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Cite as: [2003] EWCA Civ 136, [2003] 2 All ER (Comm) 788, [2003] 4 All ER 508, [2003] PIQR P31, [2003] 2 Costs LR 254, [2003] Lloyd's Rep IR 677

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		Neutral Citation Number: [2003] EWCA Civ 136
		Case No: A2/2002/1842 QBENF

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
SUPREME COURT COSTS OFFICE
Master Hurst

Royal Courts of Justice
Strand,
London, WC2A 2LL

12th February 2003

B e f o r e :

LORD JUSTICE BROOKE
LORD JUSTICE LAWS
SIR ANTHONY EVANS
____________________

	IN THE MATTER OF
	CLAIMS DIRECT TEST CASES

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Timothy Charlton QC & Nicholas Bacon (instructed by Colman Coyle) for the Claimants
Anna Guggenheim QC & Alexander Hutton (instructed by Vizards Wyeth & Lamport Bassitt and Carters) for the First and Third Defendants
Alan Newman QC & Andrew Neish (instructed by Beachcroft Wansbroughs) for the Second Defendants
____________________

HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

INDEX

		Para No
1.	Introductory	1
2.	The Facts	3
3.	The Issues	20
4.	The applicable law	22
5.	Issues 2: The Master's judgment	35
6.	The Master's judgment: Claims Direct's commission	47
7.	The Master's judgment: The payment to MLSS	49
8.	The Master's judgment: Initial insurance services	52
9.	The Master's judgment: Continuing insurance services	53
10.	The Master's judgment: Issue 4	60
11.	Issue 2: Conclusion	68
12.	Issue 4 and the reasonableness of the premium	91

Lord Justice Brooke :

1. Introductory

This is an appeal by 16 claimants in test cases concerned with what became known as the Claims Direct Protect Scheme against an order made by Master Hurst, the senior costs judge, whereby he directed judgment to be entered in costs only proceedings for each claimant in respect of recoverable premium in the sum of £621.13 inclusive of insurance premium tax ("IPT"). The test cases which have been taken to appeal are those numbered 1-3, 6-12, 14, 16, and 18-21 in the Schedule to the Master's judgment. I will describe the nature of the claimants' challenge to the Master's order in paragraphs 20 and 21 below. Master O'Hare sat with us as an assessor on this appeal, and we have benefited from his advice.

The issue Master Hurst had to decide in these test cases was whether the money a claimant paid for the right to be included within the scheme (which was started by Claims Incorporated plc ("Claims Direct") in August 1999) was a premium within the meaning of Section 29 of the Access to Justice Act 1999 ("the 1999 Act"), and to the extent that it was such a premium, whether or not it was reasonable in amount.

2. The Facts

It is possible to summarise the facts more briefly than was necessary for the purposes of the Master's judgment. In 1990 Mr Tony Sullman launched a claims management company which specialised in pursuing uninsured loss claims on behalf of taxi drivers. The company's business involved the use of franchised claims managers working alongside panels of solicitors, doctors and accountants. In 1995 the use of conditional fee agreements was permitted for the first time. Mr Sullman then joined forces with Mr Colin Poole, who is a practising solicitor, and the two men started running Claims Direct. The following year they caused a company called Medical Legal Support Services Ltd ("MLSS") to be incorporated as a wholly owned subsidiary of Claims Direct.

Between 1996 and 1999 these two companies, acting in association, provided claims handling services to claimants with personal injury claims through a network of franchise claims managers along the lines previously established by Mr Sullman. The arrangements they made were known as the Portfolio Scheme. The companies' operations were based in Telford, where Mr Poole conducted his solicitor's practice. They attracted clients through national advertising. Claims managers visited likely clients in their homes in order to obtain instructions and to complete the contract with Claims Direct. The services embraced by the scheme included helping claimants to have access to members of the panels of solicitors, and medical experts; obtaining advice from counsel (in a single set of chambers) who provided opinions on liability and quantum for a standard fee; taking witness statements; and generally guiding them through to the conclusion of their claims. This package of services did not include any insurance element. If a claim was successful, Claims Direct would receive 30% of the damages recovered, together with VAT. If the claim failed, Claims Direct would discharge the defendants' costs themselves. The scheme appears to have been a great success.

It was an important feature of the scheme that the claims managers undertook a lot of the work that would customarily be undertaken by a firm of solicitors. Mr Doona, who was the finance director of the Claims Direct group between December 1999 and September 2001, told the Master that a claims manager originally paid £1,000 - £2,000 for a franchise, but the price then went up to about £5,000 - £6,000, and possibly as high as £20,000. In return, once a case was accepted by MLSS a claims manager would be paid a minimum fee, whatever the value of the claim (the minimum fee was £425 during the period with which this appeal was concerned). This fee would be liable to increase in proportion to the amount of work required of him in a particular case.

MLSS therefore had to put in place an administrative structure capable of handling the recruitment and training of claims managers, and of acting in a liaison role between them and the others whose services were essential for the smooth running of the scheme. Mr Doona said that in his time 12 members of MLSS's staff performed these functions, although this number was liable to increase. MLSS also had a legal section comprised of about 30 members of staff who dealt with the claims handling process. Their role was to ensure that the panel solicitors complied with the requirements of the operations manual. We have been shown a copy of the operations manual which was current in the days of the Portfolio Scheme. We have also been shown a copy of the manual which was issued after the Protect Scheme came into force. The differences in the text of these two documents are insignificant. This is hardly surprising, since the basic structure of the scheme remained the same.

By March 1999 Mr Sullman and Mr Poole wished to float their company on the Stock Exchange, and for this purpose they wished to abandon the 30% contingency scheme and move to an insurance-backed model. Their original reasons for wanting to make this charge were not connected with the new opportunity afforded by the 1999 Act for recovering an "after the event" ("ATE") insurance premium from the other side as part of a successful claimant's costs. They had been advised that the success of a flotation would be prejudiced by the existence of the contingent liability of an uncertain size. This liability arose out of the costs indemnity provided under the Portfolio Scheme.

Mr Sullman therefore approached an insurance intermediary called Litigation Protection Ltd ("LPL") to discuss the possibility of using an insurance-backed model, and during the spring and summer of 1999 representatives of LPL held bilateral meetings with Lloyd's underwriters on the one hand and Claims Direct on the other. The way in which the negotiations developed is apparent from an early memorandum. This memorandum, dated 22nd March 1999, was prepared for underwriters by Mr Raincock, who handled this matter on behalf of LPL and who was subsequently to give evidence to the Master. It includes this passage:

"Claims Direct has also considered the concept advanced by LPL … that the indemnity in losing cases should include £1,000 in respect of the Claims Managers services and that in readiness for the Access to Justice Act when the premium will be recoverable, we should increase the notional premium to £1,190 plus IPT. Please note that the premium payable to Underwriters will remain based upon £190."

Although the expression "notional premium" was to disappear, the idea that a claimant would pay a large "premium" for an insurance policy, very little of which would be payable to underwriters as a premium for the risk they were undertaking to cover, remained an essential element of the arrangements that were to evolve. It was clear from the evidence that underwriters attached particular importance to the effectiveness of the group's control over the claims handling procedures. Mr Primer, whose underwriting agency was involved in the original discussions with Mr Raincock, told the Master that the risk was presented to underwriters on the basis that more than 97% of the claims would be successful, and that they would only have to pay out (both defendants' costs and claimants' costs, including the full cost of the premium) in less than 3% of the cases. They carried out their premium calculations, however, on the basis of a 4-6% overall failure rate, and they reserved the right to demand a different premium once they had some experience of how the policy operated in practice.

On 5th May 1999 Mr Raincock sent a memorandum to underwriters in which he explained the current state of Claims Direct's proposal. He recommended that underwriters should proceed on the basis set out in his paper. Under the heading "New Information" he referred underwriters to "the comprehensive and protective Operations Manual issued to all Panel Solicitors". The memorandum was returned to him with the following manuscript endorsement initialled by an underwriter:

"Warranted: Claims Direct/Poole & Co maintain existing underwriting guidelines (all amendments to be agreed) and rejection rates consistent with their historical numbers."

On 12th May, following further discussions, Mr Raincock sent Mr Poole a cover note which contained this warranty in the following slightly altered terms:

"Warranted: That the Assured will maintain the existing procedures contained in the Poole and Co Underwriters Manual dated February 1999 and that Underwriters will be informed of all proposed changes prior to their inclusion in the Manual."

The text of the cover note showed that the policy wording was at that time still to be agreed. It was envisaged that cover under the Claims Direct Protect Scheme would come into force on 1st June 1999, and that underwriters would receive a premium on each case declared to them. The figure quoted was £90 (plus IPT)

The negotiations continued, and eventually a scheme emerged whereby underwriters agreed with LPL (acting on behalf of Claims Direct) an ATE premium of £140 for each case. LPL's 32.5% brokerage commission was charged on this £140, and underwriters received their premium net of this commission. In addition, Claims Direct, with advice from LPL, fixed a "premium" which represented the total price which a claimant joining the scheme would theoretically be liable to pay. This sum was arrived at on the basis of Claims Direct's broad-brush assessment of what they believed the market would bear, reinforced by their concern to ensure that their income stream should remain the same as it had been under the Portfolio Scheme. This thinking was explained in a memorandum sent by their board of directors to all their claims managers on 5th July 1999, shortly before a couple of two-day seminars were to be held in order to explain the ramifications of the new arrangements. They were justified to the claims managers on the basis that the changes had been forced on Claims Direct by the Government.

The new "Claims Direct Protect" business model (which in many respects resembled the old model) operated along the following lines:

(1) Television and other advertising was used extensively to encourage potential claimants to ring the Claims Direct number. Claims were handled at a call centre in Telford. Initial details were taken and, if certain criteria were satisfied, the call was returned by arranging for a claims manager to visit the claimant at home.

(2) On the claims manager's visit the claimant was provided with a leaflet called "Your Worry Free Guide to Claims Direct". The claims manager helped the claimant to complete a questionnaire and obtained his/her signature to a fair trading statement ("FTS"). This set out an offer made by the claimant for Claims Direct to take on the claim in return for the payment of a "premium" of £1,312.50 (£1,250 plus £62.50 IPT) for a Claims Direct Litigation Protection Insurance Policy. The claimant also signed a consumer credit agreement with a bank under which he/she borrowed the "premium" of £1,312.50 and a medical release form. Repayment of the loan was deferred until the end of the case. It would be repaid by insurers if the claimant lost.

(3) The case was then sent to Mr Poole's firm at Telford for "vetting" (to decide whether the prospects of success were better than 50%). A fee of £72.50 plus VAT was later payable by a panel solicitor for this service if he took the case on.

(4) If the case survived the vetting procedure, it was sent to a panel solicitor with an acceptance form. There were over 80 solicitors on the panel in November 1999. If the panel solicitor agreed to take on the claim he had to pay the vetting fee to Mr Poole's firm and a fee of at least £395 plus VAT to MLSS in respect of the claims manager's services.

(5) When the solicitor accepted the case, Claims Direct sent a letter of acceptance to the claimant together with "Evidence of Insurance" signed by Mr Raincock of LPL on behalf of the insurers. At about the same time the bank, acting on behalf of the claimant, paid £1,312.50 to LPL as an agent for the insurers. The way this money was distributed is described in paragraphs 16 and 17 below.

(6) The functions of the panel solicitor and the claims manager were set out in the Claims Direct documentation. It was the solicitor's duty to send the claimant a client care letter in a recommended form, to write a letter before action, to seek advice from medical experts and counsel as required, and to negotiate a satisfactory settlement of the claim, if possible. On the other hand his freedom of action was quite significantly curtailed by the scheme.

(7) The solicitor had to rely on the claims manager to draw up any witness statements that were needed – including the claimant's own statement – and to procure plans and photographs and any other evidence he required. If medical advice was needed, he had to seek it from a member of a panel composed by Mobile Doctors Ltd (who paid MLSS £40 per case) and if advice from counsel was needed he had to seek it from counsel in a particular set of chambers in London (who paid MLSS £15 per case). The claims manager would undertake the task of arranging any necessary appointments and ensuring the claimant attended them.

(8) In the event that the claim was settled the solicitor would claim from the defendants' insurer, in addition to his own profit costs, the £395 paid to MLSS, any disbursements on the fees of medical experts and counsel, and the vetting fee.

The defendants maintain that the only actual change in the scheme after August 1999 was the replacement by an ATE insurance policy of Claims Direct's earlier liability to discharge a defendant's costs when a claim failed.

From Claims Direct's viewpoint, the new scheme achieved the purpose of replacing one source of cash (the 30% share of any damages recovered by a claimant) with another (the £1,312.50 "premium"), with the added benefit that this cash flow was now achieved at the outset of each claim, rather than at its end. There is an explanation of all this in the company's annual report and accounts for the year 2000.

Once the details of the scheme had been finalised, underwriters granted a binding authority to LPL (which was eventually extended to 15^th August 2001), whereby they appointed that company as their coverholder to bind insurance and issue certificates to Claims Direct's customers, and thereafter to process claims on their behalf. The mechanics of the arrangements ran along the following lines.

The customer's loan of £1,312.50 would be sent direct to LPL. They placed it on trust in a Lloyd's insurance broking account. They would then issue Evidence of Insurance to the customer, together with a receipt, as agent for underwriters. This document summarised the terms of a Master Policy which were incorporated in the customer's contract with underwriters. It provided for cover, up to a limit of £50,000, in the event that the claim or legal proceedings were unsuccessful or discontinued, for both sides' costs and the amount of the insurance premium, plus interest. The policy contained a term that in conducting the proceedings, compliance by the panel solicitor with the terms of the operating manual would be a condition precedent to any liability of the underwriters to make payment under the policy.

LPL then accounted to underwriters, via Lloyd's brokers, for £140, plus the IPT of £62.50, less LPL's 32.5% brokerage on £140. Lloyd's brokers retained £7 brokerage for themselves before accounting to underwriters for the balance. Of the total premium of £1,312.50, £202.50 was paid out in this way. The premium was characterised in the binding authority as "£1,250 each case less £1,110 including underwriters' contribution to costs". The remaining £1,110 was split up three ways. £110 was paid as brokerage or commission to Claims Direct. £775 was paid by LPL directly to MLSS for "insurance services" (for which see para 18 below). The remaining £225 was paid by LPL into an MLSS retention fund. This was a trust account created at underwriters' request. The money was to remain there until the end of each case, when it could be released to MLSS. The reason for this arrangement was that underwriters wished to know that there was a reservoir of money available to them in the event that anything untoward happened to Claims Direct or MLSS and they were left with the run-off responsibility.

On 26th August 1999, at the same time as the binding authority was issued, Claims Direct made an agreement with LPL and MLSS whereby MLSS agreed to provide to LPL (on behalf of underwriters) what were described as initial insurance services and continuing insurance services for a reward of £1,000 per case. Relevant features of this agreement are set out in paragraphs 52 to 54 below. A significant part of the Master's judgment was taken up with an analysis of what was being provided to the customer under the description of insurance services.

This, then, is the scheme which Claims Direct introduced in August 1999. After it came into effect, a number of challenges were made by liability insurers in cases where successful claimants sought to recover as the premium for ATE insurance the whole of the "premium" for their Litigation Protection Insurance Policy. Test cases were then selected, and in November 2001 Master Hurst directed the trial of ten preliminary issues (divided into two tranches). 23 test cases were selected for the trial of the first tranche of cases. Two of them fell away prior to the trial, and another was withdrawn by consent at the hearing. Of the claimants whose test cases featured in the trial, 16 are now parties to this appeal. The defendants were grouped according to the liability insurers who stood behind them. Of the cases taken to appeal, the defendants represented by one insurer were involved in five of them, and those represented by another in a sixth. Those represented by a third insurer were involved in all the rest. For convenience these three groups of defendants have been referred to as the first defendants, the third defendants, and the second defendants, in that order.

3. The Issues

The first trial, with which we are concerned on this appeal, dealt with the issues in the first tranche. In the event these issues were reduced to four in number, and there is no appeal against the way that Master Hurst dealt with two of them. The two remaining issues were stated in these terms, so far as material to this appeal:

Issue 2:

Is the sum payable by a claimant properly to be regarded as a premium within the meaning of Section 29 of the Access to Justice Act 1999?

Issue 4:

(i) Are any of the benefits purchased by insurance forming part of the Claims Direct scheme collateral or extraneous to such insurance?

(ii) To what extent should the costs of collateral benefits be recoverable?

At the trial there was no real issue about the legitimacy of the premium of £140, the commission of £110 to Claims Direct, or the principle that IPT on an appropriate amount was allowable. For reasons I will explain, the Master went on to hold that the claimants were entitled to recover an extra £311.50 as premium, £30 as the premium for other insurance services, and £29.58 as IPT on the sums he identified as reasonable premium. The defendants do not seek to reduce any of these sums. The claimants, on the other hand, assert that they should have been allowed the whole of the premium of £1,250 plus IPT, and they bring this appeal on this basis. They also say that this premium was reasonable and proportionate in amount.

4. The applicable law

I gratefully adopt Master Hurst's statement of the applicable law. Section 29 of the Access to Justice Act provides that:

"Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in these proceedings, the costs payable to him may, subject in the case of court proceedings to Rules of Court, include costs in respect of the premium of the policy."

The Court of Appeal in Callery v Gray (No 2) [2001] EWCA Civ 1246; [2001] 1 WLR 2142 decided that Section 29 should be interpreted so as to treat the words "insurance against the risk of incurring a costs liability" as meaning "insurance against the risk of incurring a costs liability that cannot be passed on to the opposing party" (Callery v Gray (No 2), paras 59 and 60). The statutory framework is discussed in Callery v Gray (No 2) at paras 6-10, and important issues relating to the reasonableness of a premium at paras 11 to 13, 21 to 26, 29, 32 to 33 and 37 to 47.

CPR 43.2(1)(a) defines "costs" as including "any additional liability incurred under a funding arrangement ...". CPR 43.2(1)(k) explains that "funding arrangement" means an arrangement where a person has taken out an insurance policy to which Section 29 of the Access to Justice Act 1999 applies. CPR 43.2(1)(m) states:

" 'Insurance premium' means a sum of money paid or payable for insurance against the risk of incurring a costs liability in the proceedings, taken out after the event that is the subject matter of the claim."

MacGillivray on Insurance Law (9^th edition, 1997, para 72) defines the word "premium" in these terms:

"The premium is the consideration required of the assured in return for which the insurer undertakes his obligation under the contract of insurance (Lewis Ltd v Norwich Union Fire Insurance Co [1916] AC 509, 519)."

CPR 43.2(1)(a) includes "the insurance premium" in a definition of the words "additional liability".

Although Section 29 of the 1999 Act is specifically made subject to Rules of Court in the case of court proceedings, many of the test cases settled without legal proceedings ever having been commenced. Those cases came before the Master under the provisions of CPR 44.12A (costs only proceedings).

CPR 44.4 deals with the basis on which costs are to be assessed. The relevant part of this rule is in these terms:

"(1) Where the court is to assess the amounts of costs (whether by summary or detailed assessment) it will assess those costs –

(a) on the standard basis; or

(b) on the indemnity basis,

but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount.

(2) Where the amount of costs is to be assessed on the standard basis, the court will –

(a) only allow costs which are proportionate to the matters in issue; and

(b) resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party."

CPR 44.5(1) requires the court to have regard to all the circumstances in deciding whether costs, assessed on the standard basis, were proportionately and reasonably incurred, or were proportionate and reasonable in amount.

Section 11 of the Costs Practice Direction ("CPD") gives further guidance about the factors to be taken into account in deciding the amount of costs which are set out in CPR 44.5. The Practice Direction states:

"11.1 In applying the test of proportionality the court will have regard to rule 1.1(2)(c) ...

...

11.5 In deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs.

...

11.7 Subject to paragraph 17.8(2), when the court is considering the factors to be taken into account in assessing an additional liability, it will have regard to the facts and circumstances as they reasonably appeared to the solicitor or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement.

...

11.10 In deciding whether the costs of insurance cover is reasonable relevant factors to be taken into account include –

(1) where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its cost compares with the likely cost of funding the case with a conditional fee agreement with a success fee and supporting insurance cover;

(2) the level and extent of the cover provided;

(3) the availability of any pre-existing insurance cover;

(4) whether any part of the premium would be rebated in the event of early settlement;

(5) the amount of commission payable to the receiving party or his legal representatives or other agents."

In costs only proceedings under CPR 44.12A the Practice Direction states:

"17.8(2) In cases in which an additional liability is claimed, the costs judge or district judge should have regard to the time when and the extent to which the claim has been settled and to the fact that the claim has been settled without the need to commence proceedings."

In Callery v Gray this court gave guidance in relation to ATE insurance, and its approach was left undisturbed by the House of Lords ([2002] UKHL 28). In addition to the passages already cited, particular attention should be paid in this context to Callery v Gray [2001] EWCA Civ 1117 at [65], [91], [94], [95], [99(v)] and [100], [2001] 1 WLR 2122; and Callery v Gray (No 2) [2001] EWCA Civ 1246 at [57], [63] and [68] – [70], [2001] 1 WLR 2142.

In a judgment arising out of an appeal against the Master's case management decision in these proceedings, ([2002] EWCA Civ 428 at [44]) Arden LJ said:

"44. ... The expression 'premium' is not defined by the Access to Justice Act 1999. The court has been referred to the Civil Procedure Rules and various authorities. It is not appropriate for this court to determine the meaning of 'premium' on this appeal which is concerned with case management issues and orders as to costs. However, in case the matters determined by the Senior Costs Judge should themselves be appealed, the Senior Costs Judge will no doubt wish to make clear findings on all amounts which could properly be regarded as a premium if there is any doubt as to whether any single amount constitutes a premium. I would observe that, for the purposes of Section 29, it is the premium as between the claimant and the provider of the policy which is in issue. In my judgment the premium is not necessarily limited to payments paid on inception of cover, but could include any further amounts paid by, or on behalf of the insured, pursuant to terms agreed with the insurer. The premium could also include sums paid to the benefit of the insurer. We are told that the insurer has, in effect, outsourced claims administration. The costs of this is borne by Claims Direct on behalf of Underwriters. Any part of the sum paid by the insured which is devoted to this purpose may be capable of forming part of the premium."

She went on to refer to the decision of this court in Callery v Gray (No 2) in these terms:

"46 ... [T]he court specifically added 'Satellite litigation involving such an exercise [ie examining evidence of insurance cover] is however unsatisfactory. The Judge can only be expected to give broad consideration to such evidence. It is not part of a function of a Judge assessing costs to carry out an audit of the insurance business' ... [T]he court may wish to check the overall result which it reaches by reference to the alternative method of obtaining access to justice. This might involve looking at alternative rates of cover, or the costs which would be involved if litigation were to be funded in some other way. This has been called the 'top down' approach. Nonetheless, in making that comparison it may be necessary to bear in mind that like may not be being compared with like ... Nevertheless in my judgment, the comparison between the cover provided by these appellants and other means of financing litigation, including other insurance cover, is a relevant consideration to which the appellants could properly bring ... the attention of the Senior Costs Judge. I say this, bearing in mind the general purposes of the new methods of funding litigation introduced by the 1999 Act and by the fact that it is obviously highly desirable in the interests of justice that these methods should be competitive. A premium may not be reasonable if there are alternative ways of providing the same funding at significantly less expense."

This court has now given guidance as to the correct approach to be taken to proportionality in the context of costs assessments in Lownds v Home Office [2002] EWCA Civ 365, [2002] 1 WLR 2450.

5. Issue 2: The Master's judgment

The Master first addressed Issue 2: "Is the sum payable by a claimant properly to be regarded as a premium within the meaning of Section 29 of the 1999 Act?" He said that it had long been held that the cost of funding litigation was not a recoverable cost as between the parties:

"... [B]y established practice and custom funding costs have never been included in the category of expenses, costs or disbursements envisaged by the statute or RSC Order 62. To include them would constitute an extension of the existing category of 'legal costs' which is not under the prevailing circumstances warranted."

(per Purchas LJ in Hunt v R M Douglas (Roofing) Ltd, CAT 18 November 1987. This point was not considered in the subsequent House of Lords appeal: see [1990] AC 398).

He said that it followed that the only costs of funding litigation which were recoverable were those permitted by statute, in this case section 29 of the 1999 Act. Section 29 was specific and had been interpreted by this court in Callery v Gray. Anything falling outside the scope of that section was not recoverable.

He found that when a claimant entered into a contract with Claims Direct he was not exclusively a "party who has taken out an insurance policy". He was certainly given Evidence of Insurance, but this was only part of the package he purchased. In the Master's view a claimant was entitled to recover the actual reasonable cost of the insurance element. He went on to accept the claimants' submissions that he should not further analyse the amount which he found to be properly the insurance premium.

He said that the nub of these test cases was whether the sum paid by an individual claimant (£1,250 plus IPT) was a premium within section 29 of the 1999 Act, and if so whether it was reasonable. There was no dispute between the parties that the sum of £140 paid to LPL on behalf of the brokers and underwriters was indeed premium, and therefore recoverable. At the trial there was some argument, now no longer pursued, over the status of the £110 commission paid to Claims Direct. The main argument, however, centred on the £1,000 paid to MLSS in accordance with the agreement of 26th August 1999 (see para 18 above). Although Claims Direct was a party to that agreement, the agreement imposed no duties on that company. The Master considered that the recital to the agreement explained the true position:

"LPL has agreed with Claims Direct to introduce an insurance scheme ... and ... has made arrangements for the issue of an insurance policy underwritten by certain Underwriters at Lloyds ... in respect of which LPL has been appointed Underwriters' representatives, which will provide an indemnity for clients of Claims Direct ... in relation to legal proceedings whether formally issued or not ..."

The next paragraph of the recital stated:

"LPL has agreed to engage MLSS to undertake certain services ... which will enable LPL as Underwriters' representatives both to introduce and to manage the necessary insurance arrangements ..."

The recital went on to set out the requirement for MLSS to undertake the initial and continuing insurance services. The agreement provided that in consideration of the premium allocation (£1,000 for each and every claim) MLSS would provide LPL the initial and continuing insurance services described in the agreement. Claims Direct was given no role to play under this agreement except, by implication, the introduction of prospective claimants.

Mr Charlton QC, for the claimants, had argued, as he has before us, that since the contract between the individual claimants and Claims Direct was not a sham, the court could not go behind that contract to carry out an audit of the insurer's business. Similarly he argued that everything which a claimant received was sufficiently closely connected with the subject matter of the insurance (ie the risk that the insured might at the end of his case have a liability for both the costs of his own representatives and of the defendants' representatives) for the whole of the "premium" to be recoverable, and that no part of these services should be regarded as collateral benefits of one kind or another.

The Master considered that the flaw in this argument was that Claims Direct was not the insurer, nor even the agent of the insurer. Claims Direct offered to members of the public a package which included an insurance element. He accepted that most of the claimants who purchased the Claims Direct product were not sophisticated, and that they would have taken at face value what they saw in the advertisements and what they were told by Claims Direct's claims managers. They could not be expected to analyse how the money they paid was to be utilised, and therefore what proportion of it was potentially recoverable from a defendant. Nonetheless, he said, this situation could not of itself render the whole of the money paid to Claims Direct a recoverable insurance premium if it was not.

He said that the true position was that this insurance was provided by the underwriters through their brokers and coverholder LPL to the claimant via Claims Direct. The claimant would, if asked, almost certainly think that he/she was making an agreement with Claims Direct, and not LPL or the underwriters.

Under the 26^th August agreement MLSS had to carry out what were described as the initial and continuing insurance services, and the Master accepted that some of these might indeed be insurance services, and therefore covered by the premium. Other activities, although nominally undertaken for the benefit of underwriters, formed no part of the actual insurance since they were part of a normal claims handling service. If these services had not been carried out by claims managers, they would have been carried out by solicitors in the normal way. To the extent that this work was reasonable and proportionate it might instead be recoverable as costs on behalf of a successful claimant.

He said that the agreement between the claimant and Claims Direct was not an agreement with an insurer, and that the money paid under it was not all premium. Part of what was provided by Claims Direct under its Claims Protect Scheme was, however, an insurance policy, the premium for which was recoverable, in so far as it was reasonable. He therefore had to identify the amount attributable to the insurance.

He added that if this was wrong, and if the claimants' argument that the whole of the Claims Direct premium was a recoverable insurance premium was soundly based, he would then have to decide whether £1,250 plus IPT was reasonable. He addressed this topic later in his judgment (see paras 89-90 below).

He said that in deciding what constituted "premium" he would adopt the definition from MacGillivray on Insurance Law (see para 25 above). He therefore had to decide what part of the money paid by the claimant was the true consideration for which the insurer was undertaking his obligation under the contract of insurance. In considering the sums which properly went to make up the recoverable premium he said that the starting point was the £140, being the figure originally allocated to underwriters, a sum which included brokerage and commission. It had soon become apparent to the underwriters, however, that this allocation was badly wrong, and they exercised their contractual right to a review. It is unnecessary for the purposes of this appeal to refer in any detail to the Master's reasons for concluding that a further £311.55 per cover became recoverable as ATE premium in each case, because the defendants do not now challenge his conclusions. It is sufficient to say that after the review payments totalling £16.6 million were made to underwriters. These payments were made in respect of all covers bound in 1999 and 2000, a total of 53,282 covers in all. It was by this route that the Master accepted that underwriters received an extra £311.55 per cover.

6. The Master's judgment: Claims Direct's commission

The Master then referred to the commission of £110 received by Claims Direct for every insurance which was accepted. The evidence showed that they used this money for advertising purposes. He said that there was in principle no difficulty over the inclusion of a referral commission in the overall cost of an insurance premium. Although the commission was high it did not appear to him to be unreasonable, particularly in the light of the fact that this was a new product which necessarily had to be advertised heavily in order to generate the business.

As I have said, the Master's findings in paras 46 and 47 above are not challenged by the defendants on this appeal.

7. The Master's judgment: The payment to MLSS

The Master then went on to consider the breakdown of the sum of £1,000 which was paid to MLSS. Originally this fee to MLSS was described as "Claims Managers' Profit Commission". The amount payable to MLSS was later reduced, following the reallocation of premium. The Master said that the question he had to decide was the extent to which the Initial and Continuing Insurance Services were part of the insurance being provided by underwriters and, in so far as they did form part of the insurance, the value which should be put on them.

He began his analysis by following the guidance given by Arden LJ (see paras 32 and 33 above). In so far as underwriters had outsourced the "insurance claim handling" services to a third party, this did not make any difference when answering the question whether such a cost was recoverable in principle, if otherwise it would have been reasonable to expect underwriters to do these specific tasks themselves in order to provide the insurance product in question. The claimants had argued that once it was accepted that the services were of benefit or value to the underwriter they did not need to show any more. The Master did not accept this argument. He said that he had to examine each of the services provided by MLSS and to decide to what extent, if at all, they accorded with the guidelines suggested by Arden LJ.

In relation to the work undertaken by claims managers the Master bore in mind remarks written by Mr Raincock (of LPL) in a memorandum for underwriters dated 5th May 1999:

"Underwriters have expressed their reservations to [claim managers' profit commission] in principle because they were led to believe … that claims managers had some 'judgment' over claims pursued. This is not so; they are solely expected to provide a completed report form and are then effectively an 'outdoor clerk' who is the 'gofor' for the appointed representative ..."

8. The Master's judgment: Initial insurance services

The defendants had conceded that Item 1 (arranging for the completion of the Claims Direct application form) and Item 2 (arranging for the client to complete a credit agreement application form) were legitimately related to insurance. The Master agreed, and he added that he regarded Item 3 (forwarding the application form) as a necessary and integral part of the first two items. Item 4 (obtaining further information), on the other hand, was clearly part of the claims handling process. It referred to obtaining such further information as might be requested by the panel solicitor prior to his agreement to commence the legal proceedings.

9. The Master's judgment: Continuing insurance services

The Master then turned to the items described as "Continuing Insurance Services". He said that Item 1 (obtaining witness statements from clients, witnesses and experts) self-evidently related to claims handling. It did not constitute insurance services. Item 2 (monitoring the conduct of the panel solicitor during the course of the legal proceedings and reporting to LPL), on the other hand, seemed to him to be properly part of the insurance services.

Item 3 (arranging for the Claims Direct client to attend appropriate medical examination) and Item 4 (review by a costs draftsman) could not, in his view, form part of the insurance services, although he accepted that it was in the overall interest of underwriters that the claims were efficiently handled. Item 5 (maintaining relevant financial information as may be required for LPL), on the other hand, seemed to him without doubt part of the insurance services.

He rejected a submission by the defendants to the effect that because these services, or most of them, were also being provided by MLSS in the days before the Claims Direct arrangements included an insurance product, this prevented them being part of the insurance under the Claims Direct Protect Scheme. He said that the items he identified as being genuinely part of the insurance services represented legitimate outsourcing by the underwriters.

He then considered an argument by the claimants to the effect that because underwriters had an interest in the Initial and Continuing Insurance Services being carried out, and may indeed have insisted on them, and because the agreement with MLSS was not a sham, it was not possible to go behind it, nor to apportion the money paid to MLSS, unless it could be shown that the services were for the benefit only of the individual's underlying damages claim and that they were not required to be performed for the benefit of insurers.

The Master said that this approach was too narrow. He did not regard the whole of the money paid by a claimant to constitute premium. In order to assess what was truly premium it was necessary to consider the various elements which went to make up the total figure. In broad terms the Initial Insurance Services were to his mind properly part of the insurance services, particularly if Item 4 of the Initial Services was exchanged with Item 2 of the Continuing Services. This would mean that the whole of the Continuing Services (apart from Item 5) were claims handling, and not recoverable as part of the insurance premium. Item 5 (the maintaining of relevant financial information) was, it seemed to him, something which would be undertaken in any event as part of the monitoring of the conduct of the panel solicitor and reporting to LPL. He did not think there would be any significant increase in the amount required properly to remunerate this insurance service.

The Master then referred to figures in Claims Direct's Prospectus. He said that it appeared that about £400 per case was being spent on advertising, £75 on irrecoverable VAT, and £425 on services provided by franchisees. It seemed clear from the evidence that the amount actually paid for "insurance services" was £425. Of this £395 was said to be financed by money from the solicitors and the other £30 from Claims Direct's funds. The defendants had conceded that £30 should be allowed in respect of the insurance services, on the basis that their liability insurers were also being asked to pay £395 to the solicitors as a disbursement. The premium element paid towards the insurance services could not, in the Master's view, exceed the £30 to the franchisees paid from Claims Direct's funds. Money paid by the solicitors was not premium. He was satisfied that £30 was not an unreasonable amount to pay for the insurance services which he had described.

Adding together the sums he had held properly to be regarded as premium, £451.55 plus £110 (see paras 45 and 46) and £30 (see para 58) brought the total recoverable and allowable premium to £591.55 plus £29.58 IPT (as to which, see para 21 above), being sums totalling £621.13. As we have said, the defendants do not appeal against this award.

10. The Master's judgment: Issue 4

Master Hurst then went on to consider Issue 4. This issue, so far as it is still live on this appeal, was in these terms:

(i) Are any of the benefits purchased by insurance forming part of the Claims Direct scheme collateral or extraneous to such insurance?

(ii) To what extent should the costs of collateral benefits be recoverable?

He said that in his view the word "premium", properly understood, excluded the value of these items, so that this issue was relevant only if his decision on issue 2 was wrong.

The claimants invited him to approach this issue from the point of view of a claimant. It was the claimant who was intended to be helped by section 29 of the 1999 Act. What mattered, therefore, was what was known, or ought reasonably to have been known, by individual claimants when taking out their Claims Direct policies. The claimants asserted that no benefits were provided by the Claims Direct policy that fell outside the insurance allowed by section 29. They said that everything that they received was sufficiently closely connected with the subject matter of the insurance to permit its recovery.

They suggested that it would be anti-competitive and contrary to the notion of easy access to justice if collateral benefits were disallowed from a competitively priced policy. Individual claimants would have no knowledge of the detailed operations of Claims Direct, MLSS and their appointed solicitors. It was argued that claimants have to choose an ATE policy by reference to the overall costs to them, and by reference to the attractiveness of the services offered. The test of reasonableness should therefore be perceived through the eyes of the ATE cover buyer only. Accordingly any finding that a collateral benefit was not recoverable should be prospective only, because it would be only from the date of that finding that it could be said that a claimant was acting unreasonably in purchasing such cover.

Mr Newman QC, who appeared for the second defendants, had argued that there was a distinction between insurance services on the one hand and claims handling services on the other hand. Claims Direct provided claims handling services to its clients, and these were collateral benefits in respect of which nothing was recoverable. He relied on the finding of Master O'Hare in his report annexed to the judgment in Callery v Gray (No.2) (at para 51). Having described work done by claims managers (not necessarily in Claims Direct cases) Master O'Hare said:

"In my view these benefits are extraneous to legal expenses insurance and a substantial discount on the recoverable premium should be made in respect of them."

Lord Phillips MR in his judgment in Callery v Gray (No.2) referred to that paragraph of Master O'Hare's report and said (at para 33):

"If a payment described as a premium entitles the insured to benefits such as these it is ... at least arguable that to that extent the premium does not fall within the ambit of Section 29."

Lord Phillips gave guidance on the test of what is reasonable at para 12:

"It is important in this context to draw a distinction between two separate matters. The first is the nature of the benefits to which the litigant is contractually entitled in exchange for the payment of the premium. This falls to be determined from the terms of the contract under which the premium is paid. Section 29 permits the recovery of the premium where this is payment for insurance against a risk of liability for costs. If payment of a so-called premium buys a contractual entitlement to other benefits, it is, to say the least, arguable that the premium cannot to that extent be recovered under Section 29. Thus the court has to consider the terms of the contract under which the premium is paid to see whether it is simply a contract of insurance against liability for costs or whether it is something other than or additional to that."

Mr Hutton, who appeared for the first and third defendants, had argued that any benefits over and above those covered by the £140 paid to underwriters were collateral or extraneous and should not be recoverable. He referred in this context to the speeches of the House of Lords in Dimond v Lovell [2002] 1 AC 384, suggesting that they should be applied by analogy. The House of Lords found that the claimant could not recover the full amount charged under his agreement with a specialist vehicle hire company for a replacement car when his own car was damaged in an accident. Although it was reasonable for the claimant to use the services of such a hire company, he obtained more from the agreement than the cost of a replacement car, and the additional benefits were not recoverable against the defendant. The House found that the recoverable loss, after allowance had been made for the additional benefits, would normally be the market rate for hiring from an ordinary car hire company. See Lord Hoffmann at pp 401E-403A and Lord Hobhouse of Woodborough at p 407B-D.

Reliance was also placed by the defendants on the points already made in relation to the content of the initial and continuing insurance services. It was said that the claims manager in effect held the client's hand throughout the entire legal process. His services went far beyond true insurance services and should not be paid for as part of the insurance premium.

Master Hurst concluded on this issue that the starting point should be that any benefits over and above those covered by the payment of £451.55 to underwriters (which included an element of own costs cover) should be regarded as collateral or extraneous and should not be recoverable. If his decision on Issue 2 was wrong, he would hold that the premium of £1,250 included payment for the extraneous benefits, namely the claims handling services, which he had already identified, and that the costs of those services were not recoverable as premium. On the other hand the actual amount paid by Claims Direct for insurance services was £30, and that element was recoverable.

11. Issue 2: Conclusion

The main issue we have to determine on this appeal is whether the Master was correct in refusing to accept that the "premium" of £1,250 identified in the Binding Authority must be automatically equated with the premium referred to in section 29 of the 1999 Act. We were told that if we were to allow the "deconstruction" of a premium liability in the manner advocated by the defendants, insurers would raise endless arguments on the appropriateness of different elements of a premium, and that this would make the assessment of this type of "additional liability" a nightmare for those concerned with the assessment of costs. All that was needed, Mr Charlton said, was a proportionality check of the type already required by CPD para 11.10 (see para 29 above).

I certainly agree that the court should apply a proportionality check whenever costs are assessed on the standard basis (see para 34 above for the leading case on this topic). The courts will not sanction a situation in which the recoverable costs are altogether too high in relation to the value of a claim (but see CPD para 11.5 – set out in para 29 above – for the treatment of "additional liabilities" in this context). But this consideration in itself throws no light on the distinct issue we have to decide, namely what constitutes the "premium" on the facts of these cases for the purposes of section 29 of the 1999 Act. There is a particular feature here which is bound to excite attention. The services provided for the claimants were in most respects identical under the Portfolio Scheme and the Claims Direct Protect Scheme. How then can it be said that all the claims handling services (previously remunerated out of Claims Direct's 30% share of the award in successful cases) suddenly became insurance services when an ATE insurance element was added to the package? This consideration alone is sufficient to put a costs judge on inquiry.

The insurance agreement was not a sham in the sense that it was intended to give the appearance of creating legal rights and obligations different from the actual legal rights and obligations which the parties intended to create (see Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802). But before a court could be satisfied that when the parties to these unusual negotiations adopted the word "premium" in their arrangements in the sense of a premium paid for the purpose identified in section 29 of the 1999 Act it is necessary for it to conduct an exercise of the type undertaken by Master Hurst. In Street v Mountford [1985] AC 899, for instance, the parties gave the word "licence" to the agreement they had made as to the terms on which residential premises might be occupied. The House of Lords held, however, that the legal effect of their agreement could not be conclusively determined by the label they gave to it. Lord Templeman said at p 819E-F:

"..[T]he consequences in law of the agreement, once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence."

In order to analyse the true nature of the arrangements more deeply, I must go to the evidence of the claimants' three witnesses which the Master summarised in his judgment. He was clearly impressed by the experience and professionalism of each of them, and he accepted the evidence they gave.

The Master had taken as his starting point what Claims Direct told the public about its business at the time of its flotation. The relevant part of its prospectus reads:

"In total, the Group receives about £1,560 of gross revenue per claim, but incurs direct costs of approximately £425 and indirect costs of approximately £475. The Group makes a gross profit per claim of approximately £660."

Although Mr Doona (for whom see para 5 above) had not been with the company at the time the original figure for the premium was calculated, he said that underwriters had arrived at it by looking at their costs and the profit ratio they wished to make and settling the figure accordingly.

After describing the structure of MLSS's business (for which see para 6 above) Mr Doona told the Master that the direct costs of £425 related entirely to the payments made to the claims managers. In addition to the £395 they were paid by the panel solicitor, a further £30 came from other income of the group. He thought that the suggestion in the Reply that this £30 came from the premium was not strictly accurate. It would have been better to have said that the £30 simply came from Claims Direct's general income, although of course the amount the company received from LPL was the largest single component of this income.

As to the indirect costs of £475, he said that £75 represented irrecoverable VAT, and £350-£400 was his best estimate of the total cost of annual advertising. He said that there were also the indirect expenses of performing the claims handling services on behalf of underwriters, as required under the agreement. He found it very difficult to calculate a precise cost per policy for these services, because the work was not costed that way. He said that they had never tried to apportion the expenses of claims handling by isolating the expenses attributable solely to the services provided to underwriters from any other expenses, and then seeking to apportion this total cost to each policy. He agreed that a profit of £660 per claim, as shown in the prospectus, was an extraordinary one.

In his evidence Mr Doona was trying to identify the cost to MLSS of carrying out the work which underwriters required them to undertake under the 26^th August agreement. The origin of these obligations was made clear in the evidence given by Mr Raincock (see paras 10-12 above for the history). He said that underwriters were not willing to accept the risk offered to them unless the proponents of the risk were willing to undertake that they would continue to run an efficient business.

He explained that he was in the habit of carrying out random audits on individual files. If he was dissatisfied with what he saw, he would then report his dissatisfaction to MLSS, and they would then inspect the file to ensure that the panel solicitor was performing his duties in the manner required of him by the Operating Manual. He told how the number of panel solicitors increased from 175 to almost 400 in order to cope with the volume of business. Solicitors were required to attend a seven-day training course run by MLSS. An accreditation system was also set up.

Mr Raincock expressed the view that all these services were intrinsic to the insurance cover because without them the insurance policy could not have been managed. He accepted that the monitoring service, designed to improve performance, was not only provided for the benefit of underwriters. It benefited the claimants as well. He conceded that there might be an element of damages claim handling in the work undertaken by Claims Direct and MLSS.

Mr Primer gave evidence from the perspective of the underwriters. He said that underwriters had always approached this risk on the basis that virtually all the work involved in promoting the project and in the work of vetting cases and claims handling and administration would be subcontracted. Underwriters were concerned to ensure that these functions were properly carried out, particularly the vetting.

Since most of these functions were being subcontracted, underwriters took the view that they should calculate the "burning cost" per policy (with a margin for error, given their lack of experience with this type of policy) and then apply an appropriate margin for overheads and profit. [The phrase "burning cost" means the frequency of loss (ie the percentage of policies in which a claim is made) multiplied by the average cost of each claim]. Underwriters' figures were originally calculated on the assumption of a failure fate of 4-6%. In March 2002 the failure rate was about 25%.

He said that underwriters would not have been prepared to underwrite the business without proper arrangements being in place for promotion, vetting, claims handling and so on, and that they were not in a position to undertake this work themselves. There was a relatively small allocation of premium to pure underwriting risk. Underwriters expected LPL to maintain a rigorous supervisory regime over the activities of Claims Direct and MLSS, including the vetting procedures, in return for the 32.5% commission they were to receive. The initial £91 net premium turned out to be a "poor call" due to the excessive failure rate experienced in practice.

So far as Lloyd's internal arrangements are concerned, underwriters are bound by an agreement with Lloyd's (which permits them to carry on business at Lloyd's) whereby a limit is placed on the total gross premium which a syndicate is permitted to underwrite. It is noteworthy that the figure which appeared in the syndicates' books as premium income was the net amount (originally £91), and not the £1,250, although that sum was described as "premium" in the binding authority. Section 21 of that authority provided, in its final form, that:

"Unless otherwise agreed by the Underwriter in writing and endorsed hereon the total gross premium income attaching hereunder shall not exceed 21 million after the deduction of the Premium Allocation payable to MLSS." (Emphasis added)

In his witness statement Mr Primer said, like the other witnesses, that no specific costings were provided for individual components of MLSS's work. He would readily accept, however, from his experience in the industry and his knowledge of the work MLSS did, that the cost per claim would be likely to be several hundred pounds. In his oral evidence he put this figure at between £300 and £900. He said that he knew what it cost to bring third party administrators in, what coverholders had to pay their auditors, and what brokers charged for their services.

In the course of his submissions on the appeal Mr Charlton relied on what his clients called a "deconstruction schedule" which was based on this evidence. Their case was founded firmly on the contention that the only contract which the individual claimants had made was a contract with the underwriters, who undertook to provide them with protection against their own costs and the other side's costs in the event that their claims failed, and all this for a premium of £1,250 (plus IPT). Viewed in this light, the cost of "risk control/claims handling/vetting" which underwriters required MLSS to perform for them could be put between £225 (the original amount paid into the retention fund) and £689 (the whole of the £1,000 paid to MLSS, less the £311 clawed back once premium was reallocated). Similarly, the sum of £475 mentioned in the Claims Direct prospectus as part of the indirect costs attributed to each claim could be properly treated as advertising and promotion costs required by underwriters.

The Master considered that there were two relevant contracts with which each claimant was concerned, and not merely one. Once Claims Direct accepted the proposal the claimant made in the Fair Trading Statement (see para 13(2) above) it expressly undertook to assist him with his claim. Consideration was given for this undertaking because Claims Direct expected to profit as a result of the obligations the claimant agreed to undertake. The task the Master had to perform in these circumstances was to identify how much of the premium allocation to MLSS in truth represented the cost of the obligations Claims Direct undertook (to all its customers) to procure, even though in a quite different agreement, to which the claimants were not parties, many of these services were labelled "insurance services".

In my judgment it is clear that the Master attached too much weight to the figures quoted in the prospectus, about which Mr Doona was quite rigorously cross-examined. The difference between the minimum fee of £395 which a panel solicitor had to pay a claims manager and the sum of £425 quoted in the prospectus as a direct cost suggests a net outlay of £30 by MLSS on each claim, but I do not consider that this figure casts any particularly useful light on anything the Master had to decide. It is clear that MLSS incurred significant expense in performing the "insurance services" required of them under the 26^th August agreement. The central issue under Question 2 is whether the Master was entitled to lift the veil and to be influenced by what was actually being provided in return for the premium allocation paid to MLSS (see paras 18 and 39 above).

In my judgment, in this quite exceptional case, it was inevitable that the Master should adopt this approach in order to identify what should truly be treated as the premium. As this court explained in Callery v Gray (No 2) at paras 11-12:

"It was common ground, and rightly so, that the Court, when considering whether to award an insurance premium by way of costs, has to consider whether the premium is reasonable. It was also common ground that, insofar as the Court finds that the premium is not reasonable, it can and should reduce it. There was debate as to the appropriate approach to the application of the test of what is reasonable.

It is important in this context to draw a distinction between two separate matters. The first is the nature of the benefits to which the litigant is contractually entitled in exchange for the payment of the premium. This falls to be determined from the terms of the contract under which the premium is paid. Section 29 permits the recovery of a premium where this is payment for insurance against the risk of liability for costs. If payment of a so-called premium buys a contractual entitlement to other benefits it is, to say the least, arguable that the premium cannot, to that extent, be recovered under section 29. Thus the Court has to consider the terms of the contract under which the premium is paid to see whether it is simply a contract of insurance against liability for costs or whether it is something other than, or additional to, that."