Peterborough & Stamford Hospitals NHS Trust v McMenemy & Ors  EWCA Civ 1941
Two appeals on the recoverability of ATE premiums in low value clinical negligence claims post LAPSO.
The two appeals concerned the recovery of After the Event (“ATE”) insurance premiums in clinical negligence cases. In each case the claimant took out ATE insurance as soon as solicitors were instructed. In the event both claimants settled by accepting an offer of compensation before any proceedings were issued and before any expert report was commissioned.
McMenemy v Peterborough & Stamford NHS Trust
Ms McMenemy’s bill of costs was served on 24 September 2014 totalling £15,795 including disbursements and VAT, of which £5,088 was the recoverable element of the ATE insurance premium. The bill was provisionally assessed by DDJ Davies on 30 March 2015 with the premium allowed in full.
The Trust requested an oral hearing pursuant to CPR 47.15(7) solely in respect of the premium. On 17 July 2015 the matter came before DDJ Holligan who found in favour of the Trust, considering that it was unreasonable for the policy to have been taken out when it was, before Ms McMenemy’s solicitors had seen her medical records to confirm the facts, and therefore before there could be any assessment of risk. Given that finding the Deputy District Judge did not go on to consider whether the amount of the policy was reasonable.
HHJ Pearce heard the appeal on 15 February 2015 and allowed the premium in full. He held that the premium was recoverable in principle and remitted the case to a regional costs judge for consideration of the amount recoverable.
Reynolds v Nottingham University Hospitals Foundation Trust
On 10 August 2015 Mr Reynolds served a Bill of Costs in the sum of £13,215.68, including the ATE insurance premium of £5,088. The Bill was provisionally assessed on 24 November 2015 with the premium allowed in full.
On 17 December 2015 the Trust requested an oral hearing pursuant to CPR 47.15 to address the premium and other aspects. On 15 February 2016 DJ Rogers held that it was unreasonable to have insured against the cost of expert reports on the question of liability but that it would have been reasonable to insure against the cost of reports on causation. However, he declined to attempt to apportion the premium and thus disallowed the whole of it.
HHJ Moloney QC granted permission to appeal on 22 June 2016 on the basis that Mr Reynolds would either apply for the appeal to be heard by the Court of Appeal or that it would be stayed pending the disposal of the appeal in McMenemy. On 26 October 2016 I directed that the appeal proceed in the Court of Appeal and be heard with McMenemy.
Recoverability of ATE premiums under the old regime
The leading case is Callery v Gray  EWCA Civ 1117;  1 WLR 2112, a decision of the Court of Appeal, which was upheld by a majority in the House of Lords ( UKHL 28;  1 WLR 2000) largely on the ground that the Court of Appeal was the right court to rule upon matters of civil procedure.
The decision of the Court of Appeal was to allow the recoverability of ATE premiums, to be paid
The essence of the decision is contained in the following paragraphs of the court’s judgment:
“ The defendants contend, however, that it is unjust to saddle defendants with the costs of the ATE insurance premiums and success fees without giving them a fair chance to identify those cases where liability and quantum is not disputed so that success is assured.
 We see the force of this submission, but we have concluded that, at least in the circumstances of the two appeals, the prejudice to defendants is not as clear as is suggested and that it is outweighed by the legislative policy and by a number of practical considerations. Thus:
(i) If the new regime is to achieve its object, the legal costs of claimants whose claims fail should fall to be borne by unsuccessful defendants in the manner described in paragraph  above. On these appeals the court has to decide whether to permit liability for success fees to be apportioned in relatively small amounts among many unsuccessful defendants, or to insist on an approach under which they will be borne in much larger amounts by those unsuccessful defendants who persist in contesting liability.
(ii) If the latter alternative is adopted, the defendants who contest liability will not share liability for costs in a manner which is equitable. Where there is a strong defence which it is reasonable to advance, a larger uplift will be appropriate than where a defendant unreasonably persists in contesting liability despite the fact that the defence is weak. Thus the more reasonable the conduct of the defendant, the larger the uplift that he will have to pay if his defence fails.
(iii) In relation to claims arising out of road accidents, where defendants will be insured, the same insurers will often be sharing the costs involved, whether in the form of many uniform small uplifts or fewer large uplifts.
(iv) So far as insurance premiums are concerned, these will produce cover which benefits the defendants, for they will ensure that costs are awarded against unsuccessful claimants and that such awards are satisfied.
(v) Defendant interests, with the assistance of the court, should be able to restrict uplifts and insurance premiums to amounts which are reasonable having regard to overall requirements of the scheme. In saying this we are contemplating a position where there will be adequate data to enable informed judgment of the amount of uplift and the size of insurance premium that are reasonable in circumstances such as those before the court. We are well aware that that position has not yet been reached and that, on these appeals, we are faced with doing our best on very sketchy data. We have had particular regard to the fact that the representations and evidence submitted after the hearing have not been tested or analysed in the course of oral argument.
(vi) Claimants naturally want to know at the outset that a satisfactory arrangement to cover the costs of litigation has been made which provides sufficient protection for them, no matter what the outcome.
(vii) Claimants incur liabilities for costs to their legal advisers as soon as they give them instructions. Once a defendant starts to incur costs in complying with a protocol, the claimant will be exposed to liability for those costs if proceedings are commenced.
(viii) Solicitors and claims managers are anxious to be able to offer legal services on terms that the claimant will not be required to pay costs in any circumstances. This will assist access to justice.
(ix) There is the overwhelming evidence from those engaged in the provision of ATE insurance that unless the policy is taken out before it is known whether a defendant is going to contest liability, the premium is going to rise substantially. Indeed the evidence suggests that cover may not be available in such circumstances.
 For these reasons we have concluded that where, at the outset, a reasonable uplift is agreed and ATE insurance at a reasonable premium is taken out, the costs of each are recoverable from the defendant in the event that the claim succeeds, or is settled on terms that the defendant pay the claimant’s costs.”
The Court of Appeal referred to The Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No 2) Regulations 2013 (“the No 2 Regulations”). At Regulation 3 of these Regulations it provides:-
“(1) A costs order made in favour of a party to clinical negligence proceedings who has taken out a costs insurance policy may include provision requiring the payment of an amount in respect of all or part of the premium of that policy if—
(a) the financial value of the claim for damages in respect of clinical negligence is more than £1,000; and
(b) the costs insurance policy insures against the risk of incurring a liability to pay for an expert report or reports relating to liability or causation in respect of clinical negligence (or against that risk and other risks).
(2) The amount of the premium that may be required to be paid under the costs order shall not exceed that part of the premium which relates to the risk of incurring liability to pay for an expert report or reports relating to liability or causation in respect of clinical negligence in connection with the proceedings.”
Does the recovery of the ATE premiums engage the CPR at all?
The Court of Appeal was not persuaded by Mr Bacon QC’s submission that recoverability of ATE premiums should not be subject to the CPR and that it could be controlled solely by market forces. The Court considered the observations of Brooke LJ in Rogers v Merthyr Tydfil County BC (2006) EWCA Civ 1134 and the view endorsed by Lord Hoffman, when Callery v Gray went before the House of Lords. The Court of Appeal at paragraph 51 concluded:-
“But Brooke LJ’s observations are not in conflict with what Lord Hoffmann said. A challenge is a challenge in the course of a detailed assessment of costs; and ultimately what is allowed on such an assessment is what the costs judge will allow. In the light of those observations it seems to me to be unlikely that Parliament chose to allow the level of recoverable ATE premiums to be determined solely by such an imperfect market, with further regulation as a back-up in case of market failure”.
In addition Lewison LJ provided the following reasons why Mr Bacon QC’s submissions were not right. These were as follows:-
- Neither section 58C nor the No 2 Regulations expressly empower the court to make a costs order at all. They presuppose that the court has such a power, and merely state what such an order may include. The court’s power to make an order for costs is contained in section 51 of the Senior Courts Act 1981 which says that “subject to rules of court” costs are in the discretion of the court.
- Regulation 3 does not say that ATE insurance premiums are recoverable. It merely says that a costs order may include them. How is that discretion to be exercised if not in accordance with the CPR?
- Most cases settle: often by the claimant’s acceptance of a Part 36 offer. CPR Part 36.13 (3) provides that those costs are to be assessed on the standard basis if not agreed. That assessment must take place within the confines of the CPR.
- Lewison LJ was not impressed by the submission based on the detailed definition of “costs” in CPR Part 44.1. In a context in which the No 2 Regulations state expressly that ATE premiums may be included in a “costs order” it is an inevitable consequence that either the definition of costs in the CPR must be expanded to include ATE premiums where authorised by the No 2 Regulations, or alternatively, that the context does require an expanded definition.
- Lewison LJ concluded that Parliament must be taken to know that a “costs order” is an order made under the CPR.
Does the new test of proportionality apply?
The Court of Appeal found at paragraph 62 of the decision that the new test of proportionality in accordance with CPR Part 44.3 applied to the recoverability of ATE premiums in clinical negligence claims post 1st April 2013.
“I conclude therefore that the new test; including the provisions about proportionality, apply to post-April 2013 clinical negligence claims. As I have said, this was common ground between counsel in BNM v MGN Ltd (at  and ) and nothing in the judgment of Etherton MR casts doubt on that measure of agreement.”
Does Callery v Gray still apply?
The Court of Appeal was asked by Mr Mallalieu to consider precisely the same arguments as we advanced by the Insurers in Callery v Gray, on the grounds of the changes made in the Jackson reforms. The Court concluded at paragraphs 74 to 76:-
“Although there is undoubted force in Mr Mallalieu’s submissions I have not been persuaded that we should depart from the policy decision taken in Callery v Gray and examine the reasonableness of taking out ATE insurance on a case by case basis. Nor am I persuaded that the new proportionality test requires a case by case approach. It is clear from the Government’s formal response to Sir Rupert Jackson’s recommendations that “for reasons of public policy” the Government decided to exclude ATE insurance premiums relating to the cost of expert reports in clinical negligence cases from the general abolition of their recovery. The concern was that claimants might not be able to afford the “upfront” costs of such reports, and thus that access to justice might be unduly restricted.
Section 58C (2) (d) expressly requires a qualifying policy to apportion the premium between the recoverable and the non-recoverable elements. Although the first set of regulations would have barred recovery where no report was in fact obtained, that obstacle was removed from the No 2 Regulations. Nor did the Government accept Sir Rupert’s recommendation that there should be a breathing space equivalent to the protocol period during which the taking out of ATE insurance would be premature. The Government knew, as Sir Rupert had reported and as the case law made clear, that ATE policies were taken out at the same time as a potential claimant entered into a CFA, and must have intended not to disturb that practice. That, as it seems to me, was also recognised by the Explanatory Memorandum accompanying the No 2 Regulations.
For these reasons, in addition to those advanced by Mr Bacon, I consider that it is still permissible for ATE insurance to be taken out as soon as a claimant enters into a CFA.
Having had conduct over these two appeals and having addressed the arguments made by the NHSLA regarding the restriction on the recoverability of ATE premiums following the Jackson reforms on numerous occasions, it is appreciated that the Court of Appeal have clarified the recoverability and opted to allow the law governing reasonableness to remain as it was rather than being tempted to change it on account of the amendments to the law brought in post April 2013 or be to persuaded by financial factors, which were clearly at the forefront of the Court’s thought process, having considered paragraph 2 of the decision to influence their minds.
Whilst the reforms of Sir Rupert Jackson have resulted in the abolition of the recovery of ATE premiums in most cases, the Government’s position was clear in excluding ATE premiums relating to the risk of incurring the costs of expert reports in respect of breach of duty or causation from this. There was no good reason put before the Court of Appeal in these appeals, which should persuade the Court to abandon the position, it itself set out in 2001 in Callery v Gray, which was upheld by the House of Lords.
On the other hand, whilst the Court of Appeal’s decision on reasonableness will go some way to providing finality to arguments on the test of reasonableness, the Court’s comments on the application of the new test of proportionality will be unwelcome reading.
The issue before the Court in both appeals as identified paragraph 78 was whether ATE insurance may be taken out at all at the outset. Issues of quantum were not before the Court in these appeals. In addition it is noted that the costs from 1 April 2013 are subject to 44.3(2)(a), which states:-
“only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred”.
Furthermore, it is noted at paragraph 74 that the new test of proportionality does not require a case by case approach. These paragraphs leave two issues in my mind, which need to be addressed:-
Firstly how can the Court apply the new test of proportionality when assessing if the ATE premium should have been taken out at the outset? Quantum of the ATE premium in these appeals was not an issue before the Court and the new of test of proportionality in CPR 44.3 specifically refers to “costs which are disproportionate in amount may be disallowed” This would appear to imply when assessing the recoverability of ATE premiums, that the Court should apply the test of reasonableness to whether an ATE premium was reasonably incurred and then address proportionality when considering the quantum of the ATE premium.
Secondly, the Court referred to CPR 44.3(5) which contains the factors relevant to the question of proportionality, which will be case specific, however practitioners are not required to apply a case by case assessment. These two concepts conflict with one another.
It is noted that the application of the test of proportionality in respect of ATE premiums in low value Clinical Negligence claims is an issue, which will be addressed by the Court of Appeal in the upcoming matter of Demouilpied v Stockport NHS Foundation Trust & West v Stockport NHS Foundation Trust, which are cases to be heard in the Summer of 2018. It is hoped that these appeals will put this matter to rest.