Case No: PTH 1300060
IN THE SENIOR COURTS COSTS OFFICE
TRANSFERRED FROM WANDSWORTH COUNTY COURT

Royal Courts of Justice
London, WC2A 2LL

Date:   27 September 2013 

Before :

SENIOR COSTS JUDGE HURST
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Between :

	(1) MARGARET KELLY
(2) PAUL KELLY
	
Claimants	
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	BLACK HORSE LIMITED	Defendant	

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Mr Tyler (Costs Lawyer) (instructed by Black Lion Law LLP) for the Claimants
Mr Daniel Saoul (instructed by SCM Solicitors, Barnet) for the Defendant

Hearing date: 1 August 2013
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Judgment
Senior Costs Judge Hurst: 

1.	In 2001 the Claimants took out a loan with Black Horse Ltd and purchased payment protection insurance at the same time.    In 2011 the Claimants brought an action on the basis that the insurance had been mis-sold.    That claim was fully defended and went to a trial before Deputy District Judge Dagnall, who, after a full day’s hearing, ordered that the current balance outstanding from the loan agreement between the parties of £5,202.63 be written off by the Defendant, that the Defendant should re-pay the Claimants the sum of £6,000 and that the Defendant should pay 70% of the Claimants’ costs to be subject to detailed assessment if not agreed.   The detailed assessment came before me on 1 August 2013, when the majority of issues were dealt with.   One of the outstanding issues concerned the level of the ATE premium, which, including IPT at 6%, was claimed at £15,900. 
2.	Given the great number of PPI mis-selling claims which are currently before the courts, and given also that I was told that the issue of ATE premiums recurs constantly, I decided to reserve judgment and hand down a written judgment in the hope that this may assist in resolving future disputes in this area.
3.	The Claimants’ bill including disbursements, success fees and ATE premiums totals £46,661.22 (70% being £32,662.85).   The base costs were between £13,000 and £15,000 (depending upon which party’s measure one adopts).   The Defendant points out that their own costs, including counsels’ fees, amounted to a total of £5,837.10. 
4.	The success fee had been claimed at 100%, but Mr Tyler, who appeared on behalf of the Claimants, had to accept that the risk assessment was entirely meaningless.    Having heard submissions as to the level of risk when the CFA was entered into, I formed the view that the prospect of success was 65%, and accordingly the success fee should be 53.85%.    
SUBMISSIONS 
5.	In their Points of Dispute the Defendant pointed out that the insurance policy covers adverse costs and the Claimants’ own disbursements.   Accordingly, excluding the Claimants’ Solicitors’ and Counsels’ own fees, the Claimants’ disbursements totalled £1,406.20.     This, added to the £5,837.10 Defendants’ costs, meant that the insurer was facing a potential liability of £7,243.30 in respect of which the Claimants have paid a premium of £15,900.   The Defendant submits that as a result of the detailed assessment the ultimate exposure would be far less than the figure I have mentioned.   Given that the detailed assessment is still continuing, I do not think it appropriate to speculate as to the possible ultimate exposure, but to proceed on the basis of the estimated maximum liability (EML).    
6.	In the Points of Dispute the Defendant argued that since the premium was significantly more than the damages recovered, it was disproportionate, and asked for disclosure of the calculation which had been undertaken in order to arrive at the premium claimed.    No such disclosure was provided. 
7.	Mr Saoul relies on: the decision of the Court of Appeal in Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134, my decision in Motto & Ors v Trafigura [2011] EWHC 90207 (Costs) and the Court of Appeal decision in the same case [2011] EWCA Civ 1150, and Redwing Construction Ltd v Wishart [2011] EWHC 19 (TCC) Akenhead J.   Mr Tyler also relied in part on these judgments.  Below I quote selected passages from the judgments. Although there is a great deal more in them than appears in this judgment, no useful purpose would be served in reciting the judgments more extensively. 
8.	The decision in Rogers v Merthyr Tydfil County Borough Council was given on 31 July 2006.   The case concerned a DAS 80E ATE policy.    The policy was staged and claimed at £5,103, plus IPT.   The damages in the case (an injury to a child who fell over in a park) were agreed at £3,105 plus interest.    On appeal to the Circuit Judge the ATE premium was reduced to £900.     Lord Justice Brooke gave permission for a second appeal, and invited submissions from a number of interested parties, including other ATE insurers.    At the request of Brooke LJ, I held a case management conference and took evidence from Mr Bellamy, who was DAS’s operations manager and from Mr Carter, the Claimants’ solicitor.   The Respondents adduced written evidence from three witnesses, none of whom were able to attend the CMC. These were:   Mr Mitchell (assistant solicitor in the firm representing the Respondents), Mr Boobier (a partner in that firm) and Mr Hudman (a claims executive with Marsh Insurance Brokers).    The Court of Appeal recorded that I had accepted what Mr Bellamy said, in so far as it was factual evidence.    His evidence was to the effect that: 
“33.	For all but the more serious or specialised personal injury claims, ATE insurance is block rated, rather than individually assessed.    For block rating to work the insurer needs to be sure that it is receiving a full and fair selection of cases ranging from those where liability is unlikely to be in doubt, to those where it is contested.    In order to avoid adverse selection, it is standard practice for ATE insurers to require solicitors to insure all available cases with the ATE provider.    In practice, therefore, Claimants’ solicitors cannot simply pick and choose from a variety of products and offer different policies to different clients.   This approach is in any event incompatible with block rating.
34.	 The level of premium is not generally … predicated by or related to the amount of damages.   It is set by reference to the risk to the insurer and his exposure to costs and disbursements in a failed case.
35.	In setting a premium ATE insurers adopt two different approaches. They either adopt a single fixed premium that applies throughout the case whenever it is concluded, or a staged, or stepped, premium (as in this case), where the amount payable increases as the case progresses.   Although fast track cases can be insured by single fixed premiums, most providers require multi-track cases to be separately rated.”
9.	Paragraphs 39 to 44 of the judgment set out the details of the DAS ATE product: 
“43.	In the present case the figures passed to the senior underwriter were: 
(i) Claimant’s disbursements estimated at £2,000;  
(ii) Opponent’s profit costs estimated at £3,000;  
(iii) Opponent’s disbursements estimated at £1,500;  
(iv) Total EML £6,500.
44.	The underwriter is then required to assess the risk and to apply a percentage in order to calculate the premium.  In this case liability had been denied and there was no Part 36 offer.  The prospects of success had been assessed by case handlers as “acceptable”, which in effect meant 51%.   Mr Bellamy would not expect prospects of success to be rated much higher than this in a case about to go to trial where liability was still denied. Based on that information the underwriter applied a rate of 54% to the EML, producing a third stage premium of £3,510 plus IPT. The insurers expect to lose about half the cases which go to trial.  Defendant insurers will therefore be called upon to pay the Stage Three premium in about 2½% of all cases.”
10.	The court went on to consider a reasonable allowance for overheads (paragraph 52 ff). 
11.	Having reviewed the evidence, the court stated: 
“96.	This is the first occasion on which the reasonableness of an ATE premium has been considered authoritatively by this court since its landmark decisions in Callery v Gray (No 1) [2001] EWCA Civ 1117; [2001] 1 WLR 2113 and Callery v Gray (No 2) [2001] EWCA Civ 1246; [2001] 1 WLR 2112.  In those two judgments the court was principally concerned to decide whether an ATE premium was reasonable when ATE cover was taken out by a claimant before the first letter of claim was made, and when the defendant’s reaction to the claim was still unknown.  On the present appeal, three main issues arise for decision:
(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?”
12.	Dealing with the size of the premium, the court stated:
“109. 	In the present case the total EML of £6,500 compared favourably with the actual outturn of £6,875 revealed to the deputy district judge.  Given the defendants’ determination to go to trial, the handler’s assessment of the risk at no greater than 51% was not unreasonable, particularly as DAS’s experience was to the effect that more slipping and tripping cases taken to trial were lost than won.  And on these figures it is impossible to say that a total premium of £4,680 was unreasonable.  Put quite simply, if in two cases insurers face a 50% risk of having to pay out £6,500 on one of them, it is reasonable for them to charge a premium of £6,500 (not allowing for overheads or profit) on each. On the one they win, they will be able to get their premium paid by the defendant, and this will recompense for them having to pay out £6,500 on the one they lose.
110.	On these figures it is quite impossible to say that a total premium of £4,860 was unreasonable.  Indeed, it was not fixed at a sufficiently high level to reflect the risk and to provide a contribution to the insurer’s reasonable overheads and profit.”
13.	The court then set out the procedure to be followed in the future: 
“116.	During the course of argument it was accepted on all sides that a party who has an ATE insurance policy incorporating two or more staged premiums should inform its opponent that the policy is staged, and should set out accurately the trigger moments at which the second or later stages will be reached.  This obligation should be undertaken in addition to the obligations set out in CPR 44.15(1) and in paras 19.1(1) and 19.4 of the Costs Practice Direction.  If this is done, the opponent has been given fair notice of the staging, and unless there are features of the case that are out of the ordinary, his liability to pay at the second or third stage a higher premium than he would have had to pay if the claim had been settled at the first stage should not prove to be a contentious issue.
Evidence justifying the ATE premium claimed
117.	If an issue arises about the size of a second or third stage premium, it will ordinarily be sufficient for a claimant’s solicitor to write a brief note for the purposes of the costs assessment explaining how he came to choose the particular ATE product for his client, and the basis on which the premium is rated – whether block rated or individually rated.  District judges and costs judges do not, as Lord Hoffmann observed in Callery v Gray (Nos 1 and 2) [2002] UKHL 28 at [44]; [2002] 1 WLR 2000, have the expertise to judge the reasonableness of a premium except in very broad brush terms, and the viability of the ATE market will be imperilled if they regard themselves (without the assistance of expert evidence) as better qualified than the underwriter to rate the financial risk the insurer faces.  Although the claimant very often does not have to pay the premium himself, this does not mean that there are no competitive or other pressures at all in the market.  As the evidence before this court shows, it is not in an insurer’s interest to fix a premium at a level which will attract frequent challenges.”
14.	Mr Tyler relies on the last quoted paragraph in submitting that I should not attempt to adjust the premium.    Although the Claimants had given notice to the Defendant, as required by paragraph 116, no note was produced for the purpose of the costs assessment, as recommended in paragraph 117.    
15.	Mr Saoul’s submissions, based on that judgment, are that the Court of Appeal approved the DAS method of calculating the premium (see paragraphs 109 to 110).    Although the court did not criticise in any way the way in which the premium had been arrived at, I have been unable to find any specific approval of the way in which the premium was calculated.    
16.	In the case of Motto v Trafigura Ltd, heard before me on 12 April 2011, the claimants sought an ATE premium of £9,677,554, provided by First Assist an insurance intermediary acting under a managing general agency agreement with Great Lakes Reinsurance UK Plc, which was itself part of the Munich Re Group.    At paragraphs 10 to 14, I set out the evidence of Mr Peter Smith of First Assist, in which he explained how the premiums were arrived at.   There had been an earlier case before me, RSA Pursuit Test Cases in 2005, where I found that there were certain flaws in the way in which the premium had been calculated.  As a result of this, the policy wording was amended by First Assist, which allowed the premium rate to be applied directly to the actual exposure faced by the company, ie, the actual costs of the opponent at the time the case was settled in favour of the insured.    Mr Smith set out his formula for calculating the premium: 
“15.	Mr Smith sets out the formula used for calculating the premium: 
●	an exposure multiplicand is calculated, being the sum of own disbursements and opponent’s costs (subject to any limit of indemnity on the former); 
●	a risk multiplier is applied to the exposure multiplicand; 
●	a basic risk multiplier is ascertained in the same way as a success fee is ascertained, namely by dividing the chance of losing by the chance of winning; 
●	this basic figure therefore represents the pure “burning cost” of the insurance (that is the “break even” cost disregarding the need for the underwriter to fund its business overheads and make a profit); 
●	the basic figure is then adjusted to include an allowance for overheads, marketing and brokerage costs and profit; 
●	this provides the overall risk multiplier; 
●	the overall risk multiplier is applied to the exposure multiplicand, to derive the net premium; 
●	insurance premium tax is then applied to produce the overall figure.
16.	Mr Smith says that this method of calculating the risk multiplier was approved by the Court of Appeal in Rogers v Merthyr Tydfil CBC ...”
17.	I noted at paragraph 160 of that judgment: 
“No criticism is made [by the defendants] of the actual mechanism used by First Assist in order to calculate the premium, save that it is too high.”
18.	I concluded that the Defendants either had to accept that the premium should be calculated on the original figures submitted, or produce evidence justifying a lower figure.   In the event they provided no further evidence and the matter went to the Court of Appeal where the issue was dealt with relatively briefly at paragraphs 135 to 144.    It was not argued before the Court of Appeal that the method of calculating the premium was flawed.   The court commented: 
“141.	Fourthly, the defendants say that the premium is startlingly high. It may appear so to many people (and indeed the Judge said that there was “no denying that the premium claimed in this case is extremely high”), but, as the Judge said, there was no “expert evidence of policies providing similar cover available on the market at lower premiums” and “no criticism is made of the actual mechanism used by First Assist in order to calculate the premium”.  In addition, there was cogent evidence that the 15% uplift was reasonable.”
19.	The final authority relied on by the parties is Redwing Construction Ltd v Wishart.   In that case the claimant entered into an ATE insurance policy, with a total sum insured of £20,000, £15,000 relating to opponents’ costs and £5,000 to own disbursements.  The ATE premium was £8,480.  At paragraphs 11 to 14 of the judgment, Mr Justice Akenhead reviewed the law and authorities, he stated: 
“15.	One can draw all this together: 
(a) 	In relation to CFAs and ATE Insurance, the basic costs rules and practice about reasonableness and proportionality apply. Thus, to the extent that the mark-up or uplift under the CFA or the premium for the ATE Insurance is unreasonable or disproportionate, it should be disallowed, at least on a standard assessment.
(b)	A CFA percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant proportionate), the total appears disproportionate.
(c)	A primary factor in considering the reasonableness of the percentage increase must be the prospects of the claimant succeeding on its claim. This is to be judged primarily as at the date that the CFA is entered into. The greater the prospects of success, the lower the reasonable and proportionate percentage will be. It is difficult to be prescriptive about this however and there is no magic sliding scale. Where the chances of success, judged objectively at the time when the CFA is entered into, are about even or less, the greater the justification will be for a 100% mark-up. Where the chances of success are great, there will almost invariably be a strong feeling that the CFA mark-up should be significantly discounted. Where the claimant was as good as bound to win, no mark-up may be allowed.
(d) 	Similar considerations apply to the ATE Insurance. 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.
…”
20.	The Judge concluded: 
“20.	As for the ATE Insurance, on its face the premium was very high for a case which at the time it was arranged … Redwing was likely to be the substantial winner. A premium of £8,480 for cover of £20,000 appears substantially excessive, judged at that time.
21.	As indicated to the parties at the conclusion for the costs hearing, I had and do form the view that Redwing should have 20% of the CFA uplift and of the ATE Insurance premium. The reasons are as follows: 
…
(b)	In relation to the ATE Insurance premium, there being no presumption that it was reasonable and bearing in mind that this is a summary assessment of costs on a standard basis, whilst one can understand why a claimant might well want the safety net of such insurance, the risk of losing, judged at the time when it was entered into, was sufficiently low to undermine the reasonableness of imposing anything near 100% of it on the paying party in this case. In the absence of any evidence from the Claimant as to the reasonableness of the premium but without deciding that as such the premium is itself unreasonable, I have formed the view that it would only be reasonable to make Mr Wishart pay 20% of the premium. I must and do presume that a wholly unrealistic assessment of risk was made to justify the imposition of a premium of some 42% of the insured amount. I have a very real doubt that anything more is reasonable.”
21.	Relying on those authorities Mr Saoul submits that the recoverable premium should be arrived at by calculating the “burn” premium (ie, the risk of paying out times the exposure) to which should be added brokerage and profit in respect of which he suggests an increase of 10% and 15% respectively.   Using Mr Saoul’s unchallenged figures for exposure, £7,243.30, and the risk of paying out as found by me in respect of the success fee, the burn premium is £2,535.16 (0.35 x 7243.30) with the addition of brokerage and profit, this figure becomes £3,168.95. 
22.	In the Points of Dispute the Defendant goes further and suggests that it does not follow that the 35% risk of loss is the same risk that the insurer would have been required to pay out.  The Points of Dispute state: 
“The Defendant is aware that ATE insurance policies carry with them numerous onerous exclusions and limitations which can prevent the insured making a claim.” 
23.	On that basis the Defendant submits that there was no more than 15% risk that the Claimants’ insurers would have been required to pay out under the terms of the policy.    They put forward a burn premium of £1,086.50 and a total premium of £1,358.15, rounded up to £1,360 plus IPT.    In respect of this last submission, there is no evidence before me as to any onerous exclusions or limitations, and the best figures which I have are those which I have already set out.   I regard this submission as no more than speculation on the part of the Defendant.   
24.	There is, however, a difficulty in that neither the Claimants nor the insurer would know at the outset the full extent of their exposure.    It would be possible to calculate the Claimants’ disbursements, but it is unlikely that the Claimants and the insurers would have anticipated that the Defendant’s costs would be as low as £5,837. 
25.	Mr Tyler urged me to have regard to what was said by Lord Justice Brooke at paragraph 117 of Rogers, and to recognise that I do not have the expertise to judge the reasonableness of a premium “except in very broad brush terms”.    He accordingly submitted that I should proceed with a broad brush approach as demonstrated by Akenhead J in Redwing Construction Ltd. 
CONCLUSION
26.	There is no doubt that the ATE premium sought in this case is wholly disproportionate.   I have already found that the base costs claimed in the bill are disproportionate, as was the success fee of 100%.    I have been given no evidence as to the information which was given to the ATE insurers to enable them to rate the policy, but, given the risk assessment completed for the purpose of the CFA, which was entirely meaningless, it is safe to assume that the insurers were not given accurate information.    By applying Mr Saoul’s formula to the premium of £15,000 plus IPT, and assuming the Claimants’ disbursements at £1,406, it appears that the insurers, no doubt acting on the information given to them by the Claimants’ Solicitors, would have predicted exposure for the Defendant’s costs at something in excess of £20,000. Such a figure is wildly inaccurate.    It would have been permissible at the outset of these proceedings to estimate that the Defendant’s costs might be in the region of £7,000, which together with the Claimants’ disbursements would produce a potential exposure of £8,406, which in turn would produce a premium of £3,677.63. 
27.	Adopting as a cross-check the broad brush approach of Akenhead J in Redwing Construction Ltd, I find that the reasoning that he sets out at paragraph 21(b) of his judgment fits almost exactly with my view of the circumstances of this case, save that I am conducting a detailed assessment and he was conducting a summary assessment.     
28.	In my judgment it is reasonable to expect the Defendant to pay 25% of the premium claimed of £15,000.   This produced a figure of £3,750, which compares favourably with the £3,677 which I calculated using Mr Saoul’s formula.   I accordingly allow the Claimants £3,975, including IPT.    This figure, in common with the rest of the bill, is subject to the Order of Deputy District Judge Dagnall, that the Defendant should pay 70% of the Claimants’ costs.