Sharratt v London Central Bus Co

On 15 May 2003 I gave judgment dealing with the premium issues in these test cases (see paragraph 253 and following).

Different levels of premium were claimed in respect of Lloyd’s insurance for the 2000 year and for the 2001 year and in respect of NIG for the 2001 year. At paragraph 335 of the judgment I said this:

Earlier in the judgment I had explained the position with regard to the 2001 Lloyd’s year:

It is now common ground between the parties that the full swing premium will be payable to the underwriters. The judgment continued:

The parties have been unable to agree any figures between them.

In his skeleton for the hearing of the premium issues Mr Neish pointed out that the swing premium is capped at £550 per case (£312 + £238). This was confirmed by Mr Charlton in his skeleton (paragraph 19). His submission was:

Mr Charlton suggests that there are two questions to be asked:

What is the amount of the premium which covers qualifying Section 29 benefits?

What effect does the reasonableness and proportionality test have on that figure?

When giving judgment in this case I also gave to the Claimants permission to appeal. The Claimants, now, properly point out that the submissions which they make about swing premium are on the basis of my original findings in respect of which they, of course, reserve their position. It follows that any decision on swing premium might have to be adjusted should the Appeal Court overturn the original findings.

In arriving at the figures for premium allowed in the original judgment I approached the analysis in what Mr Charlton calls the "building blocks" manner and then cross checked the figures using Mr Cowley’s approach. Mr Charlton now argues that the appropriate starting point is the figure of £550, which is agreed to be the maximum amount payable under the swing premium agreement (ie, £312 plus £238). The calculations of both parties put forward during the substantive hearing of the premium issues started from a base of £312. If the figure of £550 is used as a starting point and deductions made for ring-fencing (£10, together with 15% for cost of funding and 18% for the cost of insuring the AIL fee) that figure comes down to £358.50. At this point the calculations of both parties are the same. They then diverge. Mr Charlton goes on to demonstrate that if one utilises Mr Neish’s approach of making certain deductions for non-recoverable items and then adding back recoverable items, this produces a figure of £611. If, on the other hand, the figures relied on by the Claimants at the original hearing are utilised, the figure produced is £744.

In order to arrive at his figure of £744 Mr Charlton commenced with the premium figure of £550, deducted only the £10 for ring-fencing and then added back £16.50 for Prentis Donegan commission, £78 coverholder commission and £80 introductory commission, as well as £30 for insurance services.

Mr Neish argues, in my view correctly, that the correct starting point should still be £358.50 which, since that incorporates the deduction for ring-fencing, produces a figure of £563 (£358.50 + £16.50 + £78 + £80 + £30).

Mr Charlton suggests that in the original judgment a figure halfway between that put forward by the Defendants and by the Claimants was taken and the court validated its findings by use of the Cowley cross check. A halfway point between the figures put forward by Mr Charlton bringing into account the swing premium is £677.

Turning to Mr Cowley’s cross-check, Mr Charlton suggests that, for the purpose of this cross check, the figure for TAG commission should be the figure put forward by the Claimants in their closing submissions, namely 32.5%. He suggests that this figure should be added to the 25% used when following the building block route, and therefore the appropriate percentage for TAG commission should be 57.5%. Utilising that figure produces a figure for premium including swing premium of £684, which he suggests compares favourably with his midpoint figure of £677 described above. He therefore submits that the appropriate figure is £684, to which should be added 5% for IPT, giving a total recoverable premium for 2001 Lloyd’s of £718.20.

Mr Charlton’s final suggested figure of £718 is coincidentally an increase of exactly the amount of the full swing premium (ie, £238 higher than the £480 which I originally allowed).

The Claimants never put forward any proposed figures at the original hearing and at paragraph 322 of my judgment I summarised the rival figures which I had arrived at, having had to construct figures which, so far as I could tell, reflected the Claimants’ case. These figures were all significantly more than the Defendants’ figures and significantly more than the figures finally arrived at in my judgment. I do not find the figures put forward by Mr Charlton in his submission to be helpful in relation to swing premium.

Mr Neish in his most recent skeleton points out that, although the judgment to which I have referred accepted the Defendants’ submission, this was based by the Defendants on the ability to identify the recoverable risk premium. In Mr Neish’s submission it is necessary to isolate the recoverable risk premium (i.e. that element of the per case figure paid to Lloyd’s underwriters in 2001 which insures recoverable benefits). Once that figure has been isolated two things need to be done:

A pro-rating exercise designed to arrive at an uplift for "swing premium" in the same ratio as that between the base "risk premium" (£312) paid to Lloyd’s underwriters and the maximum payable to them (£550) under the swing mechanism.

The imposition of a pro-rated cap to reflect the fact that the swing was subject to a cap however bad the losses became.

Since the judgment arrives at a figure for recoverable premium that is "reasonable and proportionate in all the circumstances", the Defendants have attempted to identify what they call "an indicative figure" for swing premium.

As I have said it is common ground between the parties that the starting figure is £358.50. Mr Neish however goes further and suggests that the £358 should be reduced by operation of a pro rata cap which prevents the swing premium rising any further. This is explained in the explanatory footnotes to the Defendants’ premium schedule (Annex B) as follows:

Mr Charlton points out correctly that the agreement for swing premium: "Overall Premium Allocation Refund" in the Fourth Schedule to the TAG Conditional Fee Insurance Scheme Service Agreement of 5 November 2002 (I/2560-2561) makes no mention of any cap by reference to 43% or any other percentage. The provision simply states:

At paragraph 322 of the judgment I set out in tabular form the rival figures put forward by the parties. The relevant elements of that table are as follows:

The Defendants, using Mr Cowley’s approach upon which they had relied in arriving at their figure of £441, rely on similar calculations to arrive at a figure inclusive of capped swing premium of £557.55 (£531.00 + £27.55 IPT). Mr Neish points out that any figure for premium must be subject to adjustment by reference to the reasonableness cross check and in this regard he points to the recoverable premium in respect of NIG in 2001, namely £425 arrived at without any element of swing premium.

Since the figure of £358 is itself arrived at from the capped premium of £550 I am not persuaded that it is correct to carry out the pro rata capping which Mr Neish advocates. He continues the exercise in relation to brokerage, coverholder’s commission and acquisition commission producing the anomalous result that the figures under these heads are lower than those which he put forward for the premium before swing. Using those original figures in relation to the starting point of £358 produces a total, inclusive of IPT, of £608 (£358 + £11 + £102 + £78 + £30 + £28.95) which is very close to Mr Charlton’s figure of £611.

In my judgment the preferred approach is to take as a starting point the figure of £358 and to add to it figures for brokerage, coverholder’s commission and acquisition commission at the same rate as applied to the premium before swing. Mr Neish correctly submits that the swing premium related only to the premium paid to underwriters and was not intended to and did not affect the amounts payable as brokerage and commission. The figure which I arrive at is therefore £608.

The Defendants’ present position is that no further premium should be allowed in respect of the 2001 Lloyd’s policies in any event because, in Mr Neish’s submission, Mr Cowley’s model already factors in the effect of swing premium so that his cross check figures require no further adjustment. Allowing a higher premium to those claimants who randomly happened to be provided with a Lloyd’s policy rather than an NIG policy would be unreasonable and disproportionate to the extent that it allowed any further disparity between the two types of policies for 2001. The present difference is £55 per case. Finally, he submits, allowing greater premium recovery than £480 for 2001 Lloyd’s policies would take the premium for such policies outside the range of what is reasonable and proportionate in all the circumstances.

Mr Cowley in his first witness statement (D/39/1020(a)) explains the BWD Report at paragraph 9 (see paragraph 237 of my earlier judgment). As I explained in my judgment (paragraphs 244 ff) Mr Cowley carried out two exercises. One was an analysis "where explicit assumptions were made around levels of brokerage commission and expenses which might be implicit within the premium calculation". This exercise was performed separately to the other exercise set out in the tables exhibited to his witness statement. The formula used by Mr Cowley to carry out his analysis enabled Mr Neish to produce his "calculation of level of premium based on actual underwriting results". This schedule is a spreadsheet calculated on the basis of Mr Cowley’s formula which allows any figure which is put into the spreadsheet to perform "an illustrative calculation". It was that spreadsheet which I used in my original consideration of the judgment to carry out the cross-check. Mr Cowley explained this in cross-examination (day 4, page 124).

Mr Charlton submits that Mr Cowley’s formula does not refer to swing premium but Mr Neish argues that, because of the way the model is constructed, the swing premium is factored in and for that reason the figures which he put forward at the earlier hearing (totalling £441) should not be increased and that consequently my figure of £480 should not be increased. I am not persuaded that Mr Cowley’s formula does in fact take swing premium into account in the way suggested by Mr Neish, although it is possible to alter the figures for premium in the spreadsheet to reflect an allowance for swing premium.

Using Mr Cowley’s spreadsheet and taking as the basis for the cross check the figures for 2001 Lloyds, which I used for the purpose of the cross check in my earlier judgment, the only item which should be altered is the figure for underwriters’ profit. I see no reason to depart from the percentage used for TAG commission in the previous cross check, nor in the figures for brokerage and insurance services. If however the percentage for underwriters profit is increased to 34% it will be seen that the premium increases to £605.90 inclusive of IPT. The figure for TAG commission also increases coincidentally but in my view that is immaterial for the purpose of this cross check. The figure arrived at is sufficiently close to the figure of £608 (set out at paragraph 21) to provide a useful cross check (see paragraph 329 of my earlier judgment).

Having arrived at the figure of £608 for premium including swing premium and IPT, the question now to be decided is: to what extent is that figure recoverable from the paying party? Mr Neish argues that the premiums so far approved by the Court of Appeal range from £357.50 in Callery v Gray to £621.13 in Claims Direct . In respect of Claims Direct he points out that that agreement provided for both sides’ costs and therefore provided wider benefits than those provided under the TAG scheme. He also points out that the amount allowed in respect of NIG policies was £425 inclusive of IPT and that to allow in respect of 2001 Lloyds policies more than the £480 already allowed would take such policies outside the range of what is reasonable and proportionate in all the circumstances.

During the course of the original hearing Mr Primer told me that his firm had suffered losses for the 2000 year in respect of which he demanded further payment as a condition of providing TAG with further facilities. It was as a result of that loss experience that Mr Primer insisted upon the swing premium provisions for the 2001 year. Mr Charlton told me that in respect of NIG 2001 that company has also experienced a loss, although I have no formal evidence about it. In exhibit SDM4 to his statement of 21 February 2003 Mr McCulloch exhibited a list of ATE premiums charged by various companies. These range from £315 in cases relating to road traffic accident fast track (Law Society/Accident Line Protect) to £525 (up to 30 August 2001) offered by Litigation Protection. Also listed was the Temple policy of £367.50 used in Callery v Gray and a number of more expensive policies offered by the Law Society/Accident Line Protect. In respect of other cases:

Mr McCulloch also lists the Claims Direct and TAG premiums. Both of these have of course been reduced in my earlier judgments (Claims Direct reduced from £1,250 to £621.50; TAG reduced from £997.50 to £480). Apart from the Temple policy used in Callery v Gray I am not aware of any of the other policies having been the subject of judicial decision, nor were any such decisions drawn to my attention.

Paragraph 11.10 of the Costs Practice Direction states:

Under the TAG scheme all work was done by panel solicitors under a conditional fee agreement with a success fee but the success fee was required to be zero. The purpose of this was presumably to keep down the overall cost. The Costs Practice Direction also provides (at paragraph 11.7):

Paragraph 17.8(2) states:

The effect of these two paragraphs was confirmed by the Court of Appeal in Halloran v Delaney [2002] EWCA Civ 1258; [2003] 1 WLR 28:

In the context of these Test Cases I have to decide what figure represents a reasonable and proportionate amount for the paying parties to pay. There are 18 test cases in all, all of which settled pre-proceedings. They have come before me in the course of costs only proceedings. The damages agreed range from £1,000 to £3,606.49. In arriving at a figure which appears to me to be reasonable and proportionate I bear in mind what I said in paragraphs 232 and 233 of my earlier judgment. Whilst it may be, in the future, that there will be evidence showing that the premiums charged by NIG and others are insufficient to enable those companies viably to offer ATE insurance, it is necessary for me to approach the matter on the basis of the solicitors’ knowledge at the time these agreements were entered into. Whilst I accept that it is appropriate to reflect any increase in the recoverable premium to reflect the operation of the swing premium I am not persuaded that it is appropriate to allow the full amount of £608 since this would in my view produce a disproportionate result (particularly when coupled with the other costs and disbursements) for straightforward cases of this kind. As I said at paragraph 332 of my earlier judgment I do not say that the figure which I allow is the only correct figure, but it is within a bracket of what I would regard as reasonable. For 2001 Lloyds including the swing premium and IPT I allow £525.