EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Reed Lord Drummond Young Lord Marnoch	[2011] CSIH 8 CA105/09 OPINION OF THE COURT delivered by LORD REED in the cause QUANTUM CLAIMS COMPENSATION SPECIALISTS LIMITED Pursuers and Reclaimers; against WREN INSURANCE SERVICES LIMITED Defenders and Respondents: _______

For the Pursuers: Smith QC, Beynon; Lefevre Litigation

For the Defenders: Lake QC; Simpson & Marwick WS

1 February 2012

Introduction

[1] This case is concerned with the interpretation of a policy of insurance. The pursuers ("Quantum") carry on business in funding and managing litigation on a "no win, no fee" basis. They agree to meet the outlays incurred by their client's solicitors in pursuing the litigation and to indemnify their client against any liability in expenses in return for a proportion of any damages which may be awarded to their client.

[2] The defenders ("Wren") are an insurance company who, at the relevant time, entered into policies under which they undertook to indemnify companies such as Quantum in respect of such outlays and expenses. In particular, Wren entered into annual policies with Quantum which provided insurance up to one of four agreed levels of cover, with a maximum cover of £150,000. In the case with which the present proceedings are concerned, the agreed level of cover was £100,000. The policies also provided for an excess of £10,000 in respect of each claim. In the present proceedings, Quantum seek to recover £90,000, being the agreed cover of £100,000 less the excess of £10,000. Wren deny liability under the policy.

The policy

[3] It is convenient at this stage to set out the material terms of the policy. The "Insuring Clause" states:

"In consideration of the Insured having paid the premium ... Underwriters agree to pay on behalf of the Insured:

(a) all Defendant Costs ordered by the Court to be paid by any Client of the Insured to the Defendant in any Legal Action but not exceeding the Sum Insured ... provided always that the Client and their Legal Action has been declared and accepted by Underwriters.

(b) Following loss of any Legal Action in Court, all Own Disbursements incurred by the Insured's Legal Representative, but the total claim under (a) and (b) of this Insuring Clause must not exceed the Sum Insured ..."

It is to be noted that Wren's liability under head (b) arises only in the event that the client loses his case.

[4] Certain terms are defined in a "Definitions" clause. In particular, "Defendant" is defined by reference to a schedule to the policy, where the following definition appears:

"DEFENDANT: All Defendants subject to a Court action managed by the Insured shown in Item I of this Schedule, providing such action has been declared to Underwriters in accordance with the Declaration Clause forming part of this policy."

"Insured" is defined, again by reference to the schedule, as meaning Quantum. The other material definitions are as follows:

"Defendant Costs - All costs, expenses and disbursements ordered by the Court to be paid by the Client in any Legal Action.

...

Legal Action - Any Action (including interlocutory proceedings) shown in Item VII of the Schedule. Any counterclaim or appeal will only be included with Underwriters' prior written consent.

Own Costs - All costs, expenses reasonably and properly incurred by any Legal Representative in the prosecution of any Legal Action.

Own Disbursements - All costs and expenses, but not Own Costs, reasonably and properly incurred by the Legal Representative in the prosecution of any Legal Action."

In relation to the definition of "Legal Action", item VII of the schedule is in the following terms:

"LEGAL ACTION: All Court action managed by the Insured shown in Item I of this Schedule, providing such actions have been declared to Underwriters in accordance with the Declaration Clause forming part of this policy."

[5] An "Exclusions" clause provides for a number of exclusions from liability. In particular, Wren are not to be liable for:

"(k) any Defendants Costs, Own Disbursements and Own Costs which have been incurred after the Insured and/or their Client becomes aware of any fact or matter which adversely affects the prospect of success in any Legal Action or the quantum of the Claim unless Underwriters have given their prior written consent which will not be unreasonably withheld."

[6] The policy also contains a number of clauses under the heading "Conditions". They are prefaced by the following provision:

"If the Insured and/or their Client does not comply with any obligation or requirement in the following Clauses then Underwriters shall have no liability under this Policy."

The conditions include, under the heading "Providing Information to Underwriters", the following:

"The Insured and/or their Client must inform Underwriters as soon as possible if they become aware of any fact or matter which adversely affects the prospect of success in any Legal Action or the quantum of the claim."

It is the interpretation of that provision, which we shall refer to as the information condition, which is at issue in the present proceedings.

[7] Two other clauses in the policy require to be noted. First, a clause headed "Closing of Legal Action" permits Wren to discharge their liability in respect of any legal action at any time, by paying to Quantum all Defendant Costs and Own Disbursements payable as at that date, subject to the excess. Secondly, a clause headed "Declaration Clause" provides:

"Underwriters agree to include any Client Legal Actions, formally accepted by Underwriters and declared within the Period [from October 1999 to 30 September 2000], subject to the terms and conditions of this Policy, providing the Insured immediately completes a proposal form and sends this to the Underwriters at their address shown in this policy."

The relevant facts

[8] Mr John Carter was injured on 26 May 1997 while he was a passenger in a car being driven by his wife, Mrs Kathleen Carter. The car took off at speed, left the road and hit a tree. Mrs Carter had been suffering from progressive multiple sclerosis. She had been involved in an earlier accident as a result of her inability to operate the foot brake. Hand controls had been fitted to her car shortly before the accident. Mr Carter raised an action of damages against his wife, in which it was alleged that she had placed her foot on the accelerator pedal and had been unable to remove it. He obtained the assistance of Quantum after the solicitors whom he had initially instructed withdrew from acting for him. Mrs Carter's solicitors denied that she had been at fault and stated that they were considering bringing into the action as third parties Harpers Garage and a Mr Wood, who had fitted hand controls to the car and had not fitted a pedal guard.

[9] Quantum submitted a proposal form to Wren as envisaged in the Declaration Clause of the policy. In the form, which was dated 22 March 2000, they identified the client as Mr Carter and the defender as Mrs Carter. In answer to a request in the form that they "provide a summary of facts and issues involved in this case", they stated that it concerned a road traffic accident resulting in personal injury. They also stated that the defender might bring into the action as a third party the garage which modified the car shortly before the accident. In answer to other questions, they estimated the duration of the proof at five days, the client's total costs at £20,000 and the defender's total costs at £25,000. Wren agreed to include the action under the policy.

[10] In May 2000 Mr Carter's legal representatives decided that three additional defenders should be brought into the action, on the basis that a pedal guard should have been fitted to the car: Harper Motor Company Limited ("Harper"), which was thought to operate Harpers Garage; Harpers (Aberdeen) Limited, an associated company which might have done so; and Mr Wood. Quantum were advised that these additional defenders had been convened. They did not inform Wren.

[11] During 2002, having ascertained that Harpers (Aberdeen) Limited were not responsible for Harpers Garage, Mr Carter's legal representatives abandoned the action so far as directed against them on the basis that no expenses were found due to or by either party.

[12] The action against the remaining defenders proceeded to proof during 2004. The proof lasted eleven days. The evidence against Mr Wood did not emerge as expected, with the consequence that Mr Carter's action against him was abandoned with a liability in expenses. The Lord Ordinary awarded Mr Carter £1500 in damages against the executors of Mrs Carter, who had by then died. He held that Mr Carter had failed to establish his case against Harper that they should have advised that a pedal guard be fitted. Mr Carter was found liable to Harper in expenses. An appeal was abandoned after a tender was lodged which Mr Carter accepted. The total outlays and expenses which Quantum had to pay amounted to about £212,000.

The issue

[13] The matter in dispute is whether the convening of the additional defenders in May 2000 was a "fact or matter which adversely affects the prospect of success in any Legal Action", in terms of the information condition. If so, it is accepted that Quantum are in breach of the condition, and that Wren are therefore entitled to repudiate liability under the policy.

[14] The Lord Ordinary determined this issue in favour of Wren. He observed that it was clearly a material concern to a legal expenses insurer to know how many defenders were involved in an action, as that might significantly affect its exposure. The convening of a multiplicity of defenders, and the recovery of a modest sum of damages from one while incurring a significant liability in expenses to those who were absolved from liability, might be a pyrrhic victory for the litigant if he were personally liable for the expenses, and would certainly not be a success for Quantum. The concept of "prospect of success" therefore had a broader meaning in the context of this type of insurance than the probability of establishing liability. The Lord Ordinary concluded (para 32):

"In my opinion the phrase, 'prospect of success in any Legal Action or the quantum of the claim' ... refers not only to the prospect of establishing liability against a defender and the amount of the claim, but also to a broader consideration of recovery of damages or the achievement of another legal result at an economic cost."

So understood, the prospects of success of the action had been adversely affected by the convening of the additional defenders. That was therefore a circumstance about which Quantum ought to have informed Wren.

[15] One difficulty with the Lord Ordinary's reasoning is that it assumes that the additional defenders are party to the same "Legal Action", within the meaning of the policy, as the original defender. Elsewhere in his Opinion, however, the Lord Ordinary held that that was not the position:

"While the action against Mrs Carter remained the same action ... as a matter of court procedure after the additional defenders were brought into the cause, I consider that in the context of the insurance policy, and in particular the Insuring Clause and the Declaration Clause, the only 'Legal Action' which Wren had accepted was that against Mrs Carter ... Quantum did not inform Wren of the action against the additional defenders; nor did Wren accept the risks of that action." (para 36)

[16] Both parties accept that the Lord Ordinary was correct in taking that view. If that is so, however, then the arguments which he advanced in favour of his interpretation of the phrase "prospect of success in any Legal Action" become less compelling. Since the insurer is not on risk for the outlays and expenses incurred in respect of proceedings against additional defenders unless it has been informed of those proceedings and has accepted the risk, the convening of defenders of whom it has not been informed and for which it is not on risk is of much less significance. Similarly, the possibility that the client might recover a modest award of damages from one defender while incurring a significant liability in expenses to others is of little if any significance to the insurer if it is not on risk in respect of that liability. In such a situation, a pyrrhic victory for the client might nevertheless be a commercially successful venture for the insurer.

[17] Counsel for Wren recognised the force of these criticisms of the Lord Ordinary's reasoning, but submitted that they were not a complete answer to the more fundamental point which lay at the heart of the Lord Ordinary's approach: namely that the concept of "success", in the context of the contract of insurance between Quantum and Wren, had a broader meaning than the client's success in establishing the liability of the defender. Success, it was submitted, was Quantum's not having to indemnify their client in respect of any liability in expenses or the disbursements made on the client's behalf. In that regard, counsel submitted that the convening of additional defenders was of material concern to the insurer even if it was not on risk in respect of the outlays and expenses incurred in the proceedings against them, since their involvement might extend the duration, and hence the cost, of the proceedings against the original defender. Counsel acknowledged that, following that approach, the duty to inform the insurer of any matter adversely affecting the prospects of success would extend to any matter which would materially increase the cost of the proceedings. In relation to the separate contractual duty to inform the insurer of any matter adversely affecting the quantum of the claim, counsel submitted that the explanation for the imposition of such a duty, in addition to a broadly construed duty in respect of the prospects of success, might lie in the possibility of a tender being made: whether a tender adversely affected the prospects of success, as so understood, would in that event be related to the quantum of the claim.

[18] We do not find these submissions persuasive. The concept of the prospects of success in an action, particularly when used in apposition to the quantum of the claim, has a natural and familiar meaning: put shortly, the likelihood of the pursuer's establishing liability on the part of the defender. In the context of an action of damages in particular (as is envisaged in the clause in question, since it refers to the quantum of the claim), the prospects of success would ordinarily mean the likelihood of establishing the defender's liability to pay damages. That construction also makes sense in the context of the policy, since the insurer's liability under the Insuring Clause will be significantly affected by the client's success or failure in his action: whether there is a liability for "defendant costs" will often depend on whether the client is successful in the action, and the insurer's liability "for own disbursements" arises only "following loss of any Legal Action in Court". There is nothing in the surrounding circumstances which appears to us to point away from that meaning. In particular, we are not persuaded that a different meaning is necessary in order to give the policy a commercially sensible construction. There are of course commercial reasons why an insurer might wish to be informed of a broader range of considerations bearing upon the likelihood of his having to pay out under the policy, as counsel submitted; but that does not entail that the words in question must be so construed in order for the policy to make commercial sense. Considered from the perspective of the insured, an obligation to inform the insurer of anything which would materially affect the prospects of their having to indemnify their client, and call upon the policy cover, would potentially be much wider in scope than an obligation relating to their client's prospects of success in the litigation, and its operation would be less easily predicted and determined. We do not consider that the parties can be taken to have agreed to the imposition of an obligation of that character when they agreed that, as a condition precedent to any liability on the part of the insurer, it must be informed of any matter adversely affecting the prospects of success in the action.

Conclusion

[19] It is a matter of agreement between the parties that, in the event that Quantum are not in breach of the condition precedent, as we have held, they are entitled to be indemnified under the policy in respect of the outlays which are referable to the proceedings against Mrs Carter. It is also a matter of agreement that the relevant sum, after deduction of the excess, is £63,032.56, and that interest is due on that sum from 9 August 2009. We shall accordingly grant decree in those terms.