part 25.13, a court can make an order for security of costs in certain circumstances, one being where the claimant is a company and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so (part 25.13(2)(c)). There has recently been litigation regarding the relationship between awarding security for costs on this basis and ATE insurance.
In Michael Phillips Architects v Riklin,78 the defendants, Mr and Mrs Riklin, retained Michael Phillips Architects (MPA) to provide architectural and other services in respect of a property which was being renovated and refurbished. Proceedings were issued by MPA in December 2009 in which they sought damages of £147,387.04 representing the costs payable on the time-spent basis agreed between the parties. The defendants denied that there was any such agreement in place and instead put forward a counterclaim for damages exceeding £162,000. Mr and Mrs Riskin applied for security for costs on the basis that the claimant was a company and there was reason to believe that it would be unable to pay the defendant’s costs if required (Civil Procedure Rules, part 25.13(1) and (2)(c)). MPA responded to this by saying that it had applied for ATE insurance which would fund the litigation costs if required, meaning that the defendants were already adequately protected in the event of a costs order in their favour. The question for the court was whether the existence of ATE insurance justified a refusal by the court to order security for costs in favour of the defendants, on the basis that the ATE insurance provided the necessary security that if the claim was dismissed the ATE insurers would pay the defendants’ costs. After reviewing the relevant authorities, Akenhead J put forward the following propositions;
(a) There is no reason in principle why an ATE insurance policy which covers the claimant’s liability to pay the defendant’s costs, subject to its terms, could not provide some or some element of security for the defendant’s costs. It can provide sufficient protection.
(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.
(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs.
(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.79
On the facts of this case, Akenhead J concluded that the ATE insurance policy did not provide sufficient security for the defendants; the policy was ‘at the very least ambiguous’ as to whether it would cover costs awarded in the event that the counterclaim was successful;80 the sum insured could be eroded by first party costs;81 the policy contained a clause entitling the insurers to withdraw cover as soon as they believed that there was not a reasonable prospect of recovery thus removing any protection the defendants might have;82 and any failure by the claimants to fulfil their ‘responsibilities’ could lead to cancellation.83 Accordingly, Akenhead concluded that the ATE insurance policy in question provided no real security for the defendants’ costs let alone any real comfort for them, and so security for costs was ordered.84
2.5 The implications of Lord Justice Jackson’s report on civil litigation costs
In late 2008 Lord Justice Jackson was commissioned by the Master of the Rolls to undertake a review of the rules and principles governing the costs of civil litigation in England and Wales and to make recommendations to promote access to justice at proportionate costs. In January 2010, after carrying out an extensive review, he published his report, Review of Civil Litigation Costs: Final Report. This independent and comprehensive report made a broad range of recommendations for reducing costs in the civil justice system in England and Wales. Most importantly in this context was the primary recommendation that success fees in conditional fee agreements (CFA) and ATE insurance premiums should cease to be recoverable from an unsuccessful defendant and instead should be payable by the claimant, thus giving them a financial interest in the level of costs incurred on their behalf. In addition to abolishing the recoverability of CFA success fees and ATE insurance premiums, Lord Justice Jackson also put forward a number of proposals to assist claimants with the financial implications of the change, including, for example, an increase in 10% in general damages to help towards paying for the success fee for which claimants would become liable to pay.
In November 2010 the Ministry of Justice published a consultation85 on implementing some of Lord Justice Jackson’s key recommendations, but with some refinements to the original proposals, including, for example, that success fees might still be recoverable in certain types of case (judicial review, housing disrepair, and complex personal injury or clinical negligence actions) and that ATE premiums should continue to be recoverable to the extent they relate to the claimant’s own disbursements. That consultation finished in February 2011 but on 14 January 2011, exactly a year after his original report, Lord Justice Jackson submitted his formal response. In his covering letter to Lord Chancellor Kenneth Clark, Lord Justice Jackson said that, if the government accepted his recommendation to abolish recoverability of ATE premiums and success fees and to raise general damages by 10%, ‘the package should be implemented in full’ because ‘it would be the worst of all worlds to retain elements of recoverability (subject to qualifications and exceptions) thus adding to the present morass of rules and case law’. Furthermore, he said that it would be ‘a disaster to raise general damages in CFA cases but not in other cases. Any such approach would create perverse incentives and undermine the structure of the reforms.’ In his response, while he welcomed the government’s indicated intention to abolish recoverable ATE premiums and to replace them with a more rational form of one-way costs shifting in appropriate cases, he rejected the view that ATE premiums should be recoverable in so far as they relate to the claimant’s own disbursements. He stated three reasons for this rejection: firstly, because the basic premise that losing claimants should collectively have their disbursements paid by defendants is questionable; secondly, that there is a strong case for saying that losing claimants or their solicitors should meet their own disbursements——as happens in Scotland and indeed in every other jurisdiction outside England and Wales; and thirdly, if the government decided that losing claimants should still have their disbursements paid out of public funds, then the present ATE regime is an extremely inefficient and expensive way of achieving that result—a much better and cheaper alternative would be to provide legal aid for such disbursements.
• Abolish the general recoverability of the CFA success fee from the losing side. In future any CFA success fee will be paid by the CFA-funded party, rather than the other side. Crucially, this would give individual CFA claimants a financial interest in controlling the costs incurred on their behalf. It returns the position to when CFAs were first allowed in civil litigation in England and Wales in the 1990s.
• Abolish the general recoverability of ATE insurance premiums. In future any ATE insurance premium will be paid by the party taking out the insurance, rather than the other side. Again, this returns the position to that which existed in the 1990s.
• Introduce the package of associated measures set out by Lord Justice Jackson.
However, the government has decided to refine these proposals in light of public policy concerns so that recoverability of the ATE insurance premiums will be allowed to cover the cost of obtaining expert reports in clinical negligence cases. The associated measures in the package that will assist claimants in meeting the additional costs and risks resulting from an end to recoverability will be as follows:
• There will be an increase of 10% in non-pecuniary general damages such as pain, suffering and loss of amenity in tort cases, for all claimants.
• The maximum success fee that a lawyer may agree with a client under a CFA will remain at 100% of base costs. However, in personal injury cases this would be subject to the 25% cap on damages (other than those for future care and loss).
• A regime of qualified one-way costs shifting (QOCS) will be introduced for personal injury cases, including clinical negligence. This means that an individual claimant is not at risk of paying the defendant’s costs should the claim fail (except in limited prescribed circumstances), but that the defendant—which typically in personal injury cases is a relatively well-resourced body—would have to pay the individual claimant’s costs should the claim succeed. The exceptions will be: (i) on behaviour grounds—where the claimant has acted fraudulently, frivolously or unreasonably in pursuing proceedings—so a reasonable claimant will not be at risk of paying the other side’s costs on behaviour grounds; and (ii) on financial means grounds—only the very wealthy would be at risk of paying any costs.
• Part 36 of the Civil Procedure Rules (offers to settle) will be amended to equalise the incentives between claimants and defendants to make and accept reasonable offers.
• Damages-based agreements (DBAs/contingency fees) will be allowed to be used in civil litigation. DBAs are another type of ‘no win no fee’ agreement, but the lawyer’s fee is related to the damages awarded, rather than the work done by the lawyer. The government will lift the restriction on their use in civil litigation.
• A new test of proportionality in costs assessment will be introduced. This will mean that only reasonable and proportionate costs may be recovered from the losing party.
This would act as a long stop to control the costs of activity that is clearly disproportionate to the value, complexity and importance of the claim.
Most of the key reforms, including these changes to CFA/ATE insurance, will require primary legislation. The government intends to introduce such legislation as soon as parliamentary time permits, and it is anticipated that the changes will be implemented by autumn 2012.
3. Employers’ liability insurance
The liability of employers for industrial injuries or disease caused to employees continues to be one of the most litigated areas of the tort of negligence.87 Operating in tandem with the common law there are a range of statutory duties imposed on employers in respect of employee safety. The state scheme for industrial injuries provides for compensation without the need to prove fault. However, actions in negligence remain the preferred route for claimants because of the higher level of common law damages. As with actions against impecunious or uninsured defendants generally, little is gained from litigation if a damage award cannot be actually recovered. In order to ensure that an employee who is awarded damages for negligence against an employer receives the compensation due to him, the Employers’ Liability (Compulsory Insurance) Act 1969 requires employers to insure against liability for injuries sustained by employees in the course of their employment.88 Section 1(1) of the Act provides that subject to certain exceptions contained in sections 2 and 3,89
every employer carrying on any business in Great Britain shall insure, and maintain insurance, under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or disease sustained by his employees, and arising out of and in the course of their employment in Great Britain in that business, but except in so far as regulations otherwise provide not including injury or disease suffered or contracted outside Great Britain.90
3.1 The ambit of the statutory duty—the course of employment
The key to determining the scope of the employers’ duty to insure against liability to employees lies in the meaning of the phrase, contained in section 1(1) above, namely, ‘arising out of and in the course of their employment’. This form of wording also appears in the Road Traffic Act 1988, section 145 and in the old workmen’s compensation legislation. In Moore v Manchester Liners Ltd,91