Many claims issued against motor finance companies over the past few years have been funded with the benefit of an ‘after the event’ (ATE) insurance policy. Such policies are taken out by claimants to cover their costs exposure (opponent’s legal costs and own disbursements) should they lose.
Where the claimant is successful and the ATE insurance policy was taken out before 1 April 2013, the premium can be recovered from the losing defendant.
The reasonableness (or otherwise) of a recoverable ATE insurance premium is often a contentious issue as the premium can appear disproportionately large compared to the sums claimed and the costs actually incurred.
Helpfully, the recent decision in Kelly v Black Horse Ltd has affirmed that such premiums must relate to the costs exposure they purport to cover.
In Kelly, the claimants succeeded on a payment protection insurance claim and were awarded 70% of their costs which included a pre-1 April ATE insurance premium.
The premium was £15,900. Black Horse’s costs were £5,837.10 and the claimants’ disbursements £1,406.20. The insurer’s potential costs liability was therefore £7,243.30, less than half the premium paid. The premium was also significantly more than the damages awarded to the claimants, being just over £11,000.
Black Horse argued before Senior Costs Judge Master Hurst that the premium was disproportionate.
Master Hurst held that, historically, judges had been uncomfortable in accepting
challenges to the reasonableness of ATE premiums without the benefit of expert evidence which was notoriously difficult to obtain. A broad brush approach to premiums was therefore generally taken.
However, premiums should be linked to an assessment of the risks and the prospects of success and if the premium was unreasonable or disproportionate, it should be disallowed.
A formula known as the "burn" premium (being the risk of paying out times the exposure) plus a percentage for profits had been utilised in a number of cases in determining a reasonable premium.
Black Horse argued that formula should be used here to which 10% brokerage and 15% profit should be added. Using the figure of £7,243.30 and the risk of paying out as found by Master Hurst (35%), the premium should be £3,168.95.
Master Hurst found the premium claimed to be wholly disproportionate. At the outset, the defendant’s costs, and so the insurer’s potential exposure, were not known. A reasonable costs prediction was £7,000.
Applying the formula to those costs and the claimants’ disbursements, the potential exposure was £8,406 which produced a premium of £3,677.63.
Applying a broad brush cross-check, it was reasonable for the defendant to pay 25% of the premium claimed, being £3,750.
That compared favourably to the "burn" premium formula. Including insurance premium tax, the claimants were allowed £3,975.
In the absence of compelling evidence as to how the premium was calculated, paying parties should encourage the court to apply the "burn" premium formula as the appropriate starting point to ensure the premium properly reflects the insurer’s costs exposure.
ATE insurance premiums for policies obtained post 31 March are generally no longer recoverable from a losing party.
Greg Standing is a partner in Wragge &
Co’s motor finance litigation team