BAILII Citation Number:[2002] EWHC 9002 (Costs)

IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE 
		Supreme Courts Costs Office
Cliffords Inn
Fetter Lane
London
EC4A 1DQ
		19 July 2002
B e f o r e :
CHIEF MASTER HURST, SENIOR COSTS JUDGE
____________________
	RE: CLAIMS DIRECT TEST CASES		
____________________
Mr T. Charlton QC & Mr N. Bacon (instructed by Colman Coyle for the Claimants)
Mr A. Hutton (instructed by Vizards Wyeth, Lamport Bassitt and Carters 
for the 1st & 3rd Defendants)
Mr A.Newman QC & Mr A. Neish (instructed by Beachcroft Wansbroughs for the 2nd Defendant)
____________________
____________________
HTML VERSION OF JUDGMENT: APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

Chief Master Hurst 
I N D E X
Background 	1	
The Issues	7	
The Test Cases	8	
The Applicable Law	10	
The Claims Direct Business Model	23	
The development of the Claims Direct Litigation Protection Insurance Policy	29	
The MLSS Agreement	44	
How the premium was allocated	49	
The New Scheme	65	
The Claimant’s contract with Claims Direct	78	
The Evidence	88	
          Mr Raincock	89	
          Mr Primer	117	
          Mr Doona	137	
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?	154	
          The Claimants’ submissions about premiums	154	
          The Second Defendants’ submissions about premiums	161	
          Submissions of the First and Third Defendants	166	
          Conclusions	171	
                    The amount paid to Underwriters	183	
                     Claims Direct commission	185	
                    The payment to MLSS	186	
                               Initial Insurance Services	189	
                               Continuing Insurance Services	190	
Issue 4: Collateral Benefits and Ring Fencing	201	
(i) Are any of the benefits purchased by insurance forming part of the Claims Direct Scheme collateral or extraneous to such insurance	201	
Claimants’ submissions	201	
(ii) To what extent should the cost of collateral benefits be recoverable?	203	
(iii) To what extent is any additional payment made with the intention of ring fencing the Claimants damages recoverable?	204	
          Second Defendants’ Submissions	205	
          Submissions of the First and Third Defendants	209	
          Conclusions	211	
Issue 5: Block Rating	215	
(i) Whether it is reasonable for a Claimant in an RTA case to take out insurance costed on a block rating basis	215	
          Claimants’ submissions	215	
(ii) If not are there any other cases where it is unreasonable?	216	
          Defendants’ submissions	217	
          Conclusions	219	
Issue 6: What premium would be reasonable in circumstances where liability is admitted before a policy is taken out?	223	
          Claimants’ submissions	223	
          Second Defendants’ submissions	228	
          Conclusions	230	
Insurance premium tax	232	
Result	233	
SCHEDULE OF TEST CASES	ANNEX	
BACKGROUND
1.	These test cases have been selected to enable a number of issues of principle to be decided, the most important of which is whether the money paid to Claims Direct PLC (Claims Direct) by the Claimant in each case is a premium within the meaning of Section 29 of the Access to Justice Act 1999 and, to the extent that it is such a premium, whether or not it is reasonable. (The issues to be decided are set out at paragraph 7 below). Although the test cases are brought in the names of the individual successful Claimants, the claims are supported by Claims Direct itself which has a significant interest in establishing that the claims for premium are valid. Similarly the Defendants, although sued in their own names, are protected by a number of different insurers and it is these insurers rather than the nominal Defendants who are challenging the costs claimed in these proceedings. Although there are relatively few test cases, and the premium claimed in each is £1,250 plus £62.50, IPT total £1,312.50 (and in one case £1,495 plus £74.75 IPT, total £1,569.75), so that the amounts at stake in the individual claims are relatively small, I am informed that some 100,000 cases await the final decision in these test cases. The amount of money actually at stake is therefore considerable. 
2.	Put shortly, the Claimants’ position is that the money paid is all premium and not susceptible to further breakdown. The Claimants also argue that, whilst the amount payable in respect of premium is itself open to scrutiny to ensure that it is reasonable and proportionate, when compared with other cases conducted under CFA arrangements with a success fee together with ATE insurance, the charge made by Claims Direct is both reasonable and proportionate. The product offered by Claims Direct is a stand alone policy and does not involve the use of CFA. 
3.	The Defendants for their part argue that the recoverable premium is only the risk bearing element, ie that part of the money paid which is directly referable to the amount paid to Underwriters (including appropriate brokerage and commission), which the Second Defendants put at £140 and the First and Third Defendants put at £200. They argue that the services supplied under the Claims Direct litigation protection policy fall into two parts. On the one hand insurance services proper (in respect of which the premium is recoverable), and on the other hand claims handling services (in respect of which nothing is recoverable). In answer to the question: what figure would be reasonable and proportionate if the whole of the amount paid to Claims Direct was found to be premium? the Defendants submitted that figures at or near those mentioned above would be appropriate. 
4.	In 1990 Lord MacKay of Clashfern, the then Lord Chancellor, having become concerned over the diminishing number of people eligible for legal aid on the one hand, and the legal aid budget threatening to run out of control on the other, commenced consultation and in 1995 introduced Conditional Fee Agreements for a limited number of proceedings. His successor, Lord Irvine of Lairg, greatly extended the permissible use of CFAs in 1998. The Access to Justice Act 1999 introduced major changes to the funding of civil litigation and set up a new Legal Services Commission to take the place of the Legal Aid Board. At the same time the availability of legal aid was restricted and was no longer generally available in respect of claims for personal injury (other than those arising out of clinical negligence). The developments in relation to litigation funding between 1988 and 2000 are outlined in paragraphs 8 to 13 of the Court of Appeal judgment in Callery v Gray [2001] EWCA Civ 1117; [2001] 1 WLR 2112. Section 29 of the Access to Justice Act deals with “Recovery of insurance premiums by way of costs”. In the view of the Court of Appeal the “evident purpose is to enlarge the scope of items of costs which a successful party to proceedings ... may recover from the paying party.” (Callery v Gray, para 13). 
5.	The court in Callery v Gray went on to consider the historical development of after the event (ATE) insurance. The judgment pointed out that the introduction of CFAs in 1995 still left a litigant at risk of having to pay the other side’s costs: 
“The Law Society therefore developed the ATE policy, with the help of insurance brokers, as a new form of insurance cover.” (Callery v Gray, para 15)
6.	At first the premiums for this type of cover were very modest, but adverse claims experience drove the premium up sharply and in 2000 the original Underwriters withdrew from the market after suffering major losses. Paragraphs 14 to 23 of the judgment in Callery v Gray deal with the early years of ATE insurance and set out the regulatory and legislative backdrop to the revival of the ATE market following the enactment of the 1999 Act. 
THE ISSUES
7.	Against that background a number of challenges have been made in cases where successful claimants sought to recover the amount paid to Claims Direct by way of premium. A number of test cases were selected, both by those representing Claims Direct interests and those representing the interests of the liability insurers. By an order dated 1 November 2001 I directed that ten preliminary issues divided into two tranches be tried. The present trial deals with the issues in tranche 1. There were originally six issues but for reasons which do not need further elaboration in this judgment the number of issues was reduced to four as follows: 
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; 
(iii) to what extent is any additional payment, made with the intention of ring fencing the claimant’s damages, recoverable?
Issue 5: Block rating:
(i) whether it is reasonable for a claimant in an RTA case to take out insurance costed on a block rating basis;
(ii) if not are there any other cases where it is unreasonable?
Issue 6: What premium would be reasonable in circumstances where liability is admitted before a policy is taken out?
THE TEST CASES
8.	There are 20 live test cases remaining which are set out in the Schedule annexed to this judgment. There were originally 23 test cases selected, of which two fell away prior to the hearing and one further one (Lees v Jackson) was withdrawn by consent at the hearing. It is numbered 15 in the Schedule. The Defendants were grouped according to the liability insurers standing behind them. The First Defendants were involved in cases 12, 14, 16, 19, 20 and 21 and the Third Defendant in case 18. The Second Defendants were involved in cases 1 to 11. Case number 13, Kimber v Legoland had been issued by the Claimants’ Solicitors, Messrs Colman Coyle, with a view to making it a test case. Mr Charlton told me that it appeared from his solicitors’ file that at the time of the case management conference on 1 November 2001 there were no solicitors on the record acting for the Defendants at that point, but there had been subsequent correspondence with solicitors representing the Defendants. In the event nobody appeared to represent the Defendants in this case. Therefore, to the extent that any point of principle might arise within that case, it will be necessary to give the Defendants the opportunity to be heard before the matter is finally decided. 
9.	As to case number 17, Norton v Spitfire Technology Group Ltd, the staff at the Supreme Court Costs Office were unable to produce a court file. The details of the case are included in bundle 5, the statement of facts and issues, but it is not at all clear how the case came to be included. Nobody appeared on behalf of the Defendants. In the circumstances, in the absence of any information or any representation of the Defendants, I propose to remove the case from the list of test cases. 
THE APPLICABLE LAW 
10.	Section 29 of the Access to Justice Act provides: 
“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.”
11.	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) paragraphs 59 and 60). 
12.	The statutory framework is discussed in Callery v Gray (No.2) paragraph 6-10 and the meaning of “premium” at paragraphs 11 to 13, 21 to 26, 29, 32 to 33, 37 to 47. 
13.	CPR 43.2(1)(a) defines “costs” as including “any additional liability incurred under a funding arrangement ...” Rule 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 and Rule 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.”
14.	I was referred to a number of authorities dealing with the meaning of “premium”. I found the following to be the most helpful: MacGillivray on Insurance Law 9th edition 1997 Sweet & Maxwell, paragraph 72 [Authorities page 158]: 
“Premium defined. 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).”
15.	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 court proceedings ever having been commenced. Those cases come before me under the provisions of CPR 44.12A (costs only proceedings). I deal with the parties submissions in relation to the meaning of “premium” at paragraph 154 below. 
16.	Whilst dealing with the Rules it is necessary to consider CPR 44.4 which deals with the basis of assessment. The relevant part of the Rule is as follows: 
“(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.”
17.	CPR 44.5 requires the court to have regard to all the circumstances in deciding whether costs were proportionately and reasonably incurred, or were proportionate and reasonable in amount. The Rule goes on to provide: 
“(3) The court must also have regard to –
(a) the conduct of all the parties, including in particular –
(i) conduct before, as well as during, the proceedings; and
(ii) the efforts made, if any, before and during the proceedings in order to try to resolve the dispute; 
(b) the amount or value of any money or property involved; 
(c) the importance of the matter to all the parties; 
(d) the particular complexity of the matter or the difficulty or novelty of the questions raised;
(e) the skill, effort, specialised knowledge and responsibility involved;
(f) the time spent on the case; and
(g) the place where and the circumstances in which work or any part of it was done.”
18.	Section 11 of the Costs Practice Direction gives guidance about the factors to be taken into account in deciding the amount of costs. Those factors are set out at CPR 44.5. The Practice Direction says this: 
“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.”
19.	In Callery v Gray the Court of Appeal gave certain guidance in relation to after the event insurance. The approach of the Court of Appeal was left undisturbed by the House of Lords in their judgment of 27 June [2002] UKHL 28. Where necessary I have referred to specific passages from the judgments in Callery v Gray but I bear in mind particularly the following: Callery v Gray [2001] EWCA Civ 1117, [2001] 1 WLR 2122, paras 65, 91, 94, 95, 99 (v) and 100; Callery v Gray (No.2) [2001] EWCA Civ 1246, [2001] 1 WLR 2142 in addition to those already referred to paras 57, 63 and 68 to 70. 
20.	Lady Justice Arden observed in the appeal against my case management decision in these proceedings, heard on 19 March 2002, [2002] EWCA Civ 428: 
“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.” 
21.	Arden LJ [Authorities 24, page 385] also quoted with approval the decision of the court in Callery v Gray (No.2) stating: 
“46 ... the 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” ... the 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.”
22.	The Court of Appeal has given guidance as to the correct approach to be taken to proportionality in Home Office v Lownds [2002] EWCA Civ 365. 
THE CLAIMS DIRECT BUSINESS MODEL
23.	Before proceeding further it is necessary to understand something of the history of Claims Direct, the Claims Direct business model and the underwriting history. The information relating to the development of Claims Direct appears in the chronologies prepared by the Claimants and the Second Defendants. It is apparent from the documents through which I was taken at great length by all parties and confirmed by the evidence of the witnesses. The validity of these documents is not in issue and the factual background is not controversial. 
24.	In 1990 Mr Tony Sullman set up a company called Somerford Claims Plc (Somerford) which specialised in pursuing uninsured loss claims on behalf of taxi drivers. In 1995 (the year in which conditional fee agreements were first permitted) Mr Sullman and Mr Colin Poole set up Claims Incorporated Plc. This company was the parent of Claims Direct. Somerford was a claims management company which appears to have involved the use of franchised claims managers and panels of solicitors, doctors and accountants. This formula was transferred to Claims Direct. Medical Legal Support Services (MLSS) was also incorporated by Mr Sullman and Mr Poole in or around 1996. Neither Claims Direct nor MLSS was or is an insurance company, the services which they provided were those of a claims handling company. 
25.	Between 1996 and 1999 Claims Direct operated a scheme under which it assisted members of the public to make claims for compensation against third parties on the basis that Claims Direct would receive 30% of any damages recovered and Claims Direct would themselves be liable for the opponent’s costs if the claim were to fail. This scheme, known as the Portfolio Scheme, 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. Panel solicitors were then used, as was a panel of medical experts and a particular set of Counsels’ Chambers were used to provide opinions on liability and quantum at standard rates. There was no element of insurance at this stage. The Scheme was very successful. 
26.	By March 1999 Claims Direct was actively considering flotation on the Stock Market, it was however advised by its accountants that flotation would be handicapped by the existence of the contingent liability of an uncertain size relating to the costs indemnity which it provided under the Portfolio Scheme. In about March 1999 Mr Sullman approached Litigation Protection Ltd (LPL), an insurance intermediary, to discuss the possibility of obtaining insurance to indemnify its customers against costs liabilities in place of the indemnity currently provided by Claims Direct itself. 
27.	After considerable discussion and negotiation, which I will refer to in more detail in a moment, an agreement was signed between LPL, Claims Incorporated and MLSS dated 26 August 1999 [8/1A/39], which gave effect to the Claims Direct Protect Scheme. 
28.	The Claims Direct Protect business model is summarised in the following paragraphs. It is set out in some detail in the Second Defendants’ amended Points of Dispute, paragraph 3A [1/2 P20]. The description of the business model by the Second Defendants is largely uncontroversial, but in this summary I have taken into account the few points where Mr Charlton has corrected the Defendants’ version. 
i. Television and other advertising was used to encourage potential claimants to ring the Claims Direct number where 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. Claims were handled at a call centre.
ii. When the claims manager visited the claimant 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 the claimant’s signature to the fair trading statement (FTS) which set out an offer made by the claimant for Claims Direct to take on the claim in return for the payment of £1,312.50 (£1,250 plus £62.50 IPT). Repayment of the loan required to fund this amount was deferred until the end of the case and insured if he lost. There was also a consumer credit agreement with the bank under which the premium was lent to the claimant and finally there was a medical release form.
iii. The case was then sent to Poole & Co for “vetting” (to decide whether the prospects of success were better than 50%) for which a fee of £72.50 plus VAT was payable by the panel solicitor if the case was taken on. Colin Poole was the senior partner of Poole & Co at that time and was also managing director of Claims Direct. After Claims Direct floated in July 2000 Mr Poole continued to vet cases.
iv. If the case was passed by Poole & Co it was sent to a panel solicitor with an acceptance form. If the claim was accepted the solicitor had to pay the fee to Poole & Co and a fee of £395 plus VAT to MLSS (a wholly owned subsidiary of Claims Direct) and to send a client care letter based on the model suggested by Claims Direct. Although the solicitor had a discretion as to how he did this, these fees were, at the discretion of the solicitor, to be claimed back from the losing defendant at the end of the case.
v. If the solicitor accepted the case Claims Direct then sent a letter of acceptance to the claimant with “Evidence of Insurance” signed by Mr Raincock of LPL on behalf of the insurers, incorporating the Master Policy.
vi. At about the same time the bank acting on behalf of the claimant paid £1,312.50 to LPL. The claimants do not admit that LPL was anything other than an agent for the Underwriters. LPL distributed the money as follows: 
(a) £1,000 to MLSS;
(b) £110 as commission to Claims Direct;
(c) £140 in total, shared between the Underwriters of the insurance, the Lloyds brokers Prentis Donegan Group and LPL themselves;
(d) £62.50 paid to the Underwriters to be paid as IPT.
vii. The panel solicitor then received a witness statement of the claimant taken by the claims manager and was obliged to instruct Mobile Doctors for a medical report and counsel for an opinion on liability and/or quantum. In addition Mobile Doctors paid MLSS £40 and counsel paid MLSS £15. It is a matter for the tranche 2 issues whether these payments were or were not referral fees.
viii. The claims manager then had to lead the claimant through the personal injury claim, arrange medical appointments for the claimant and prepare a third party witness statement and further accident evidence as required by the panel solicitor. 
ix. After acceptance of the claimant’s case the solicitor, following procedures dictated by Poole & Co on behalf of Claims Direct and/or other Claims Direct Group companies, took certain steps, including writing the retainer letter, a letter before action, instructing Mobile Doctors to prepare a medical report, receiving the witness statement of the claimant and any documentation from the claims manager and instructing counsel to advise in respect of liability and quantum. The claimants accept that these steps were to be taken but say that this is not a complete list of what the solicitor had to do.
x. In the event that the claim was settled the solicitor, in seeking to agree the claimant’s costs, would, in addition to his own profit costs, claim from the defendants’ insurer the £395 paid to MLSS, the costs incurred in respect of Mobile Doctors, the costs incurred in respect of counsel and the Poole & Co vetting fee.
THE DEVELOPMENT OF THE CLAIMS DIRECT LITIGATION PROTECTION INSURANCE POLICY
29.	Given the nature of the Defendants’ argument to the effect that the money paid by the Claimants was not properly a premium for insurance services, it is necessary to examine the development of the Claims Direct Protect Scheme in some detail. 
30.	During the early part of 1999 a series of communications and meetings took place between Mr Sullman of Claims Direct and Mr Raincock and Mr Gilbert of LPL with a view to creating an insurance backed product. There were also meetings between Mr Raincock and Underwriters and Mr Raincock prepared a number of memoranda for Underwriters setting out the various ideas under discussion. The progress and development of the scheme can be seen from Mr Raincock’s Memorandum for Underwriters dated 5 May 1999 [8/1A/25]. This memorandum essentially sets out the basics of what later became the Claims Direct Litigation Protection Scheme. Quoting selectively from the memorandum it states: 
“BJDR [Mr Raincock] put forward Underwriters views on the matters discussed and, in general, these were accepted although, as will be explained by Claims Direct Limited, there are counter arguments to Underwriters viewpoint. The points that emerged and which will form the basis of our meeting are as follows:
Structure
In view of the passage of time (albeit short) and the rapid development of their business, as well as their conviction that the CFPP Lloyd’s Underwriters/LPL offer the best solution, it has been agreed to reduce the Schemes to the following:
( Portfolio Scheme to include cases where Claims Forms are issued ...
( Claims Direct Protect Scheme to include all cases where Claim Forms not issued and all new cases accepted by Claims Direct (approximately 2000 per month from May onwards)” 
31.	The memorandum deals with various other headings, including: programme, claims history, claims managers profit commission, premium, limits of indemnity, policy document commission, new information and review arrangements. The paragraphs dealing with claims managers profit commission and premium state: 
“CLAIMS MANAGERS PROFIT COMMISSION
Underwriters have expressed their reservations to this in principle because they were led to believe (by BJDR) 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. Their co-operation is vital, particularly under Woolf (where proportionality is an emerging issue) and it is in Underwriters interests to maintain the quality of the Claims Managers Service in order to reduce costs.
Recommend that it should continue to form part of the cover.
PREMIUM
The premiums for the Portfolio Scheme are agreed.
There is resistance to the increase to £125 for the Claims Direct Protect particularly in view of the aggregate limit of £5M – they say “we are paying £2M in premiums for a maximum limit of £5M”!
Recommend Underwriters agree to £100 although £90-£95 is probably a fair figure.”
32.	Under heading “Commission” the memorandum states: 
“In view of the (hopefully) revised arrangements, it is proposed that we revert to the original arrangements of 10% payable to CDL [Claims Direct Ltd] by LPL/PDP [Litigation Protection Ltd/Prentice Donegan and Partners] on receipt of premiums.
No Profit Commission would be payable to CDL whose philosophy is to let all parties make (and retain) profit.”
33.	And in respect of “Review Arrangements”: 
“It is agreed that all aspects of the Schemes will be reviewed as at 1 November 1999 when all parties will be better able to assess the effect of Woolf, the benefits of the policy and the emerging results.
Recommend that Underwriters agree to proceed on the basis now set out.”
34.	Appendix B to the memorandum refers to future Claims Direct Protect cases [pages 106-107]. The inception date of the scheme is put at 31 March 1999 and the operative date at 1 June 1999. The Appendix sets out the assured, ie the clients of Claims Direct who have been declared to Underwriters through the procedures agreed with the Underwriters’ representatives; the cover to be provided; the limit of indemnity; and, under the heading “Premium”: 
“£80 - £125 (to be agreed) plus IPT payable at conclusion of each case.”
35.	Those figures have been struck through and the figure of £90 substituted. Similarly in respect of commission the figures “7.5% - 12.5%” have been struck through and “10%” substituted. These alterations have been initialled with the Underwriters’ scratches on the left of the page. The Underwriters have also put their marks on the first page [page 101] under the handwritten words: 
“Warranted:- Claims Direct/Poole & Co maintain existing underwriting guidelines (all amendments to be agreed) and rejection rates consistent with their historical numbers ie 70%.”
36.	On 13 May 1999 Mr Raincock issued a cover/debit note [pages 109, 112]. This cover note reflects the position set out in the memorandum to which I have just referred, under the heading “Premium” it states: 
“(b) Claims Direct Protect - £90 plus IPT per case declared.
To be paid on completion of each case on a basis to be agreed.
Policy Wording
To be agreed following submission of initial draft by Litigation Protection Limited and finalised by end May 1999.”
37.	The note makes provision for minimum and deposit premium, and continues: 
“Warranted:
That the Assured will maintain the existing procedures contained in the Poole & Co Underwriting Manual dated February 1999 and that Underwriters will be informed of all proposed changes prior to their inclusion in the Manual
Conditions:
1. All claims under the Policy shall be subject to review by MLSS Costs Drafting Service
2. ...
3. Declarations of new Assured’s under the terms and conditions of the insurance shall be passed to the Underwriters’ Representatives, Litigation Protection Limited.
4. The Scheme will be reviewed in all respects as at 1 November 1999.
Other Matters:
1. Claims Managers Profit Commission to be retitled Medical Legal Support Services Limited (MLSS) Fees
2. Commission A commission of 10% shall be payable to Claims Direct Limited, to be deducted from any Premium Payments made to Litigation Protection Limited beyond the application of the Minimum and Deposit Premium.
3. Underwriting Review
(a) ...
(b) Claims Protect Direct
Underwriters require that Litigation Protection Limited survey on a random basis a sample of all cases accepted by Claims Direction Limited
(c) Acceptable Cases
Litigation Protection Limited in conjunction with Claims Direct Limited will agree an Underwriting Criteria whereby all cases that fall outside the parameters laid down shall be referred to Litigation Protection Limited for underwriting decision”
38.	Under the terms of this cover note LPL are described as the Underwriters representatives and later came to be known as the coverholder. The cover note also deals with declaration of risks: 
“5. Declarations
(a) All clients on behalf of whom proceedings have been issued shall be declared to Litigation Protection Limited in accordance with the frequency set down in the Service Levels Agreement
(b) All clients accepted under the Claims Direct Protect Scheme shall be declared on a real time basis to Litigation Protection Limited ...”
39.	It is next necessary to look at the binding authority, that is the agreement by which the Underwriters at Lloyds give authority to LPL to act as coverholder [8/1A/6, p.12 to 29]. The agreement is between LPL and Prentis Donegan & Partners Limited, the Lloyds Broker. Under the heading “Grant of Binding Authority” the agreement sets out what the coverholder is authorised to do: 
“The Underwriters hereby authorise the Coverholder:-
1.1 to bind insurances and amendments thereto for the Underwriters’ account;
1.2 to issue the following documents evidencing cover in respect of insurances bound under the Agreement:-
1.2.1 certificates of insurance,
1.2.2 endorsements,
1.2.3 such other documents as may be agreed in writing by the Underwriters;
1.3 to process claims
in accordance with the terms and conditions contained herein or agreed in writing by the Underwriters and endorsed hereon.”
40.	Authority to bind is granted to Mr Raincock and Mr Gilbert both of LPL and the agreement is stated to be effective during the period from 16 August 1999 to 15 August 2000. On 22 November 1999 the period of the binding authority was extended until 15 August 2001 making it a two year coverholder agreement [8/1A/60 p.279]. Section 9 of the agreement [8/1A/6 p.17] provided that before any certificate of insurance was issued by the coverholder a specimen should be approved by the Underwriters. Section 10 [page 17] sets out what documents the coverholder must issue: 
“10.1 The Coverholder will issue in respect of every insurance bound hereunder:-
10.1.1 a consecutively numbered certificate as specified in Section 9; 
10.1.2 endorsements, if any, consecutively numbered for the insurance concerned;
10.1.3 other documents, if any, as may be agreed in writing by the Underwriters.
10.2 The Coverholder shall retain a copy of all such documents and shall send a further copy to the Lloyds’ Broker with the bordereaux to which it applies.
10.3 The Coverholder shall issue and send certificates and endorsements to Assureds as soon as practicable, but in any event no later than 45 days after inception, or in accordance with local legislation.
10.4 Certificates may only be issued to Assureds domiciled in the country of domicile of the Coverholder. In respect of Assureds domiciled elsewhere policies will be issued by the Underwriters.
10.5 When a policy is required instead of a certificate then:-
10.5.1 the Coverholder shall request a policy and such policy shall be issued by the Underwriter and
10.5.2 in such circumstances any certificate issued shall be withdrawn and cancelled.”
41.	After dealing with other matters which are not relevant for present purposes Sections 20 and 21 deal with Premiums, Deductibles and Excesses and Gross Premium Income Limit as follows [page 21]: 
“SECTION 20
PREMIUMS, DEDUCTIBLES AND EXCESSES
20.1 All premiums for insurances bound under the Agreement shall be calculated as follows (incorporating any applicable Deductibles and/or Excesses as shown in 20.2):-
£1250 each case less £1,110 including Underwriters contribution to costs; subject to review at 31 March 2000 or as may be agreed by the Underwriters hereon.
20.2 Deductibles and/or Excesses:-
N/A
SECTION 21
GROSS PREMIUM INCOME LIMIT
Unless otherwise agreed by the Underwriters in writing and endorsed hereon the total gross premium income attaching hereunder shall not exceed 
£3,000,000 1999/2000 year of account
£5,000,000 2000/2001 year of account.
The Coverholder shall monitor the total gross premium bound and advise the Underwriters immediately when it becomes apparent that the gross premium income will be or is likely to exceed 80% of the above figure.”
42.	The purpose of the gross premium income limit is to control the growth of the account. 
43.	For completeness I mention the agreement between Litigation Protection Ltd and Prentis Donegan [8/1A/42, p.190 to 204]. Mr Charlton told me that this was the slip which led to the preparation of the binding authority to which I have just referred. LPL are not themselves Lloyds brokers, Prentis Donegan therefore had to be interposed between LPL and the Underwriters. The Underwriters accepted the risk on 7 September 1999 [page 192]. 
THE MLSS AGREEMENT
44.	I turn now to a crucial document, namely the agreement between Litigation Protection Ltd, Claims Incorporated Plc and Medical Legal Support Services Ltd (the MLSS agreement) [8/1A/39, p.166 to 173]. This agreement, which is dated 26 August 1999, sets out “the Initial Insurance Services” and “the Continuing Insurance Services” to be provided by MLSS and its representatives. It is these services which are at the core of the dispute between the Claimants and the Defendants. The Claimants arguing that these are all legitimate insurance services (since they are of value and importance to the Underwriters) and properly included within the premium. The Defendants arguing that a large part of the services is in fact damages claim handling, the cost of which should not form part of the premium and should accordingly not be recoverable under that head. The agreement runs from 16 August 1999 to 15 August 2001 and I am told covers all the test cases. The agreement begins with a recital of the agreement between the various interested parties to introduce the Claims Direct Protect Scheme. Paragraph B of the recital [page 167] states that MLSS is to be engaged to undertake certain services: 
“which will enable LPL as Underwriters’ Representatives both to introduce and to manage the necessary insurance arrangements in respect of each and every Claim which is the subject matter of the Legal Proceedings.”
45.	The recital then refers to the Initial Insurance Services and Continuing Insurance Services: 
“C. Initially, before the Insurance is commenced in relation to the Legal Proceedings, Insurance Services undertaken by MLSS will be provided to LPL on the basis that they will form part of any insurance contract subsequently entered into between the Claims Direct Client and LPL on behalf of Lloyd’s Underwriters and will consequently be deemed to be incorporated into the insurance contract thereby providing Lloyd’s Underwriters with a written proposal and declaration for the purposes of the insurance (“the Initial Insurance Services”).
D. After the Insurance has been effected, additional Insurance Services will be undertaken by MLSS and provided to LPL so as to enable LPL, on behalf of Lloyd’s Underwriters, properly to manage the progress of each insurance contract during the course of the Legal Proceedings (“the Continuing Insurance Services”).”
46.	The consideration to be paid by LPL to MLSS for providing these services is stated to be “£1,000 for each and every claim (“the Premium Allocation”)” [page 168]. Provision is made at paragraph F of the recital for part of the premium allocation to be paid into a specific bank account at Investec Bank (UK) Ltd: 
“on the basis that it will not be available to MLSS until the Proceedings have concluded.”
This account is referred to as “the retention account”. 
47.	The agreement then goes on to give details of the Initial Insurance Services and the Continuing Insurance Services as follows [page 168 to 170]: 
“THE INITIAL INSURANCE SERVICES
The initial Insurance Services to be provided by MLSS and its representatives will include:
1. Arranging for the completion of the Claims Direct Application Form (in the form as set out in Schedule 1 including any revised form agreed by the parties hereto) which will be signed by the Claims Direct Client in the presence of the MLSS representative who will emphasise to the Claims Direct Client the requirement for full disclosure of all material facts which will enable a proper assessment by LPL of the insurance risk.
2. Arranging for the completion of the Credit Agreement Application Form in respect of the premium to be paid for the Insurance and arranging for this to be forwarded to Investec for processing.
3. Forwarding the Claims Direct Application Form to Claims Direct, together with such other documents as may be required to substantiate the Claim, in order that the documentation can be forwarded to a Panel Solicitor who will be appointed to commence the Legal Proceedings (“the Appointed Representative”).
4. Obtaining such further information as may be requested by the Appointed Representative prior to his agreement to commence the Legal Proceedings.
The Continuing Insurance Services to be provided by MLSS and its representatives will include:
1. Obtaining such further information, including a detailed Statement of Truth, statements from witnesses and experts, as may be required by the Appointed Representative.
2. Monitoring the conduct of the Appointed Representative during the course of the Legal Proceedings and reporting on same to LPL through Claims Direct whenever it is felt that LPL and Lloyd’s Underwriters ought to be made aware of such conduct in circumstances where due compliance with the Operations Manual issued by Poole & Company and the terms and conditions of the Insurance so far as conducting the Legal Proceedings with due care and diligence is concerned.
3. Arranging for the Claims Direct Client to attend an appropriate medical examination and ensuring that the resultant report is made available as soon as reasonably practicable to the Appointed Representative.
4. In cases where there is a claim under the Insurance, attending to a review by a suitably qualified costs draftsman of the bill of costs of the Appointed Representative and, where appropriate, of the Opponent’s representatives to be undertaken by the costs draftsman at an agreed rate of 4% of the bill of costs as presented, following the conclusion of the Legal Proceedings.
5. Maintaining relevant financial information as may be required by LPL for the purposes of monitoring the overall insurance result.”
48.	The next section of the agreement is headed “the Premium Allocation” [p.171 to 172] and deals with the setting up of the retention account with Investec Bank (UK) Ltd by LPL. Of the £1,000 payable to MLSS, LPL would make arrangements to distribute weekly to MLSS part of the premium allocation in the sum of £775. LPL would remit the remaining £225 of the premium allocation to the retention account. MLSS was only entitled to draw down the balance credited to the retention account once the legal proceedings had concluded. LPL would open an account with Investec Bank (UK) Ltd to which would be credited the premium and insurance premium tax payable by the Claims Direct client for the insurance. MLSS was to open and maintain the retention account. 
HOW THE PREMIUM WAS ALLOCATED
49.	On 3 September 1999 Mr Raincock sent to Mr Sullman at Claims Direct the master policy document. In his letter [8/1A/41, p.175 to 176] he gives a helpful breakdown of the premium: 
“The Premium of £1312.50 can be broken down as follows:
 	£	
Premium Allocation, as defined in the Agreement between LPL, Claims Direct and MLSS 	1,000,00	
Brokerage payable to Claims Direct	110.00	
Amount payable to LPL and Underwriters	140.00	
Insurance premium tax at 5%	62.50	
Premium	1312.50	
The insurance has been negotiated with Lloyd’s Underwriters on the basis that it will be in place until 30 June 2000 whereupon its terms and conditions will be subject to review ahead of renewal at 1 July 2000.”
50.	A new binding authority was issued by Prentis Donegan & Partners for the period 1 January 2000 to 31 December 2001. Under this authority Mr Raincock is the only person authorised to bind [8/1B/78 p.393-411]. There are a number of changes in the binding authority which are not relevant for present purposes. At Section 16 the maximum limits of liability/sums insured have been increased to an aggregate claims limit of £20 million each year of account [page 399], and under the heading “Premiums, deductibles and excesses” there is a change in the wording [page 401] which reads: 
“20.1 All premiums for insurances bound under the Agreement shall be calculated as follows (incorporating any applicable Deductibles and/or Excesses as shown in 20.2):
£1,250 each case, less £1,110 Underwriters contribution to costs; subject to review at 31st March, 2000, or as may be agreed by the Underwriters hereon.
The Underwriters contribution to costs will be reduced by £60 each case if “Positive Deficiency in Damages” is taken up and will be reduced by £100 for cases which include “Work in Progress Funding”.”
The “Positive Deficiency in Damages” is a reference to ring fencing which is the subject of issue 4 iii.
51.	Section 24 [page 403] requires Underwriters to prepare monthly bordereaux for submission to Underwriters, namely: Premium Bordereaux, paid Claims Bordereaux and Outstanding Claims Bordereaux. Section 31, “Records and Expenses”, requires the coverholder to bear and pay all charges and expenses incurred by the coverholder in the operation of the agreement [page 404]. 
52.	When a Claims Direct client had his claim accepted by Claims Direct the cost of the premium (£1,250 plus £62.50) was paid from Investec to the LPL IBA account. LPL then paid £110 commission to Claims Incorporated Plc, £1,000 to MLSS of which they received £775 and the remaining £225 was paid into the retention account at Investec. The remaining £202.50 in LPL’s hands was paid as to £45.50 to LPL, £7 to Prentis Donegan and £87.50 to Lloyds Underwriters. The remaining £62.50 was paid to the Inland Revenue as insurance premium tax. 
53.	The binding authority to which I have referred at paragraph 50 [8/1B/78 p.401] provided for there to be a review of the premium allocation at 31 March 2000. It seems that a review meeting took place in May rather later than intended. Following that meeting Mr Raincock prepared a memorandum for Underwriters [8/1C/137 p.624-629]. The first part of the memorandum records the statistics presented to the meeting by Claims Direct, followed by a burning cost calculation leading to the statement: “minimum net premium required to break even and before investment income £135” [p. 627]. The memorandum records an alteration to the brokerage terms: 
“LPL and PDP are prepared to reduce the deductions to 30% on the Claims Direct Protect premium for the period that the premium is £200 or less.”
54.	Provision is then made to alter the way in which the retention fund is to be dealt with: 
“Retention Fund
It was finally proposed that the Retention Fund should be reduced to £1.5M and that Underwriters should take a charge over the fund. The fund would be drawn down to the extent that the loss ratio (on a cash basis) exceeds 60%. The calculation of the loss ratio to be agreed by CDL. Interest to accrue to Underwriters account as from date of draw down.
The balance of the fund (approximately £3.5M) to be released to CDL on the successful completion of the current review together with interest accrued to date.
Review
The next Review to be 31 December 2000.”
55.	The memorandum records that the current agreement should be maintained on a rolling two year basis with a 12 month cancellation clause and then under the heading “Premium” the following appears [p.628]: 
“B. Claims Direct Protect
Until 30 September 2000 £140
From 30 September 2000 –
31 December 2000 £200
From 1 January 2001 (or whenever
CDL increases the Gross Premium £250”
Mr Raincock concludes his memorandum by recommending the proposals for Underwriters acceptance [p.629].
56.	On 26 May 2000 Prentis Donegan faxed to Mr Raincock the terms agreeable to the Underwriters [8/1C/139 p.634]: 
“1. Burning cost noted at £152
2. Brokerage as your memorandum
3. Profit Commission to be agreed following agreement to brokerage respect Claims Direct Protect once premium reaches £250
4. Retention Fund – agreed and new fund of £2,000,000 to be in respect cases declared in 2000 although Dan suggesting it should apply to cases accepted from inception to 30 September 2000, therefore we need to seek final clarification.
5. Review – Underwriters have considered further and are not comfortable with the proposal in view of the 12 months cancellation clause. We have therefore negotiated the following for your consideration. The current policy to be amended to 36 months subject annual review with no cancellation unless loss/profit exceeds parameters to be agreed.
6. Premiums agreed.
Await your further advises.”
57.	Prentis Donegan obtained Underwriters’ consent to certain amendments on 2 June 2000 [8/1C/149 680-681]. The period is amended to 36 months from 1 January 2000. There is a continuing right to review premium levels at 31 December in each year. Underwriters reserve the right on review to adjust premiums up or down for declarations during the forthcoming 12 month period in order to maintain the loss ratio at 60% for the period from inception. The loss ratio is to be calculated on net premium received and losses incurred since inception of the scheme. The working of the retention fund is also described. On 28 June 2000 Prentis Donegan wrote to LPL with addendum number 3 to the Cover Note. This records in terms the final version of the slip to which I have just been referring [8/1C/157 p.708, 709]. The premiums remain as set out in Mr Raincock’s memorandum of 25 May 2000. 
58.	After further discussions Prentis Donegan issued further addenda to the covernote, Addendum 6 on 28 July 2000 and Addendum 7 on 15 August 2000 [8/2D/141 p.1040-1041]: 
“It is noted and agreed in respect of Addendum number 3 dated 28 June, 2000, with attached Review Wording the following amendments are effective from 1st April, 2000:
o	The proposal to change part of the Retention Account to a Claims Fund is postponed. 
o	Accident Assist/Claims Direct Protect with W.I.P and Claims Direct Protect will include Premium Protection Cover (Positive Deficiency of Damages) limited to the gross premium per case, i.e. £1,250 plus IPT increasing to £1,495 plus IPT from 1st August, 2000, or from date to be advised. 
o	Premium allocation £300 in respect of Category “A” cases increasing to £360 per case plus IPT when the gross premium is £1,495 per case. Category “B” cases will be rated at £450 per case, subject to vetting procedures to be agreed by Underwriters. 
o	Commission and brokerage are as per slip, but in respect of the additional premium of £160 per case due for the inclusion of Premium Protection Cover on cases accepted between 1st April, 2000, and 31st July, 2000, the commission is reduced to 15% and brokerage to 2.5%. 
All other terms and conditions remain unaltered.”
59.	The premium allocation to the Underwriters has accordingly risen from the original £140 to £300, or in the case of policies with a premium of £1,495 to £360. The higher premium was payable for policies providing ring-fencing protection. Following that LPL invoiced Claims Direct for the amount due in respect of additional premium for cases incepted since 1 April and until 31 July 2000. The invoice [8/2A/7 p.18] requests payment of the additional £160 premium in respect of 20,137 policies, a total of £3,221,920. 
60.	Addendum number 7 [8/2D/141 p.1040] dated 15 August 2000 provides for retrospective adjustment to premiums. Policies issued between 3 April 2000 and 31 July 2000 will include premium protection cover (Positive Deficiency of Damages). Premium allocation to Underwriters is to increase from £140 to £300 per policy, or to £360 if a policy is amended to the higher level of premium. Additional premium is to be paid in two instalments and is subject to a adjustment once the final gross premium is known. 
61.	It is argued by the Second Defendants that these increases in premium were paid by Claims Direct and not by the Claimants personally. The amount paid by the Claimants remained £1,250, or in some cases £1,495; in response to which the Claimants say that the original allocation to Underwriters of £140 was always subject to review. The actual claims experience was far worse than the Underwriters had been told to expect and they required a significant increase to limit the loss which they were facing. Mr Primer’s evidence on this point was clear. 
62.	On 17 August 2000 David Cooper of LPL sent a fax to Mr Primer of Catlin Underwriting Agencies Ltd setting out the position: “to ensure there is no misunderstanding amongst us” [8/2A/24 p.62-63]. Among other things this fax states: 
“(1) In view of early adverse claims experience a “back-dated” increase in premium has been agreed which will produce additional gross premium of approximately 25,000 – 27,000 at £220 per policy which will produce gross brokerage of £5.5 million.
Subject to final agreement of wording by Richard Barnes, CD will make an immediate lump sum on account of £2 million.
(2) Ongoing premium from 1 August will be at £360 (compared with £140).
(3) LPL through Brian Raincock, has agreed several important initiatives with Tony Sullman to ensure that risk assessment and vetting procedures are improved. Steps taken include engaging an Operations Director, who will be named in the Binding Authority and who will be directly accountable to Underwriters through LPL for the strict adherence to the Operations Manual.”
63.	This fax demonstrates what emerged in the evidence, namely that the claims experience was far worse than anticipated, that the Underwriters were facing significant losses and that the trouble was thought to be caused, at least in part, by what Mr Primer referred to as the abysmal vetting procedures. It is clear from the documents that Underwriters use the word “premium” loosely so as to mean the actual money paid to them in some instances but in the context of “premium allocation” this refers to allocation out of the premium paid by the Claimant. 
64.	The money due in respect of the increase in premium allocation was paid as to £2 million on 31 August 2000, with a further staged payment at a later date. Mr Hacker, one of the Underwriters confirmed receipt of the £2 million in a note dated 31 August 2000 [8/2A/64 p.192]. 
THE NEW SCHEME
65.	Given the difficulties which had been experienced with the Claims Direct Protect Scheme, further meetings and negotiations took place between Claims Direct, LPL and the Underwriters as a result of which heads of agreement were drawn up between the Underwriters and Claims Direct. The heads of agreement were ultimately incorporated into formal contract form by solicitors and signed on 13 March 2001. The heads of agreement between Underwriters and Claims Direct were initialled on 14 November 2000 and 23 November 2000 [8/2B/99 p.570, 582]. The heads of agreement are “subject to contract”. The most important terms are as follows: 
“1. Enhanced vetting procedures, which have already taken effect from 1st September 2000, shall be subject to ongoing review and auditing by Underwriters.
2. ...
3. Coverage for Deficiency in Costs Recovery shall be as set forth in the attached draft. Claims Direct will also take all reasonable steps to ensure that the panel solicitors make every possible effort to recover the costs. This coverage will be provided on all policies incepting from 1st April up to 10th November 2000 for an additional premium of £245.
4. Claims Direct shall pay Underwriters, as advance payment for the coverage extension referred to in paragraph 3, an amount equal to £245 times the number of policies issued during the period 1st April to 10th November 2000 and that have not concluded as at the 10th November. That amount shall be payable to Underwriters regardless of how many policy extensions are actually sold by Claims Direct. It is acknowledged that Claims Direct have already paid £2 million. A further £5,200,000 shall be paid by telegraphic transfer by 14/11/00; and the balance will be due on completion of a contract ... between CDL and Underwriters.
5. A further £7,100,000 held by Investec/FNB shall be paid directly to Underwriters, as advance premium payments, as it is released for each concluded case. Underwriters will continue discussions with Investec/FNB to secure that release, but it is understood by Claims Direct that this would not be on terms prejudicial to Underwriters’ interests. Should this not be achievable, this amount shall be secured by an irrevocable bank Letter of Credit (“LOC”). The LOC can be drawn down on to the extent that funds on concluded cases have not been received by Underwriters.
6. With effect from 13 November 2000, all policies will be rated at a premium of £1,495 and Underwriters will receive a minimum premium of £425 for each policy. Coverage shall include Deficiency in Costs Recovery. The premium in respect of settled policies shall be adjusted so that Underwriters’ share shall be an amount equal to 125% of paid losses sustained on policies written between 13th November 2000 and 31st December 2001. Such adjustment to take effect on a monthly and cumulative basis; such cumulative adjustment would not trigger a premium to Underwriters in excess of £600 per policy.”
66.	The reference to “the attached draft” is to the two endorsements [pages 575 and 577]. There is considerable argument, particularly about the effect of paragraphs 4 and 5 of the heads of agreement both of which refer to “advance payment” whilst at the same time referring to policies issued prior to 10 November 2000. I will return to this topic. With effect from 13 November the policies are to be sold at £1,495 of which Underwriters are to receive a minimum of £425 but could receive up to £600 per policy. 
67.	I turn now to the cover note issued by Prentis Donegan on 16 February 2001 [8/2C/114 p.617-636], it is effective for 36 months from 1 January 2001. Under the heading “Premiums” the note provides [page 619]: 
“£1,250 each case plus I.P.T. of £62.50 per case less £825 Underwriters contributions to costs subject to premium adjustment hereunder.
£1,495 each case plus I.P.T of £74.75 per case less £1,020 Underwriters contributions to costs in respect of certificates including deficiency in recovery, subject to premium adjustment hereunder.
Premium Adjustment
The net premium will be adjusted to ensure that the cumulative paid net loss ration does not exceed 80% in respect of paid losses sustained on certificates issued between 1st January 2001 and 31st December 2001 and annually thereafter subject to a maximum net premium of £800 per certificate issued for the relevant annual period. This will be achieved by rebating Underwriters’ contribution to costs. Any such adjustment shall be calculated and closed on a monthly basis (Nil commission/brokerage).”
68.	The effect of this is that the amount paid to Underwriters is £425 and in the case of the higher premium £475. The premium adjustment clause entitles the Underwriters to a maximum net premium of £800 per case if the relevant loss criteria arise. 
69.	The binding authority issued by the Underwriters to take effect from 1 January 2001 [8/2C/117 p.703-722] provides [at page 714] for a premium of £1,495 plus IPT “subject to premium allocation as set forth in the [MLSS agreement]”. That binding authority was initialled by Underwriters and Mr Raincock on 13 March 2001. 
70.	Messrs Reynolds Porter Chamberlain, solicitors, drew up the Claims Direct agreement between Claims Direct and Lloyds Underwriters dated 13 March 2001, the side letter agreement, the service agreement and the binding authority agreement all dated 13 March 2001 [8/2C/118, 119, 120, 121 p.723-900]. The side letter agreement provides for: “enhanced vetting procedures” which are stated to have been in effect from 1 September 2000 and are to be subject to “ongoing review auditing and amendment as appropriate by Underwriters in conjunction with LPL” [page 739]. The Claims Direct agreement states, at paragraph 2 of the recital [page 723]: “Underwriters, Claims Direct and MLSS have now agreed to vary terms on which such services are provided”. The recital states at clause 4 [page 724] that: “Underwriters have an interest in the administration of Claims Direct’s services to Claims Direct clients”. The agreement encapsulates in formal terms the provisions in the documents to which I have already referred. Claims Direct was required to conduct its business in accordance with the provisions contained in the Service Level Agreement, the Operations Manual, the Franchise Agreement, the Standard Agency Agreement, the Panel Solicitors Operating Manual, the Vetting Procedure, the Fair Trading Statement and the Standard Credit Agreement. 
71.	At paragraph 6 of the agreement Claims Direct agreed to pay to the Underwriters [page 728]: 
“(a) The sum of £9.5 million. It is noted that £7.2 million has been paid to Underwriters prior to the date hereof and the balance of £2.3 million shall be paid by telegraphic transfer from Claims Direct to the Lloyd’s Broker appointed in the LPL Binding Authority Agreement within 48 hours of the date of this Agreement;
(b) ...
(c) The sum of £7.1 million of which sum £225 shall be paid upon the conclusion, irrespective of the result, of each Claim in respect of which an Evidence of Insurance was issued prior to 31st December 2000.”
72.	The payments referred to in these clauses reflect the agreement which had ultimately been reached with Underwriters as to the additional amounts to be paid to them. The argument in respect of these payments is that the Defendants say they are not retrospective, that none of the Claimants ever paid any additional sums and that accordingly the Claimants are not entitled to recovery of these amounts. The Claimants argue that the original premium allocation was always subject to review, that this agreement states in final form the result of the agreement following on from the review and that the wording of paragraph 6(c) is sufficient to make it clear that the arrangement is retrospective. The payment of £225 being “paid upon the conclusion ... of each claim in respect of which an Evidence of Insurance was issued prior to 31 December 2000.” 
73.	The revised MLSS agreement, dated 13 March 2001 [8/2C/120 p.744-811] set out in the second and third schedules details of the initial insurance services and the continuing insurance services [page 754 and 757]. These terms are not significantly different from those contained in the original MLSS agreement. 
74.	The fourth schedule to the Service Agreement [page 761] deals with Individual Claim Premium Allocation as follows: 
“1. The Individual Claim Premium Allocation shall be £1,020 for each Claim in respect of which a Certificate of Insurance is issued.
2. Of the said sum of £1,020, the sum of £645.50 shall be paid by LPL to MLSS not less than one week after the issue of each Certificate of Insurance.
3. Of the said sum of £1,020, the sum of £149.50 shall be paid by LPL to Claims Direct not less than one week after the issue of each Certificate of Insurance.
4. The balance of £225 shall be paid into an account designated “MLSS Retention Account” (“the 2001 Retention Account”) ... The said balance may only be drawn down by MLSS from the 2001 Retention Account once the Proceedings (including all Proceedings for the recovery of costs and premium) have concluded and provided no Individual Claim Premium Allocation Refund is or is likely to fall due and that Underwriters have given their express approval, such approval not to be unreasonably withheld.”
75.	Under these provisions the retention fund is given the purpose of providing a fund to refund to Underwriters in appropriate circumstances. 
76.	The Individual Claim Refund is described as follows [page 762]: 
“1. The Individual Claim Refund shall be:
(a) in any case concluded after 13th November 2000 in which any payment is made by Underwriters in respect of Opponent’s Legal Costs and/or Own Legal Costs and Disbursements the sum of £425 or, if less, the amount payable by Underwriter in respect of Opponent’s Legal Costs and/or Own Legal Costs and Disbursements;
(b) in any case in which any payment is made by Underwriters under the Endorsement amending Section C Deficiency in Recovery where such payment would not have been made but for such Endorsement, the sum of £500 or, if less, the amount payable by Underwriters under the Endorsement.
2. The Individual Claim Refund shall be paid by MLSS to LPL within one month of the conclusion of the Proceedings but if not so paid shall be paid forthwith out of the 2001 Retention Account.”
77.	Finally in that document there are provisions relating to Overall Premium Allocation Refund [page 763] relating to Evidences of Insurance issued between 13 November 2000 and 31 December 2000 which require a refund if the net premiums received by Underwriters after deduction of certain items amounts to less than 125% of the claims. 
THE CLAIMANT’S CONTRACT WITH CLAIMS DIRECT
78.	The contract of each Claimant in these test cases was, to all intents and purposes, similar. Mr Charlton used the contract in case 7, Norfloat v Goodfellow, to explain the terms and I refer to the same documents [5/7 p.91]. Once the claimant’s case had been accepted by a panel solicitor Claims Direct wrote to the claimant confirming that a panel solicitor was prepared to act and enclosing “the Evidence of Insurance for your claim”. That document was signed by Brian Raincock of LPL on behalf of Lloyds Underwriters. The document certifies that the person named (Mr Goodfellow) is the assured and that he is “insured under the Master Policy Document evidencing the Litigation Protection Insurance Scheme.” It continues: 
“The Assured is covered in respect of legal costs and disbursements arising out of legal proceedings being pursued on behalf of the Assured by the Appointed Representative named below. Full terms and conditions are set out in the Master Policy Document, a copy of which is available upon request from Litigation Protection Limited.”
79.	The document names the solicitors who are the appointed representatives; identifies the legal proceedings, in this case: 
“Claim for damages and related expenses arising out of personal injury sustained by the Assured as set out in the relevant Approved Application Form;”
states the insurance premium: “£1,250 plus insurance premium tax at 5%”. The document then sets out the scope of insurance cover:
“If the Claim or legal proceedings are unsuccessful or are discontinued, the Litigation Protection Insurance will indemnify any third party legal costs, the Assured’s Appointed Representative’s costs and disbursements and the amount of the insurance premium payable together with interest payable, as set out in the Master Policy Document, up to a maximum amount of £50,000.”
80.	Finally, under the heading “Interest of Premium Funders” the Evidence of Insurance states: 
“The proceeds of the Litigation Protection Insurance policy shall first be used to discharge the loan together with the related loan interest and any arrangement fee, made by the Funding Institution to fund the Insurance Premium.”
81.	The Master Policy Document [8/1A/51, page 239], after the initial recital, provides: 
“We the Underwriters hereby agree ... to provide the Assured with an indemnity in respect of:
(i) opponents legal costs (as hereinafter defined) and 
(ii) own legal costs and disbursements including counsel’s fees (as hereinafter defined) and 
(iii) the premium (plus related loan interest) as specified in the sections of cover described below and as specified in the schedule in relation to the proceedings as hereinafter defined.” 
(A specimen of the schedule referred to appears at page 248).
82.	The definitions [at pages 240 and 241] include the following: 
“The proceedings
The proceedings whether formally issued or not, in relation to the pursuit by the Assured of a legal claim for compensation arising out of personal injury, as specified in the Assured’s evidence of Insurance which shall include any Appeal provided Underwriters have granted their prior consent ...
Opponents legal costs
The legal costs which have been incurred by the opponent from the date of the commencement of the dispute giving rise to the proceedings and which are payable to the opponent by the Assured pursuant to either any court order made during the proceedings or a settlement entered into as part of the terms of a compromise, discontinuance or withdrawal of the proceedings, and to which the Underwriters have given their prior written consent. Opponents legal costs shall include the costs of any interim applications assessed at the date of the hearing.
Own legal costs and disbursements including counsel’s fees. 
(i) The legal costs (including disbursements and value added tax) reasonably and properly incurred by the Appointed Representative in the conduct of the Proceedings on the behalf of the Assured in accordance with the terms of the Operation Manual.
(ii) Disbursements shall include Court Fees, Counsel’s Fees, fees payable to Experts for the provision of Experts Reports and for attendance in Court for the purpose of providing evidence to the Court during the course of the Proceedings as well as photocopying charges and postage. In addition, disbursements shall include items of expense incurred prior to the issue of formal proceedings such as fees payable in connection with the production of the initial claim report and other assistance throughout the course of the Proceedings which shall not exceed the amount as set out in the Schedule.
Claims Direct
The trading entity of Claims Incorporated Plc which, with the assistance of its connected company Medical Legal Support Services Ltd, has entered into an agreement with the Assured to manage the pursuit of the Assured’s claim for compensation in respect of personal injury suffered which is the subject matter of the proceedings.
Underwriters Representatives
Litigation Protection Ltd which is appointed insurance manager by the Underwriters to administer on Underwriters behalf the insurance provided hereunder including the supervision of all claims made in accordance with the terms, conditions and exclusions contained in the policy.”
83.	The Definitions of Cover [page 242] are divided into three sections: A, B and C. Section A relates to the Portfolio Scheme which is not the subject of these test cases. Section B deals with the Claims Direct Protect Scheme and Section C the Deficiency in Damages Clause. They read as follows: 
“Section B – Claims Direct Protect Scheme - ...
Under this Section of Cover, Underwriters shall provide an indemnity to the Assured in respect of Opponent’s Legal Costs, Own Legal Costs and Disbursements including Counsel’s Fees and the Premium together with the loan interest payable to a provider of loan finance effected to fund the payment of the Premium PROVIDED THAT if in the Proceedings an order is also made by the Court for the payment of costs by the Opponent to the Assured, such costs shall be separately computed and set off against the amount of Opponent’s Legal Costs, Own Legal costs and Disbursements including Counsel’s Fees and the Premium otherwise payable by Underwriters so that Underwriters will only provide an indemnity for the net amount, if any, payable by the Assured.
An indemnity in respect of own Legal Costs and Disbursements including Counsel’s Fees and the Premium is provided hereunder only in circumstances when Opponent’s Legal Costs are payable by the Assured to the Opponent as specified in DEFINITIONS AND INTERPRETATION or where Condition 3(a) applies.
The liability of Underwriters under this Section of Cover shall not exceed the limit of indemnity set out in the Schedule and the Assured’s Evidence of Insurance.
Section C – Deficiency in Damages Clause – (applicable in all cases)
Under this Section of Cover, Underwriters shall provide an indemnity to the Assured in respect of the extent to which the sum of the amount of Own Legal Costs and Disbursements including Counsel’s Fees exceeds the amount of damages and legal costs (a) awarded to the Assured by order of the Court as a result of the outcome of the Proceedings, or (b) payable by the Opponent pursuant to a settlement entered into as part of the terms of any compromise, discontinuance or withdrawal of the Proceedings and to which Underwriters’ representatives have given their prior written consent, subject to the limit of indemnity set out in the Schedule and the Assured’s Evidence of Insurance.”
84.	The Master Policy imposes conditions as to compliance and, under paragraph 1(b) [page 243], the assured and the appointed representative are required to conduct the proceedings with due care and diligence and take all reasonable steps to avoid the costs and expenses payable under the policy. Certain matters are excluded from the policy [page 247], no indemnity is provided in respect of own legal costs and disbursements, including counsel’s fees where these are payable by the opponent either as a result of a court order in favour of the assured or pursuant to a settlement agreement between the assured and the opponent whether or not the costs are actually paid by the opponent. In other words the Claimant is not protected where a Defendant fails to pay costs which it has been ordered to pay or agreed to pay under a settlement. 
85.	Prior to obtaining the Evidence of Insurance each Claimant was required to enter into an agreement called a Fair Trading Statement with Claims Direct [5/17, p.153A]. In that agreement the Claimant under the heading “Proposal” signed his name to the following: 
“I agree that if Claims Direct accepts this proposal:
( It is a condition of the Claims Direct scheme that I will have purchased insurance cover under the Claims Direct Litigation Protection Insurance Policy for a premium of £1,312.50 including insurance premium tax.
( As I have borrowed the money to pay that premium from Investec Bank (UK) Limited, I will authorise my solicitor (and will not withdraw that authority):
o	To pay any compensation recovered for me to Investec Bank (UK) Ltd, I understand that Investec Bank (UK) Limited will then deduct and keep the amount outstanding under my loan agreement with them and deal with any balance (and any interest on that balance) according to my instructions; and: 
o	To give to Investec Bank (UK) Limited an irrevocable undertaking that any compensation recovered for me will be paid to Investec Bank (UK) Limited to be dealt with in this way.” 
86.	The agreement goes on to set out the obligation on the Claimant to co-operate fully with the solicitor and indicates that if the chances of success are below 50% Claims Direct may instruct the solicitor to do no further work and may withdraw its assistance. The preamble to the proposal, having identified the date of the accident, states: 
“I understand that:
( If this proposal is accepted by Claims Direct and a Certificate of Insurance is issued, Claims Direct will assist me with my claim. If my claim is not successful I will be indemnified, in so far as is provided by the terms of the Claims Direct Litigation Protection Insurance Policy, against my liability to pay my legal costs, my opponent’s legal costs and the outstanding balance on the loan made available to me to purchase the Claims Direct Litigation Protection Insurance Policy. (If Claims Direct do not accept this proposal or issue a Certificate of Insurance, the loan agreement, which I have signed today, will be cancelled automatically.)
( If my claim is successful my appointed Solicitor will attempt to recover the amount of premium I have paid to purchase the insurance policy from my opponent, in addition to my compensation.”
87.	The example of the Fair Trading Statement which I have quoted was signed on 19 April 2000, although by 19 June 2000 the wording of the last paragraph which I have quoted had been amended by the addition of the words: 
“... although recovery cannot be guaranteed” [page 18A]
THE EVIDENCE
88.	The Claimants called three witnesses: Mr Brian Raincock of LPL, Mr Daniel Primer of Catlin Underwriting Agency and Mr Paul Doona who from December 1999 until September 2001 was finance director with Claims Direct. The Defendants called no evidence on the basis, so it was said, that it was for the Claimants to establish their case. The three witnesses who gave evidence were all experienced businessmen and Mr Raincock and Mr Primer particularly were experts in their chosen fields. All three gave evidence in a straightforward manner and I have no reason to doubt the evidence which they gave. 
mr raincock
89.	Mr Raincock explained that studies had shown that only a very small percentage of persons entitled to claim damages for personal injuries actually did so, and there was an opportunity to market to these people to make them aware of their rights. He explained how at first there was no clear indication as to how any arrangements for a success fee payable by Defendants would operate and: 
“... therefore it was necessary to pitch the total costs of the premium at a figure that would be reasonable when compared with the likely cost of the success fee and insurance that might be effected on a solicitor run CFA scheme.”
[6/1 p.7 para 27]
90.	He described the original inception of the scheme, large parts of which were his idea. As time went on it was realised that there were deficiencies with the scheme which had to be paid for. 
91.	He explained how the mechanics of the Portfolio Scheme moved over from the original 30% scheme to the Claims Direct Protect Scheme involving insurance. 
92.	The premium of £1,250 plus IPT, which was mentioned in a fax from Mr Raincock to Mr Sullman of 5 July 1999 [8/1A/30 p.127/8] went back to the Underwriters’ warranty endorsed on the memorandum for Underwriters dated 5 May 1999 [8/1A/25 p.101]. This warranty put a duty on Mr Raincock to ensure that a mechanism for vetting was built up to meet the standards set in the warranty. In a fax to Mr Poole from Mr Raincock of 12 May 1999 [8/1A/26 p.111] Mr Raincock set out the conditions which had to be fulfilled. This fax also set out the requirement for audit and the extra expenses that emerged in order to fulfil the requirements laid down by the Underwriters. Mr Raincock stated that over the two months, to July 1999, the figure of £1,000 was identified as the risk assessment and claims monitoring commission. This, together with the £110 commission, paid to Claims Direct and the £140 paid to LPL produced the total of £1,250. 
93.	He explained that MLSS received £395 from the Panel Solicitors, in addition to the £1,000 from the premium. MLSS paid claims managers £425. The solicitors paid for the referral of the business and also what Mr Raincock called the “packaging of the enquiry into an acceptable format with the claims manager’s report”. 
94.	In relation to block rating he referred to the Government’s intention to improve access to justice. What was needed was a simple scheme for unsophisticated people. They accordingly decided to start with one size fits all, on the basis that in due course it might be possible to arrive at a different approach which is what has actually happened. 
95.	He confirmed that the failure rates predicted were a gross underestimate of what happened in practice and put this down in part to the fact that defendant liability insurers were more likely to fight cases when they knew that the claimant was insured, and therefore could afford to pay the costs. He estimated that £1 million in costs had been paid out to successful defence solicitors under the Claims Direct Protect Scheme. 
96.	In relation to the premium reallocation Mr Raincock said that he had formed the view that it was necessary to increase the allocation premium paid to Underwriters (to around £300) by the time he attended a Claims Direct conference in Las Vegas during November 1999. He discussed the position with Ian Hacker an Underwriter at that conference. The review finally took place in May 2000 when there were detailed face to face negotiations between Underwriters and Claims Direct. He stated that the Underwriters were persuaded to leave matters for a little longer because the loss ratio being predicted by the Directors of Claims Direct would show a good profit for the Underwriters. 
97.	Dealing with the way in which the money paid to Claims Direct was split up Mr Raincock did not think it was fairly divided because it did not reflect the emerging costs that the various parties were incurring. He said that the parties moved away from their original objective of all parties carrying out their various responsibilities and being remunerated accordingly, to one where it became “heavily one way” ie, in favour of Claims Direct. This did not however alter the value of the total premium or the costs of the total premium. 
98.	One of LPL’s duties was to run a triangulation report monthly so that Underwriters could see how the account was running. By about June 2000 it was clear to the Underwriters that the failure rate of cases was much higher than predicted giving them much higher burning cost per case. Further negotiations took place with Claims Direct in the autumn of 2000 at which stage the Underwriters were predicting losses for themselves in the region of £25 million. The Underwriters were also concerned at the rate of increase in business. 
99.	Mr Raincock then dealt with the heads of agreement dated 14 November 2000 and the subsequent formal agreements dated 13 March 2001 which I have already set out. He was not at the Heads of Agreement meeting in November 2000 but was at the meeting in March 2001. In his witness statement [para 60] Mr Raincock referred to the fact that Claims Direct had agreed to pay to Underwriters money totalling £16.1 million. He subsequently confirmed that he was mistaken over this figure and total was £16.6 million which he described as additional net premium or reallocation of premium so that Underwriters received in effect considerably more than the initial figure retained by them. 
100.	Annexed to Mr Raincock’s witness statement is a schedule [exhibit BJDR1]. He thought that the schedule had been prepared in September of 2000. This was a comparative analysis which he had prepared for his own purposes, listing the various attributes of products in which he had an interest and also of products labelled “competition”. In cross examination he suggested that the information given to Master O’Hare for the purposes of his Report in Callery v Gray (No.2) was considerably more up to date. I do not derive any assistance from that schedule. 
101.	Mr Raincock’s view was that the Claims Direct product was very competitive and an extremely good product, probably the best on the market. He suggested that the Claims Direct product gave more people access to justice since they only had to demonstrate a 51% chance of success, whereas he suggested that with a conditional fee agreement solicitors would probably be looking for cases with more than a 60% chance of success. 
102.	In cross examination Mr Raincock was taken to his memorandum for Underwriters dated 22 March 1999 [8/1A/19] which set out [at pages 76-77] the Proposition for Claims Direct. The premium was put at £200 plus IPT [p.78]. Mr Raincock stated that this was a gross premium that would go to the Underwriters. He also confirmed that the figure of £200 would comprise whatever figure would be paid to the Underwriters plus whatever would be paid by way of commission to any Lloyds broker and to LPL. A second memorandum for Underwriters dated 22 March 1999 [8/1A/20 pages 81-83] mentions under the heading “Premium” that: 
“The notional premium will be increased to £1,190 plus IPT which will allow for the payment of £1,000 to the claims manager either from the premium or from the indemnities provided.”
103.	Mr Raincock confirmed that this figure came from himself. Although the memorandum referred to “claims manager services” he confirmed that what he was referring to is what he would now call “insurance services”. He stated that the £1,000 was intended to include all the services that Claims Direct was going to provide in respect of the essential vetting services and the monitoring of the claims as they proceeded. Mr Raincock pointed out that if a Part 36 offer were to be made in respect of a claim, LPL would have to give authority and decide whether or not to proceed. This he suggested was not claims management services but insurance. With regard to the reference to “notional premium” he explained that the scheme was evolving and he had to be aware of what he was being told by Underwriters and what was happening in the market generally. He explained that he had worked out in his mind what he thought the product was going to be worth in gross terms bearing in mind his market experience and in particular what had happened to the Accident Line Scheme being run by the Law Society. He asserted that in arriving at a total figure for the premium they had worked from the bottom up rather than merely asking what the market would stand. He confirmed that the £1,250 was an amalgam of input from Claims Direct and himself. He asserted that the Underwriters were fully aware of what was being looked at, he also pointed out that no-one knew what the statistics were because this was a new scheme. 
104.	Although Mr Raincock is clearly an expert in his own field he did state that he was not an expert in binding authorities or the wording of binding authorities which he pointed out are negotiated between the Lloyds broker and the Underwriter. He did however accept that he was bound by the terms of binding authorities. In relation to the term “Underwriters contribution towards costs” he stated that he would have called it “Underwriters expenses”. Mr Raincock was asked whether any attempt had been made to try and break down the figure of £1,250, to which he replied that none of the interested parties knew what the true costs of the various elements were. They entered into the agreement as a partnership recognising they must get a gross premium sufficient to ensure that all the parties were going to be covered and would make a profit. £1,250 was thought to be the appropriate figure. They carried on with a net premium of £90 (approximately) on the basis that if the claims deteriorated there would be a reallocation. The original split, as he put it, was open to critical review, the gross premium was to be subject to regular review and regular reallocation arriving at what the gross premium should be to produce a profit for all those providing the services. 
105.	With regard to the sum of £9.5 million which Claims Direct were obliged to pay to the Underwriters [8/2C/118 p.728] Mr Raincock described this as additional premium which was payable whether or not the individual Claimant paid anything extra to Claims Direct. He stated that what Claims Direct were having to do was onward sell the additional ring fencing benefit. He though some 2,700 Claimants had taken up this proposal out of a total of some 36,000 policies. Claims Direct had to repay some of the premium allocation to the Underwriter. 
106.	In addition to the £9.5 million there was an obligation to pay a further £7.1 million. This money was released from the retention account at the rate of £225 per case as each case concluded. Mr Raincock explained that the retention fund had been set up at his instigation. He wanted a tranche of cash to be held back in the event that any of the claims management companies failed so that it could be utilised for the run off of the policies. The £225 happened to coincide with the amount paid to the claims managers but he described this as a contractual obligation of Claims Direct and not of the retention fund. 
107.	With regard to the MLSS agreement Mr Raincock said that this was what LPL required MLSS to do for the Underwriters. He explained that he carried out random audits on individual files and if this led to dissatisfaction this was reported back to MLSS who would then inspect the file to ensure that the solicitor carried out his function in accordance with the operating manual. MLSS themselves were involved in training. The number of Panel Solicitors expanded from 175 to almost 400 to cope with the volume of business. Solicitors were required to attend a seven day training course and an accreditations system was set up. He described this as all being part of the monitoring service to improve performance not just for Underwriters but for Claimants as well. 
108.	With regard to the vetting of cases Mr Raincock pointed out that there was no benefit to Claims Direct in vetting the cases under the insured scheme, and vetting was therefore a cost to them. Under the previous 30% scheme there had been a benefit because they were in effect self insuring. He said he saw the Claims Direct product as an insurance service by which a Claimant could conduct a claim at no risk. 
109.	Mr Raincock was asked about the difference between insurance claims handling services and damages claims management services. He stated that the services were intrinsic to the insurance, because without those services the insurance policy could not be managed. He explained that Claims Direct’s business was to recruit cases and once they had been recruited they became an insurance product and Claims Direct’s job was then to monitor that product which was done by means of the Continuing Insurance Services. He conceded that there might be an element of damages claims handling in the work which Claims Direct/MLSS undertook. 
110.	Dealing with the commission of £110 paid to Claims Direct Mr Raincock was asked why this went up from the original proposal of £19 or £20. He was asked if the increase covered any additional service but stated that it was specifically earmarked for marketing and promotional services, LPL wanted Claims Direct to promote as much as possible. The £1,000 paid to MLSS was paid in relation to insurance services, that was for servicing the business as LPL were getting it on the books and to monitor it as it continued until it finally came to fruition. Mr Raincock agreed that some of the £1,000 might have been used towards marketing. 
111.	Mr Raincock was asked about the normal level of commission and brokerage. His brokerage fee was 32.5% of the original £140. In relation to the £110 commission paid to Claims Direct he stated that this was part of their remuneration, it was paid to them to introduce and generate business. It was put to him that this commission was something like 130% of the premium paid to Underwriters. Mr Raincock explained that in relation to travel insurance the percentages can be similar. He gave the example of uninsured loss recovery where the net premium to Underwriters is about 50p and the gross premium £25. He pointed out that under the Claims Direct scheme there was little for the Underwriter to do, which was why all the parties received fees. LPL as coverholder had a number of tasks to perform. 
112.	Mr Raincock put the reason for failure down to bad management. In this he included solicitors and counsel as well as the claims managers. 
113.	Mr Raincock was asked in cross examination whether the £395 paid by the solicitor to MLSS covered the cost of the Continuing Insurance Services. Mr Raincock said that it did not, because LPL and the Underwriters had a different interest in the information for which they paid MLSS. He called it an insurance aspect. They wanted statements of truth to make sure they were not backing losers and to make sure that the insured client complied with the policy requirements. LPL required MLSS to safeguard the Underwriter’s money. Mr Raincock did agree that there was some duplication between the services paid for out of the £1,000 paid to MLSS and also paid for by the Panel Solicitors in the £395 which they paid. 
114.	Mr Raincock agreed that it might be cheaper to cut out the claims manager and leave the work to solicitors, but he pointed out that in his experience clients were unwilling to go to solicitors who provided a service which was not user friendly. He pointed out that claims managers were trained in assessing clients and that many claims were handled by fee earners rather than solicitors. By this I took him to mean people within solicitors’ offices who were not themselves qualified solicitors. Thus, although it might be cheaper to use solicitors, there would in his view be a considerable reduction in the number of claims processed. 
115.	Mr Raincock suggested that if the claims manager was cut out, the cost of the work undertaken by the claims manager, getting the business in, processing it, arranging the funding agreement and dealing with the Consumer Credit Act requirements would cost approximately £400 to £500 and that is what solicitors would pay to sub-contract the work. He suggested that it is necessary to accept the cost of getting it right in the first place, or the costs of getting it wrong at the end. 
116.	Although Mr Raincock’s schedule annexed to his witness statement was some 2 years out of date he did point out that premiums have had to increase considerably. Subsequent analysis which he had carried out showed that the worst claims experience tended to be in years 5 and 6 which meant that the premiums shown on his chart should be considerably higher. He referred to certain analysis carried out on behalf of DAS but that analysis was not before the court. In relation to the Law Society scheme Mr Raincock said that the premium had increased from an initial £80 to £600, rising as high as £3,000 depending on the severity of the case and the point at which the insurance was taken out. 
mr primer
117.	Mr Primer had been with Catlin Underwriters for nine years and is now a director. He is also a US attorney. 
118.	Mr Primer explained how his agency was involved in the original discussions on behalf of a particular syndicate with Mr Raincock. The matter was originally dealt with by Jamie Lewis under his supervision but Mr Primer dealt with the negotiations personally in March 2000. The original approach was always on the basis that virtually all the promotion of the project and the vetting, claims handling and administrative work would be sub-contracted. The Underwriters were concerned to ensure that these functions would be properly carried out, particularly the vetting, since this would have a critical effect on the performance of the book. Since most of these functions were to be sub-contracted the Underwriters took the view that they should calculate the burning cost per policy with a margin for error given the lack of experience for this type of policy and then apply an appropriate margin for overheads and profit. He stated that it was very difficult to gauge how this entirely new product would work out. The Underwriters were happy with the small allocation of premium at first, subject to review. He pointed out that it was important that there should be a large take up of the product, critical mass being very important to Underwriters as they need a wide spread to prevent adverse selection. A large number of cases is also required to produce useful statistics for predictability for the future. 
119.	The Underwriters originally worked on an assumption of a failure rate of between 4% and 6%. Claims Direct was suggesting a failure rate of 3% or less. In March 2002, when Mr Primer made his witness statement, he thought the rate was in the region of 25%. As Underwriters, he stated that the services provided by MLSS were an essential and integral part of the product and that they would not have been prepared to underwrite the business without proper arrangements being in place for promotion, vetting, claims handling, etc. They were not in a position to undertake this work themselves. 
120.	With regard to block rating Mr Primer agreed with Mr Raincock that there was never any discussion between them as to what impact having a wide spread of claims covered by the policy would have. It was always intended that a single policy should be available at a reasonable premium. He felt however that given the relatively small allocation of premium to pure underwriting risk the element that would be attributable to block rating would be fairly minimal. Similarly the element of Claimants’ own costs cover would only take a relatively small sum attributable to the risk premium overall. He did not think that the element for this type of cover in the premium would be significant. 
121.	With regard to the premium allocation and the retention account he described this as a long stop position for Underwriters. The scheme was rapidly growing and a significant burden was being taken on by Claims Direct and MLSS. The retention fund was to protect Underwriters if Claims Direct or MLSS failed. The amount retained was not sufficient to cover the work which needed to be done in his view but would soften the blow. 
122.	Mr Primer referred to the coverholder review carried out by Northshore International Insurance Services Ltd which is stamped 7 August 2000 [8/2A/65 p.211-230]. This review was carried out on Mr Primer’s instructions. He stated that it is standard business policy to have a third party review of Underwriting business. His view was that Claims Direct was working hard but struggling to keep up with the growth in business. LPL had authority to settle claims up to a certain level. He described LPL as “our eyes and ears”. He stated that advertising was important to Underwriters who have no marketing facility. Claims Direct had plans to access a pool of business through advertising. He confirmed that a fair degree of advertising was required. The Report made recommendations for Underwriters to perform a more detailed analysis of the business. With regard to the Summary Recommendations [p.229-230] there was ultimately an incomplete adoption of the recommendations because there were problems, namely Claims Direct grew and then shrank very rapidly. There was difficulty in achieving implementation of the recommendations. 
123.	Mr Primer explained that Lloyds Syndicates produce three yearly accounts. Open years are recorded annually on a cash basis, so that annual accounts are produced even if the year is still open. 
124.	The syndicate’s income is premium income and the amount which appears in the syndicate’s books is the net amount £91. Lloyds accounting conventions dictate that only the net retained syndicate income is booked, so that although Mr Primer was aware of the gross figure of £1,250 only the net sum received by his syndicate was recorded. A significant component of the balance came back to Underwriters as a result of the review. Mr Primer explained that Lloyds syndicates are obliged to maintain funds at Lloyds and the amount of the funds at Lloyds dictates the premium capacity. He thought that the current statutory minimum was 40% of the Underwriting capacity but that it could run in excess of 100% depending on the volatility. He confirmed that the syndicate counted £91 per policy subject to the later additional premiums. They did not count the £1,250. He did not think that the Lloyds Policy Signing Office would be concerned about what he called the top line premium. He confirmed that the gross premium income limit in the binding authority [8/1A/6 p.21] was based on either the £91 or £140 but not on the £1,250. 
125.	Mr Primer was asked about the syndicate accounting bye law taken from the Lloyds Bye Laws which required gross premium to be accounted for. Mr Newman suggested that the payment made to MLSS was not one of the items that could be deducted for accounting purposes. Mr Primer could only presume that the accounts were prepared in accordance with the Lloyds Syndicates’ Bye Laws but not being a financial director he could not comment on them in detail. He pointed out that if they had accounted for the full £1,250 this would have affected the Underwriting limits, ie the premium income limit. 
126.	Mr Primer confirmed that a claim would arise when the Underwriters were called upon to pay some amount pursuant to the policy. That claim would arise when the underlying event that was going to give rise to the policy liability had happened. 
127.	With regard to insurance services and claims management services he stated that there would have to be some initial investigation and that therefore the claim was not being managed until it had actually been taken into the system. He stated that claims management fairly characterised would not happen until a claim had been taken into the insurance system prior to that time. The earlier work is vetting and the necessary administration that goes into selecting whether a claim is to be accepted into the insurance programme. 
128.	Mr Primer explained that brokerage could be simply commission or could include claims handling and other services including an introduction fee. There could be claims collection fees and fees for sending monthly bordereaux. He agreed that a brokerage level of 11 times the actual premium was very high but he had known brokerage of 100% with some profit commission particularly in extended warranty schemes. He suggested that something between 15% and 45% would be where most insurances would fall. For the 32.5% brokerage paid to LPL he stated he would not expect the broker to carry out claims handling but that this would be mainly an introduction fee. From the Underwriters perspective they could not sell their policy unless Claims Direct provided the business. There was no natural market for the policies being written by the Underwriters. 
129.	For the 32.5% commission paid to LPL underwriters expected LPL to maintain a rigorous supervisory regime over Claims Direct and MLSS including the vetting procedures. 
130.	Mr Primer confirmed that he had attended the meeting on 3 May 2000 and that the notes of the meeting were his [8/1B/107 p.544]. He thought that the figures £400 for Claims Direct marketing and advertising and £425 for claims managers were numbers given by Tony Sullman at the meeting. He stated that the Underwriters were not totally unconcerned but their main driver was the amount of premium they were receiving. The parties were concerned to keep the premium below a £1,500 ceiling. Mr Primer pointed out that without the Underwriters’ paper Claims Direct did not have a business. 
131.	The £110 paid to Claims Direct as commission was paid for introductions. He stated that Claims Direct was 100% responsible for introductions. He confirmed that it is standard to pay brokerage commission but that there was no other scheme similar to this one. 
132.	With regard to the review and reallocation of premium, although Mr Primer was taken through the various stages of discussion the various proposals were never implemented and by March 2000 when Mr Primer came into the negotiations he was convinced that there was not enough money for the Underwriters. He said there were a lot of proposals which were not satisfactory and little progress was made until the deal on 13 November 2000. Mr Primer explained that the claimant paid £1,250 but would have no idea how it was allocated behind the scenes. It fact what was happening was that the money paid was divided up in accordance with the contract. As he put it a year later (in March 2000) he went in and renegotiated in accordance with the contract, saying: 
“That money you have had, part of that original £1,250, I will have some of that please.”
133.	The original £140 had been allocated to Underwriters subject to a contractual clause that gave them the right to renegotiate to increase their premium take so that they maintained a 60% net loss ratio. 
134.	Mr Primer characterised the £91 actually paid to Underwriters after brokerage and commission as primarily a product of negotiation between Underwriters, LPL and Claims Direct but said there was always the chance of a review. At the outset they had no reliable data and therefore had to take certain decisions. He said that the £91 was in fact a very bad underwriting policy decision. He suggested that it was a reasonable agreement but turned out to be “a bad call” because of the poor failure rate. 
135.	Dealing with the retention account the figure of £225 per case, to be paid out when the damages claim was finalised, this was a figure proposed by Brian Raincock and seemed to Mr Primer a reasonable figure which he decided to accept. He had never quantified what it would cost to bring somebody in to do the work in the event that Claims Direct or MLSS failed. He thought it would cost several hundred pounds for the work to be done, although it had not been scientifically calculated. 
136.	He agreed that the policy premium of £140 did not change but pointed out that the £2 million loss fund was set up. The parties agreed a restructured agreement which put £16 million on the table to be reallocated. Claims Direct recognised that the Underwriters were integral to their business. Mr Primer stated that he had a 60% lever, he had the right to cancel the policy whereupon the share price would have crashed. The Underwriters felt they were on a strong footing because of the contractual provisions if the losses exceeded 60%. 
mr doona
137.	Mr Doona was appointed finance director to Claims Direct in December 1999. He assisted in preparing the Company for flotation on the Stock Exchange. He stayed with the Company after the flotation in the summer of 2000 until September 2001 when there was a successful takeover of the Company. None of the other directors involved with Claims Direct at the material time were available to give evidence. Thus Mr Doona had no direct knowledge of the original discussions between Mr Raincock, the Underwriters and Claims Direct but he did have a good general knowledge of the background to the scheme and how it operated. 
138.	Claims Direct wished to operate a scheme which would enable a Claimant with a better than evens chance of success to pursue the claim. A single policy had been developed which covered all types of claim irrespective of the size or type of claim (except clinical negligence). He thought about 10% of the cases involved damages in excess of £10,000 and of those some claims were in excess of £100,000. 
139.	Mr Doona first became aware of the requirement for a review of the premium allocation when he attended discussions with the Underwriters after the Company flotation. The Underwriters were unhappy, saying that they stood to lose in the region of £25 million on their 1999/2000 book. 
140.	At the same time arrangements were made to provide ring fencing at an additional cost of £245, the total premium therefore becoming £1,495 plus IPT. Underwriters agreed that Claims Direct would be allowed to back date ring fencing to apply to all policies issued from 1 April 2000 and for this Claims Direct agreed to pay Underwriters £245 for each policy regardless of whether the individual Claimant had paid the extra premium. Claimants were invited to pay the extra and out of approximately 36,000 policies some 2,700 paid the extra. 
141.	Mr Doona confirmed how £7 million was to be paid from the retention fund to Underwriters as part of the total of £16.6 million which was allocated to them. These arrangements were set out in the Heads of Agreement signed in November 2000 and subsequently in the formal contract entered into in March 2001. He referred to the arrangement whereby the Underwriters were allowed to look at the actual outcome of claims history at the end of the period and adjust the allocation as a “swing premium”. He said that the effect of this was that Underwriters would never receive less than £425 per policy, but could receive up to but not more than £600 (this was later increased to £800). In respect of ring fencing the Underwriters would not accept the entire risk and it was agreed that Claims Direct would meet up to £500 of this cost. 
142.	Mr Doona confirmed that the original figure for the premium was arrived at by Underwriters looking at their costs and the profit ratio they wanted to make and setting the figure accordingly. 
143.	Mr Doona dealt with the work undertaken by MLSS as part of the initial and continuing insurance services, including appointing, training and accreditation of claims managers and the supervision and control of them, meeting the potential claimant via the claims manager and taking details of their case, carrying out the vetting procedure before passing it to the panel solicitor to decide whether or not to accept the case. There was a whole department dealing with franchisees, about 12 people, a number which increased from time to time and other areas of the Company linked in. In relation to the Continuing Insurance Services he said that the legal department linked in to these operations. The legal section comprised some 30 or so staff who were dealing with the claims handling process, their role was to ensure that solicitors were complying with the requirements of the operating manual. 
144.	Mr Doona dealt with the information provided to potential investors for the flotation [8/2D/142]. Under “Revenue” it was indicated that the Claims Direct income was approximately £1,560 gross per claim, out of which it had direct costs of approximately £425 and indirect costs of approximately £475. In his witness statement Mr Doona said these figures were given: 
“for indicative purposes for potential investors at the request of our bankers. In practice we do not allocate sums in this way but the figures given were the best guide available to enable potential investors to assess the future prospects of the company.”
145.	He explained that the direct cost of £425 related entirely to payments made to claims managers, of that £395 was paid by solicitors and the balance of £30 was made up from other income of the Group, which he described as Claims Direct’s general income, not specifically premium. Of the £475 indirect cost they had estimated that there was £75 per policy chargeable in respect of irrecoverable VAT and thought that the remaining money was their best estimate of the total cost of advertising annually compared with the total number of policies sold during the year. This left a figure of £660 profit per claim which Mr Doona agreed was an “extraordinary” profit. 
146.	Mr Doona thought that the Claims Direct scheme offered good value to all parties. The attraction for Claimants being the ease and informality of dealing with the claim. He did not think that the effect of block rating was substantially to increase premiums. 
147.	Mr Doona explained that Claims Direct was a franchise operation, franchisees being claims managers who had to pay approximately £1,000 or £2,000 for a franchise. This increased to £5,000 or £6,000 and possibly as high as £20,000. The franchisees expected a significant return. Under the Portfolio scheme this was 30% of the damages recovered. A fee of £200 was paid on acceptance of the case and £225 on its successful conclusion. The £200 was claimed back if the case was not accepted and was netted off if the case was lost. The £225 was kept in the retention account and paid at the conclusion of the case if successful. Essentially the job of the franchisee remained the same under both schemes. The two operations were very similar. 
148.	The Initial Insurance Services were carried out before any legal proceedings were issued and before any insurance had been obtained from the client. These would all be carried out by the claims manager. The Continuing Insurance Services were carried out in part by the claims manager and in part by MLSS (Items 2, 4 and 5). 
149.	Although cross examined about Claims Directs consolidated accounts and the treatment of the £1,250 and the £140 paid to Underwriters Mr Doona did not know how it was entered and did not know what the nominal ledger account was called. He had only been dealing with the consolidated accounts. 
150.	Dealing with the payment of £16.6 million Mr Doona confirmed that it related to the year 1999 to 2000 and stated that it was retrospective. It related to cases and losses in those years. Claims Direct had made various calculations about how they could afford to pay that amount of money but he was adamant that the money related to losses in the year 1999/2000 and was therefore retrospective. He reiterated this several times pointing out that it was in those years where the Underwriters stated their loss was. 
151.	When the Underwriters had indicated that they were likely to lose £25 million Mr Doona felt he had to come up with a way of getting money to them. £9.1 million was the maximum he could get to them and there was a further £7.2 million in the retention account. He thought the description of the money going to Underwriters as “advance premium payments” was badly worded [8/2B/99 p.573]. He explained that this was part of the negotiation and the terms were later incorporated into the final agreement in March 2001. He explained he was trying to protect the Claims Direct profit and loss account and did not want to show losses in earlier years if he could avoid it. 
152.	After the flotation Claims Direct was rocking from one disaster to another and he was fire fighting from weeks after the float. Although he had no personal injury claims experience he tried to get the failure rate lower by improving vetting. He felt that the teams were not directed as well as they should have been, added to which the number of cases was expanding rapidly. They lost a number of claimants after the bad publicity. 
153.	Mr Doona was asked if the effect of block rating had ever been worked out. He thought that Mr Sullman and Mr Poole had worked this out in the early days when the scheme had been set up. There were no documents to support this suggestion; he thought that a schedule prepared by Mr Sullman had been produced at an analyst’s meeting but no document was produced. 
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?
the claimants’ submissions about premiums
154.	Something over 75,000 Claims Direct policies were issued to individual claimants; of these approximately 16% failed or did not proceed for various reasons, a further 27% have settled or been concluded on terms which included the payment of premium as part of their costs. The remaining 57% (approximately 42,000 policies) are in respect of claims for which the inclusion of the premium as part of the costs is or may be a live issue. I understand that a very large number of claims awaiting final decision in these test cases include claims which are not Claims Direct cases, but are cases in which it is felt that similar points of principle arise. It must also be borne in mind that Claims Direct no longer markets the policies which are the subject matter of these preliminary issues. The Claimants state that this is because the original cover expired at the end of February 2002 and underwriting capacity was not available to continue to support this level of cover in the light of claims experience and the general hardening of the insurance market. The product now marketed by Claims Direct is a different form of ATE cover which depends upon claimants running their cases under the terms of CFAs without protection against liability for the claimants’ representatives’ costs. 
155.	The Claimants’ position with regard to premium is that there is an enforceable contract between the individual claimants and the Underwriters for an indemnity, the premium for which is £1,250 plus IPT. Mr Charlton argues that the word “premium” is the price paid to the insurer for the cover he provides. In his submission it is not a term of art. It has no technical or special meaning, it is an ordinary English word readily understood. But see Lord Diplock in Swain v The Law Society [1983] AC 598 at 611. 
“ “Premium” in the context of insurance law is a term of art. It means a sum of money paid by an assured to an insurer in consideration of his indemnifying the assured for loss sustained in consequence of the risk insured against.”
I prefer Lord Diplock’s view.
156.	Mr Charlton argues that the court cannot go behind the agreement for Section 29 purposes unless sham is alleged, which it is not. In other words the amount of “premium” is established by what that contract provides not by the way that the insurer chooses to use the money. The Claimants further argue that the contract defines the risks covered in terms which plainly fall within what is permitted by Section 29 of the 1999 Act. 
157.	In response to the Defendants argument that MLSS was doing what it had done for some years before the possibility of recoverable insurance premiums existed, ie carrying out claims handling services not insurance services, Mr Charlton argues that in the days of the 30% Portfolio Scheme Claims Direct was in effect the insurer. Although it was not an insurance company, they had to bear the risks of failed cases. He argues that under the new scheme the services described as Initial and Continuing Insurance Services are of value and importance to Underwriters because they are services in monitoring and controlling Underwriters’ risk exposure which is important work. The fact that the work may have value to others as well, in his submission, does not destroy the character of the services or their value to Underwriters who have an interest in minimising claims, as well as in effective prosecution of the claim which he says legitimises these services as insurance services. 
158.	Mr Charlton goes further, referring to the retention account which was set up in order to protect the Underwriters in the event of MLSS or Claims Direct failing. He argues that the Underwriters needed this protection because, in the event of such a failure, they would be faced with having to do the work which would otherwise have been done on their behalf by MLSS during the run-off period. He suggests that this gives strength to his argument that the services provided by MLSS were insurance services. 
159.	The Claimants have throughout fought against what they call the deconstruction approach to the premium, saying that the way that the money was divided up between the Underwriters and Claims Direct is not relevant because the sum paid by the Claimant still remains “premium”. The Claimants argue that once it is accepted that insurance services can be included within “premium” it does not matter in principle whether the services are insurance related or for unrelated collateral benefits for the purposes of determining whether the sum paid is “premium”. 
160.	The Claimants recognise however, following the comments of Arden LJ, which I have already quoted, that I would wish to make factual findings about the way in which the Claims Direct policies were underwritten and issued. 
the second defendants’ submissions about premiums
161.	The Defendants for their part submit that premium consists of the four elements identified by Master O’Hare at paragraph 35 of his Report: “the burning cost, the risk/profit cost, the administrative costs and the distribution commission”. They argue that the figure of £140 paid to Underwriters included their overheads and administration costs, and since the figure included brokerage and commission for the Lloyds brokers, Prentis Donegan, and the coverholder, Litigation Protection Ltd, it also included a margin for error on top of the burning cost (since this was a new field of insurance) and an element of profit for the Underwriters, the brokers and the coverholder. The Defendants argue that the services provided by Claims Direct through Medical Legal Support Services (MLSS) are not in reality insurance services at all but are properly classified as claims handling services which should not properly be treated as being part of the recoverable premium. 
162.	Mr Newman points out that the master policy [8/1A/41 p.177] sets out the cover which is being provided, namely opponent’s legal costs, own legal costs and disbursements including counsel’s fees and the premium plus related loan interest. He argues that the money which is not paid to Underwriters, ie the remaining £1,110 after payment of the £140, is not premium because it does not come within any of the items of risk covered by the policy. In addition he argues that the extra money which Claims Direct were obliged to pay in order to obtain continuation of underwriting facilities were not attributable to the premiums paid by the individual Claimants. 
163.	Mr Newman, relying on the decision of Lord Slynn in Card Protection Plan Ltd v Customs & Excise Commissioners (No.2) [2001] 2 WLR 329 paras 22 to 28, submits that my task is to look at the essential features of the transaction to see whether it is several distinct principal services or is a single service that should not be artificially split. The Defendants’ position is that the Claims Direct Scheme has as its dominant purpose the provision of claims management services rather than insurance. In the case management appeal in this case Lord Phillips MR said in respect of an inducement being offered by Claims Direct [3/3/144]: 
“[the Defendants] are saying on true analysis it is not really the Underwriter who is providing the carriage clock at all; it is the intermediary tail wagging the dog.”
164.	Mr Newman argues that Section 29 does not permit the costs of conferring other services or benefits on an insured to be recovered, only those specifically set out in the statute. In deciding the issue it is necessary to look at the substance and not merely the form of the transactions, see Lord Templeman in Street v Mountford [1985] 1 AC 809 at 819 D to F. 
165.	From the outset Claims Direct made a distinction between what it intended to charge its clients for its own services and the direct cost of the premium. The discussions with Underwriters were about the premium they would charge for the costs liability cover, they were not consulted about what Claims Direct would add to that premium in order to price its products to its customers, see Lord Phillips MR [Claims Direct Appeal 3/3 p.144]. Mr Newman also points out that LPL’s fee was calculated as a percentage of the premium element agreed with Underwriters. Mr Newman argues that the services provided by MLSS under the Claims Direct Protect Scheme were identical to those provided by claims managers under the 30% scheme and he argues that the money paid to MLSS is not premium but money payable to MLSS for providing claims handling services. Those services were not insurance services before the advent of the Protect Scheme, when no insurance was involved, and did not somehow become insurance services after the new scheme was introduced. The fact that the money is referred to as “premium” does not resolve the issue. 
Submissions of the first and third defendants
166.	The Defendants represented by Mr Hutton are concerned with Issues 2, 4(i) and 4(ii) and Issue 5. Mr Hutton generally supported the arguments put forward by Mr Newman, but did not support Mr Newman’s submission in respect of Card Protection Plan Ltd v Customs and Excise Commissioners. He relied instead on Dimond v Lovell (see paragraph 209). 
167.	Mr Hutton referred to the MLSS Agreement. With regard to the Initial Insurance Services Mr Hutton accepted 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), is related to the insurance and is legitimate. With regard to Item 3 (forwarding the application form) and Item 4 (obtaining further information) he argued that Item 4 was not properly an insurance service but was part of the damages claims handling service. 
168.	Similarly, in relation to the continuing insurance services, Item 1 (obtaining witness statements from clients, witnesses and experts) is, he argues, self evidently claims handling not insurance services. Item 2 “monitoring the conduct of the appointed representative throughout the course or the legal proceedings and reporting on the same to LPL through Claims Direct when it feels that Lloyds Underwriters ought to be aware of such conduct” he accepted in principle could be a legitimate part of insurance services. With regard to Item 3 (arranging for the Claims Direct client to attend appropriate medical examination) and Item 4 (review by a costs draftsman) Mr Hutton argued they could not be insurance services, although he accepted that Item 5 “maintaining relevant financial information as may be required for monitoring purposes of the overall insurance result” was a legitimate insurance service. He also accepted that merely because these services were being provided by MLSS before there was any insurance product did not therefore render those services non insurance services. He argues that the proper approach is to examine each item to see whether it is genuinely insurance services or not. Mr Hutton further accepted that it was legitimate for an Underwriter to outsource some of the services and that it would be proper for the Defendants to pay the reasonable cost of those services. Having said that Mr Hutton argued that the outsourced services which he was prepared to accept were of no significant value. He suggests that the £1,000 payable to MLSS in respect of these services is grossly disproportionate to the amount that it actually cost to insure the risk and is therefore a figure that cannot represent a reasonable price for the benefit of purchasers. 
169.	With regard to advertising by Claims Direct said at one point to be running at £20 million per year (see Mr Sullman [8/1B/113]), which Mr Doona suggested was the equivalent of £400 per policy, Mr Hutton accepted that advertising an insurance product was properly recoverable as part of the administration costs. Relying on Master O’Hare’s Report at paragraph 62, he suggests that since the amount paid by the Claimant to Claims Direct included substantial extraneous benefits, the premium to be allowed should be reduced to take account of the fact that the advertising costs recouped in the full premium are properly regarded as attributable not only to the selling of the standard insurance product, but also to selling the disallowed extraneous benefits, ie the claims handling service. Mr Hutton argues that the advertisements are in relation to Claims Direct’s services and no mention of insurance was made. He therefore says that the proper insurance element of the advertising cost is nil or very small. He also suggests that to pay £400 per case for advertising costs against the £140 paid to Underwriters is not reasonable. 
170.	With regard to the review of premiums, which took place in May 2000, the agreement was changed but the premiums payable to Underwriters remained at £140. Later policies were to carry a higher premium but the others remained at £140. Mr Hutton argues that in terms of the contract between the Underwriters, LPL and Claims Direct the amount payable for the actual insurance service was £140 and the review did not change that. The fact that the agreement was changed subsequently is not something for which the Defendants should have to pay. Furthermore Mr Hutton argued that the increase in the amount paid to Underwriters was a direct result of poor claims experience which in turn was the result of poor vetting. The Defendants should not in his submission have to pay for these failures but should only have to bear the originally agreed premium of £140. 
conclusions
171.	It has long been held that the cost of funding litigation is not a recoverable cost as between the parties: 
“... by 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 Lord Justice Purchas, Hunt v R M Douglas (Roofing) Ltd, 18 November 1987, CA, unreported. This point was not taken in the subsequent House of Lords Appeal.)
172.	It follows from this that the only costs of funding litigation which are recoverable are those permitted by statute, in this case Section 29 of the Access to Justice Act 1999. Section 29 is specific and has been interpreted by the Court of Appeal in Callery v Gray. Anything falling outside the scope of the Section is not recoverable. 
173.	When a claimant enters into a contract with Claims Direct he is not exclusively a “party who has taken out an insurance policy”, he is certainly given Evidence of Insurance but that is only part of the package which he has purchased from Claims Direct. In my view the Claimant is entitled to recover the reasonable cost of the insurance element and, in relation to the amount which I find to be properly the insurance premium, I accept Mr Charlton’s argument that I should not further analyse that figure. 
174.	The nub of these test cases is whether the sum paid by the individual Claimant (£1,250 plus IPT or £1,495 plus IPT) to Claims Direct is a premium within Section 29 of the 1999 Act and if it is whether it is reasonable. There is no dispute between the parties that £140 of this paid to LPL on behalf of the brokers and Underwriters is indeed premium and is recoverable. There is some argument over the status of the £110 commission paid to Claims Direct and, in the one test case where it arises, about the additional £245 paid for ring fencing. The main argument however centres on the £1,000 paid to MLSS in accordance with the agreement of 16 August 1999 [8/1A/39 p.166-173]. Although Claims Incorporated Plc, trading as Claims Direct, is a party to that agreement, the agreement imposes no duties on Claims Direct. The recital to the agreement explains 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 ...”
175.	The next paragraph of the recital states: 
“LPL has agreed to engaged MLSS to undertake certain services ... which will enable LPL as Underwriters representatives both to introduce and to manage the necessary insurance arrangements ...”
176.	The recital goes on to set out the requirement for MLSS to undertake the initial and continuing insurance services. The agreement provides that in consideration of the premium allocation (£1,000 for each and every claim) MLSS will provide LPL the initial and continuing insurance services described in the agreement. Claims Direct is given no role to play under this agreement except, by implication, the introduction of prospective claimants. 
177.	Each potential client was required to complete a Fair Trading Statement [5/17 p.153A]. Within the document it refers to itself as a “Proposal” and the terms of the agreement are conditional upon the proposal being accepted by Claims Direct. In the event that the proposal was accepted by Claims Direct the Claimant was sent Evidence of Insurance which was signed by Brian Raincock of LPL on behalf of Lloyds Underwriters. 
178.	Mr Charlton argues that since the contract between the individual Claimants and Claims Direct is not a sham the court cannot go behind that contract to carry out an audit of the insurers business. Similarly he argues in relation to collateral benefits that everything which the Claimant receives is sufficiently closely connected with the subject matter of the insurance, i.e. the risk that the insured may at the end of his case have a liability for both the costs of his own representatives and of the defendants’ representatives to be recoverable. The flaw in this argument is that Claims Direct is not the insurer nor even the agent of the insurer. Claims Direct offers to members of the public a package which includes an insurance element. I accept that the majority of Claimants who purchased the Claims Direct product are not sophisticated and will have taken at face value what they have seen in Claims Direct’s advertisements and what they have been told by Claims Direct’s claims managers. The individual Claimants cannot be expected to analyse how the money which they have paid is to be utilised and therefore what proportion of it is potentially recoverable. Nonetheless that situation cannot of itself render the whole of the money paid to Claims Direct a recoverable insurance premium if it is not. The true position is 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 he/she was agreeing with Claims Direct not LPL or the Underwriters. 
179.	As we have seen the original allocation of the money received by Claims Direct left the Underwriters with substantial losses and the allocation was reviewed and altered in accordance with the agreements to which I have referred. As part of the scheme MLSS had to carry out the initial and continuing insurance services and some of these may indeed be insurance services and therefore covered by the premium. Other activities, although nominally undertaken for the benefit of Underwriters, form no part of the actual insurance since they are part of the normal claims handling service, which, had they not been carried out by the claims managers, would have been carried out by the solicitors in the normal way. To the extent that that work was reasonable and proportionate it may instead be recoverable as costs on behalf of a successful claimant (see R (on the application of Factortame) v Secretary of State for Transport [2002] EWCA Civ 932). 
180.	The agreement between the Claimant and Claims Direct is not an agreement with an insurer. The money paid is not all premium. Part of what is provided by Claims Direct under its Protect Scheme is an insurance policy the premium for which is, if reasonable, recoverable. It is therefore necessary to identify the amount attributable to the insurance. 
181.	If that is wrong and Mr Charlton’s argument is correct that the whole of the Claims Direct premium is a recoverable insurance premium, the question to be decided is whether £1,250/ £1,495 plus IPT is reasonable. I will return to this topic in a moment. 
182.	In deciding what constitutes “premium” I adopt the definition from MacGillivray on Insurance Law which I have already quoted. It is therefore necessary to decide what part of the money paid by the Claimant is the true consideration for which the insurer undertakes his obligation under the contract of insurance. 
the amount paid to underwriters
183.	In considering what properly goes to make up the recoverable premium in these test cases the starting point is the £140 which was the figure originally allocated to Underwriters and which included brokerage and commission. As soon as it became apparent to the Underwriters that this allocation was badly wrong they sought to exercise their right to a review [see binding authority 8/1A/6 p.21] which provided for review at 31 March 2000: “or as may be agreed by the Underwriters ...” That binding authority was effective from 16 August 1999 and it was subsequently extended. Although I was taken through the various stages of negotiation, the end result can be seen from the heads of agreement of November 2000 and the formal contract of 13 March 2001. The heads of agreement [8/2B/99], which are said to be subject to contract, provide for payment by Claims Direct to Underwriters “as advance payment” an amount equal to £245 times the number of policies issued during the period 1 April to 10 November 2000 that have not concluded as at 10 November. That provision refers to ring fencing. In addition further money is to be paid to Underwriters “as advance premium payments” as it is released after each concluded case. The heads of agreement also make provision for Underwriters to receive a minimum premium of £425 for each policy with effect from 13 November 2000 with the possibility of a higher premium if the relevant loss criteria arise. This increased premium does not apply to the test cases, except possibly case number 2, Benton v Fetsum Meles. It is the Defendants’ case that these additional premiums were prospective only and could not therefore impact on policies already in existence, particularly since the individual Claimants were not called upon to pay any further contribution. In my view those submissions must fail. It is clear that the Underwriters had a contractual right to review and that as the true failure rate emerged some hard bargaining took place between the Underwriters, LPL and Claims Direct. It is also clear that had the Underwriters not been given an allocation of premium which they regarded as satisfactory they would have withdrawn cover under the terms of their contract. The fact that in the heads of agreement the payments were described as “advance premium payments” is not in my view determinative. It is casual use of language and this is borne out by the formal contract drawn up by Messrs Reynolds Porter Chamberlain [8/2C/118, 119, 120, 121]. That agreement [at p.728] records that £7.2 million has already been paid to Underwriters and a further £2.3 million is to be paid. No mention is made of this being an advance premium payment and paragraph 6(c) makes it clear that a further £7.1 million is to be paid at the rate of £225 per concluded case “irrespective of the result of each claim in respect of which an evidence of insurance was issued prior to 31 December 2000.” Those words are clear and unambiguous. The reallocation of premium was retrospective, and the contract states the final agreed position. 
184.	The effective changes to the allocation premium meant that payments totalling £16.6 million were made to Underwriters. These payments were in respect of all covers bound in 1999 and 2000, a total of 53,282 covers in all. Mr Charlton calculated, and I accept, that Underwriters therefore received an extra £311.55 per cover. Mr Charlton sought to add the £62.50 IPT to the resultant figure of £451.55 but as I explain below I am not persuaded that it is correct to treat IPT in that way. 
claims direct commission
185.	For every insurance which was accepted Claims Direct received a commission of £110. Money which was used by Claims Direct, according to Mr Doona, for advertising purposes. There is in principle no difficulty over the inclusion of a referral commission in the overall cost of an insurance premium. The commission was however attacked as being far more than could be justified on a true premium of £140. Given that the amount payable to Underwriters following reallocation is £451.55 (£140 plus £311.55) that argument loses a considerable amount of its force. The commission although high does not appear to me unreasonable, particularly given that this was a new product which necessarily had to be advertised heavily in order to generate the business as explained by Mr Primer in his evidence. 
the payment to mlss
186.	After payment of the amount due to Underwriters and the commission to Claims Direct the remaining £1,000 was paid to MLSS subject to the various provisions as to how the payments were to be made. Originally the fee to MLSS was termed: “Claims Managers Profit Commission”. Following the reallocation of premium the amount payable to MLSS reduced. The question to be decided is to what extent are the Initial and Continuing Insurance Services part of the insurance being provided by Underwriters, and secondly what value should be put upon those services? 
187.	Following the guidance given by Arden LJ, in so far as the Underwriters had outsourced the “insurance claim handling” services to a third party that does not make any difference to whether such a cost is recoverable in principle if otherwise it would have been reasonable to expect the Underwriter to do these specific tasks themselves in order to provide the insurance product in question. Mr Charlton argued that once it was accepted that the services were of benefit or value to the Underwriter he did not need to show any more. That in my view cannot be right. It is necessary to examine each of the services provided by MLSS and to decide to what extent if any they accord with the guidelines suggested by Arden LJ. 
188.	In relation to the work undertaken by claims managers it is necessary to bear in mind Mr Raincock’s remarks of 5 May 1999 in his memorandum for underwriters [8/1A/25 p.102]: 
“Underwriters have expressed their reservations to [claim managers profit commission] in principle because they were led to believe (by BJDR) that claims managers had some “judgment” over claims pursued. This 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 ...”
I bear these remarks in mind when examining the Initial and Continuing Insurance Services.
initial insurance services
189.	Mr Hutton 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 related to insurance and were legitimate. I agree. He makes no concession with regard to Item 3 (forwarding the application form) but I regard this as a necessary and integral part of the first two items and with regard to Item 4 (obtaining further information) he argued that it was not properly an insurance service but part of the damages claims handling service. Item 4 referred to obtaining such further information as might be requested by the panel solicitor prior to his agreement to commence the legal proceedings. This is to my mind clearly part of the claims handling process. 
continuing insurance services
190.	Item 1 (obtaining witness statements from clients, witnesses and experts): in relation to this item I accept Mr Hutton’s submission that this is self evidently claims handling and not insurance services. 
191.	Item 2 (monitoring the conduct of the appointed representative during the course of the legal proceedings and reporting to LPL) this seems to me properly part of the insurance services. 
192.	Item 3 (arranging for the Claims Direct client to attend appropriate medical examination) and Item 4 (review by a costs draftsman) cannot in my view form part of the insurance services although I do accept that it is in the overall interest of Underwriters that the claims are efficiently handled. 
193.	Finally, Item 5 (maintaining relevant financial information as may be required for LPL) seems to me without doubt part of the insurance services. 
194.	Mr Newman argued that because these services or most of them were being provided by MLSS before there was any insurance product that prevented them being part of the insurance under the Claims Direct Protect Scheme. I do not accept that submission. 
195.	Those items which I have identified as being genuinely part of the insurance services represent legitimate outsourcing by the Underwriters. 
196.	The Second Defendants appear to argue that no charge should be allowed for work involved before an individual risk was bound, on the basis that there was no contract of insurance in being when the work was done and therefore the work was not referable to an existing insurance contract. I reject that argument and accept Mr Charlton’s submission that the scheme was effected through a binding authority given to LPL which required the selection of appropriate risks. As stated by Mr Primer in his evidence, this is a fundamental aspect of Underwriting. The cost is spread over covers which are actually bound. No charge is made for a cover which is not bound. As for the Second Defendant’s suggestion that insurance services could only occur from the date when the claim failed I also reject this argument. As Mr Raincock states at paragraph 34 of his witness statement, the business was “live” from the very day that a risk was bound. Mr Charlton put it that the meter was running from the date of the Evidence of Insurance. Mr Newman sought to persuade me that there was no difference between this type of insurance and motor insurance but I am not persuaded by his argument. In the case of motor insurance a policy is taken out against the possibility of an accident occurring and the policy holder incurring a liability. In the case of a Claims Direct policy the relevant incident has occurred and a claim is in being. Every policy will result in either the Claimant recovering damages or the Underwriters having to pay out. Many motor policies exist in respect of which no claim is ever made. 
197.	It may well be that the Underwriters had an interest in the Initial and Continuing Insurance Services being carried out and may have insisted on them. Mr Charlton argues that since the agreement with MLSS is not a sham it is not possible to go behind it, nor to apportion the money paid to MLSS unless it can be shown that the services were for the benefit only of the individual’s underlying damages claim and were not required to be performed for the benefit of insurers. I regard that approach as too narrow. For the reasons which I have already given, I do not regard the whole of the money paid by the Claimant to be premium. In order to assess what is truly premium it is necessary to consider the various elements which go to make up the total figure. In broad terms the Initial Insurance Services are to my mind properly part of the insurance services, particularly if Item 4 of the Initial Services is exchanged with Item 2 of the Continuing Services. This would mean that the whole of the Continuing Services (apart from Item 5) are claims handling and not recoverable as part of the insurance premium. Item 5, the maintaining of relevant financial information is, it seems to me, something which would be undertaken in any event as part of the monitoring of the conduct of the appointed representative and reporting to LPL. I do not think there would be any significant increase in the amount required properly to remunerate this insurance service. 
198.	It appears to be the case, according to the figures in Claims Direct’s Prospectus, that some £400 per case was being spent on advertising, £75 on irrecoverable VAT and £425 on services provided by the franchisees. 
199.	It seems clear from the evidence that the amount actually paid for insurance services was £425. Of this £395 was said by Mr Doona to be financed by money from the solicitors and the other £30 from Claims Direct’s funds. Mr Hutton concedes that £30 should be allowed in respect of the insurance services. This is on the basis that his clients are also being asked to pay £395 to the solicitors as a disbursement. The premium element paid towards the insurance services cannot in my view exceed the £30 paid from Claims Direct’s funds. Money paid by the solicitors is not premium. I am satisfied that £30 is not an unreasonable amount to pay for the insurance services which I have described. 
200.	Adding together the sums I have held properly to be regarded as premium, £451.55 plus £110 (see para 185) and £30 (see para 199) brings the total recoverable premium which (subject to the determination of other issues), I allow, to £591.55 plus £29.58 IPT (as to which, see para 232), a total of £621.13. 
ISSUE 4: COLLATERAL BENEFITS AND RING FENCING
(i) Are any of the benefits purchased by insurance forming part of the claims direct scheme collateral or extraneous to such insurance
claimants’ submissions
201.	In my view “premium” properly understood excludes the value of these items. Thus this issue is relevant only if either my decision on issue 2 is wrong or any further adjustment is needed to take account of ring fencing. 
202.	The Claimants urged that I should approach the remaining issues in these test cases from the point of view of the Claimant. Mr Charlton asserts that it is the Claimant who is intended to be helped by Section 29 of the 1999 Act and therefore what matters is what was known or ought reasonably to have been known by the individual Claimants when taking out their Claims Direct policies. The Claimants’ position is that no benefits are provided by the Claims Direct policy that fall outside the insurance allowed by Section 29. The Claimants assert that everything that they receive is sufficiently closely connected with the subject matter of the insurance to permit its recovery. 
(ii) To what extent should the cost of collateral benefits be recoverable?
203.	The Claimants suggest 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. The Claimants personally would have no knowledge of the detailed operations of Claims Direct, MLSS and their appointed solicitors. Mr Charlton suggests that they have to choose an ATE policy by reference to the overall costs to them and by reference to the attractiveness of the services offered. He argues that the test of reasonableness should be perceived through the eyes of the ATE cover buyer only and that accordingly any finding that a collateral benefit is not recoverable should be prospective only since it is only from that date that it could be said that a Claimant was acting unreasonably in purchasing such cover. 
(iii) to what extent is any additional payment made with the intention of ring fencing the claimants damages recoverable?
204.	In respect of this question the Claimants’ position is that any additional payment is recoverable in full so long as the effect of making the additional payment is not to make the overall cost unreasonable when judged by the yardstick of alternative available ATE cover or other available methods of funding access to justice. In the context of this case, ring fencing is the indemnity that some claimants obtained against the risk that the damages that they recovered might not be enough to cover the premium that they had paid. The additional premium is £245 (the difference between £1,250 and £1,495) and it is referred to in the documents as the “positive deficiency in damages” provision. The cover also included cover in respect of costs only proceedings. Mr Charlton argues that paying an additional premium for ring fencing is conceptually no different to paying insurance against having to pay the premium if the action is lost, an element of insurance which is in principle recoverable, see Callery v Gray (No.2) paras 44, 45, 62 and 63. 
Second defendants’ submissions
205.	Mr Newman argues that there is a distinction between insurance services on the one hand and claims handling services on the other hand. He argues that Claims Direct provided claims handling services to its client and that these are collateral benefits in respect of which nothing is recoverable. He relied on the finding of Master O’Hare in his Report annexed to the judgment in Callery v Gray (No.2) at paragraph 51, where having described work done by claims managers (not necessarily in Claims Direct cases) he stated: 
“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.”
206.	The Master of the Rolls giving judgment in Callery v Gray (No.2), having referred to that paragraph of Master O’Hare’s Report stated (at paragraph 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.”
207.	The court gave guidance on the test of what is reasonable at paragraph 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.”
208.	Mr Newman pointed out that the ring fencing cover was required because of the bad publicity received by Claims Direct when the £1,250 which had been borrowed was recouped with interest out of any damages recovered. Claims Direct wished to be able to protect the first £1,000 of any damages from such deductions. Mr Newman argues that the additional ring fencing cover is not insurance against the Claimant’s costs risk but is additional cover which protects a Claimant against the adverse effect of having participated in the Claims Direct Scheme. Again Mr Newman relies on Master O’Hare’s comment at paragraph 47 that the cost of ring fencing “is best regarded as extraneous to the legal expenses insurance contemplated by Section 29”. 
Submissions of the first and third defendants
209.	Mr Hutton argued that any benefits over and above those covered by the £140 paid to Underwriters are collateral or extraneous and should not be recoverable. He referred to the judgment of the House of Lords in Dimond v Lovell [2000] 2 WLR 1121 suggesting that it should be applied by analogy. He pointed out that in that case the court had stripped the collateral benefit out of the agreement which the claimant had entered into with a specialist vehicle hire company. The House of Lords found that the claimant could not recover the full amount charged, since 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. The Court of Appeal in Callery v Gray (No.2) stated (at paragraph 12): 
“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.”
It seems to me that those two authorities give considerable support to Mr Hutton’s submissions.
210.	Mr Hutton also relied on the points which I have already set out under Issue 2 relating to the initial and continuing insurance services. He argued that the work done by the claims manager is in effect holding the client’s hand throughout the entire legal process and is far beyond true insurance services and should not be paid for as part of the premium. 
conclusions
211.	Mr Newman sought to combine Issues 4(i) and 4(ii) with Issue 2 and relied on the same arguments. Leaving aside the question of ring fencing (Issue 4(iii)) for the moment, it seems to me that Mr Hutton’s submission, that any benefits over and above those covered by the £140 (which included an element of own costs cover), paid to Underwriters should be regarded as collateral or extraneous and should not be recoverable, provides the starting point. If my decision on Issue 2 is wrong the premium of £1,250 would include payment for the extraneous benefits, namely claims handling services, which I have already identified and the costs of those services are not recoverable. As I have said the actual amount paid by Claims Direct for insurance services was £30 and that element is recoverable. 
212.	With regard to ring fencing, this issue arises only in relation to Test Case No.8, Pretoria Working Mans Club v Thompson-Ward. The accident occurred on 5 June 2000. The date of the Fair Trading Statement is 20 June 2000 and the date of the Evidence of Insurance 11 July 2000. The total premium paid by the Claimant was £1,569.75 (ie, £1,495 plus £74.75 IPT). The Claimant was one of those who elected to pay the additional premium of £245 plus IPT and it appears to be beyond doubt that the whole of that premium was passed to Underwriters in respect of ring fencing cover. The claim was settled for £1,784.30 plus costs. The solicitors are claiming profit costs of £2,121 plus VAT of £371.17 and disbursements (including the Claims Direct premium) totalling £2,644.44. The total claimed as costs and disbursements is £5,136.61. The effect of the ring fencing purchased by the Claimant was that the first £1,000 of any damages would be payable to her even if there was a shortfall in the amount recovered in respect of premium from the paying party. 
213.	The Defendants object to paying this additional premium, firstly because they say it was brought about by the poor claims performance of Claims Direct, which is ultimately due to bad management, for which they should not have to pay. Secondly, they argue that in any event the cover purchased by the additional premium does not fall within the ambit of Section 29. The Court of Appeal in Callery v Gray (No.2) explained the position in this way: 
“38. Insurance is the purchase of an indemnity against the risk of loss caused by a fortuity. A contract that provides for the payment of a sum of money upon the occurrence of a fortuitous event will not be insurance unless the sum in question is intended to indemnify against a consequence of that event. When considering the nature of “own costs insurance”, it is necessary to identify the fortuity that triggers liability and consider the extent to which this fortuity exposes the insured to the loss against which cover is provided.”
The fortuity here is not the inability to recover costs but the event of claiming too much.
214.	In my view, since the cover purchased for £245 plus IPT was a discrete add on to the existing insurance for which the Claimant paid separately, and since the cover provided does not fall within the strict limits of Section 29, no part of the £245 plus IPT is recoverable. Had the Claimant taken out a policy which included ring fencing at the outset it still seems to me that this element of cover and therefore its cost should be excluded from what is recoverable from the paying party. 
ISSUE 5: BLOCK RATING
(i) whether it is reasonable for a claimant in an rta case to take out insurance costed on a block rating basis
claimants’ submissions
215.	Mr Charlton argues that this question only arises if the cost of Claims Direct cover comes at a price which is significantly higher than other funding options. He relied on the evidence of Mr Raincock to demonstrate that Claims Direct Protect was a competitive scheme. Mr Charlton answered the question raised with another question: 
“On what basis is it inappropriate to treat RTA cases as themselves inappropriate for a block rating treatment?”
(ii) If not are there any other cases where it is unreasonable?
216.	Mr Charlton said nothing in relation to this other than he awaited the identification of any other cases in which it is said to be wrong in principle to have a block rating approach. Claims Direct block rated all their claims, no matter what they involved. They did not accept clinical negligence claims. 
defendants’ submissions
217.	Mr Newman’s position is that it is never reasonable to have block rating in RTA cases. He also made the point, echoed by Lord Scott in the House of Lords at paragraph 112, that block rating runs directly contrary to the case by case assessment of costs required under the CPR. Mr Newman had no difficulty with insurers categorising different classes of insurance according to risk and having banded premiums. He also pointed to the fact that Claims Direct have apparently adopted a three tier approach to their premiums in more recent cases. Mr Newman drew attention to the judgment of the Master of Rolls in Callery v Gray (No.2) [p. 88, paragraph 23]: 
“The issue of whether it would have been reasonable for Mr Callery to take out insurance for his claim at a much higher premium than £350 costed on a block rating basis does not arise for determination in this appeal. On the face of it adoption of such an option would seem hard to justify.”
218.	Mr Hutton adopted Mr Newman’s arguments adding that although block rating is not objectionable in itself, applying it across the board will lead in small cases to disproportionate premiums. 
conclusions
219.	At paragraph 23 of Callery v Gray (No.2) (quoted above) the Master of the Rolls referred to the Report of Master O’Hare who had been told that had Mr Callery been issued with insurance on a block rating basis he would have been charged £997.50 including IPT. Lord Scott in his dissenting judgment in the House of Lords, paragraphs 124 and 125, pointed out that the Court of Appeal appeared to have been proceeding under a misapprehension as to the basis upon which the £350 premium had been calculated. He stated: 
“The £350 premium was in fact a uniform premium charged by Temple for ATE insurance cover in respect of every claim which carried a prospect of success of better than 50% (see para 22 of the second judgment). This was a “block rating” case, not an individual case ...”
220.	Both Lord Hoffman, at paragraph 35, and Lord Scott, at paragraph 114, expressed the view that invoking a global approach designed to produce a reasonable overall return for solicitors moves away from the judicial function of the Costs Judge and into the territory of legislative or administrative decision and (per Lord Scott) the correct approach is to look at the circumstances of the particular case: 
“The question whether the paying party should be required to meet a particular item of expenditure is a case specific question.”
221.	Turning to the evidence in this case it seems clear that those involved were keen to provide a simple straightforward one price product. There does not appear to have been any analysis in the early stages of whether and to what extent the insurance product should be banded, although according to Mr Raincock that has now happened. Mr Primer was clearly of the view that any element attributable to block rating would be “fairly minimal”. Mr Doona agreed with that view. Mr Raincock confirmed that the parties decided that it would be preferable to have a one size fits all type of policy with a standard premium irrespective of the type of case. 
222.	When the Claims Direct Protect Scheme was being set up it is clear that those involved were more interested in providing an easily accessible and easily understandable scheme than in producing a sophisticated and accurately costed scheme. There can be no criticism of this since the venture was entirely new and there was no statistical information upon which the Underwriters particularly, could base their calculations. Such evidence as there is on the topic of block rating is to the effect that the level of recoverable premium would have been altered to a minimal extent. Accordingly, in the context of these test cases, I make no deduction in respect of block rating. As Master O’Hare stated in paragraph 15 of his Report the issue may arise again in cases where there is sufficient evidence to decide whether block rated policies are more expensive than individually rated policies and if so whether the premium of such a policy is reasonably recoverable. 
ISSUE 6: WHAT PREMIUM WOULD BE REASONABLE IN CIRCUMSTANCES WHERE LIABILITY IS ADMITTED BEFORE A POLICY IS TAKEN OUT?
claimants’ submissions
223.	The Claimants submit that it is reasonable to take out insurance even where liability has been formally admitted because this ensures that the many pay for the few. In relation to this proposition Mr Charlton relied on Callery v Gray (No.1) paras 42-55 and Callery v Gray (No.2) para 2. Lord Scott in Callery v Gray in the House of Lords thought differently, see paragraphs 108, 112-114. 
224.	The Claimants say that the general benefit of taking out insurance even where liability has been formally admitted is that cover is thereby made more affordable for the majority. This issue affects test cases number 6, 9 and 10. The Claimants point out that even where an admission is made this usually leaves open for further argument questions of causation which can be highly contentious and difficult to resolve. 
225.	During the course of argument I was taken to case number 6, Larkin v Kelly. Maxine Kelly was involved in a road traffic accident on 1 June 2000, Gaynor Larkin driving in the opposite direction, moved out to overtake a parked vehicle and there was a head-on collision. I was shown a letter, which may have been the printout of an e-mail, dated the same day as the accident from Gaynor Larkin’s liability insurers. The document stated: 
“Our policy holder has told us about this accident in which a vehicle was damaged. Information available appears that liability will not be an issue. Like to discuss how best to handle your claim.”
226.	I was also shown a letter from the firm representing Maxine Kelly, which appears to have been written some time in September. That letter stated: 
“We have seen the copy of your letter to our client dated 1 June 2000 and note liability is not in dispute. ”
227.	According to the schedule of test cases prepared by the Claimants Maxine Kelly signed the Fair Trading Statement on 27 June 2000 and the Evidence of Insurance is dated 31 July 2000. 
second defendants’ submissions
228.	Mr Newman points out that Claims Direct only take on cases where the Defendant is insured, therefore he suggests there is a negligible risk that costs will not be recovered. Where liability is admitted the Claimants’ risk in a simple case is negligible or non existent. He suggests that the general rule should be that where Claimants have taken out policies after the Defendants’ insurers have admitted liability, no part of the premium paid or payable should be recoverable because the policy was unnecessary (and therefore disproportionate) and unreasonable. 
229.	The Defendants argue, particularly in relation to case number 6 and case number 10, that the insurance was taken out after the Defendants had admitted liability and that the premium should not be recoverable. 
conclusions 
230.	Although I have at bundle 5 the statements of facts and issues relating to all the test cases I have heard no evidence about the individual cases and as I have indicated the documents to which I have just referred were shown to me by Mr Newman in argument. It would not be proper for me to express a concluded view in respect of these individual cases without having heard full evidence and argument in relation to each. What I can do is to set out the basic principle which I think should be applied. 
231.	Where an incident occurs, particularly a minor road traffic accident causing slight injury (Maxine Kelly’s claim was settled for £2,500 general damages) and where the liability insurer has from the outset accepted liability for the occurrence, it will generally be disproportionate and unreasonable to take out an ATE policy. There may however be circumstances surrounding the incident, particularly if there is likely to be a live issue as to causation (which on the facts of Kelly v Larkin there did not appear to be) which would make it reasonable to take out ATE insurance. 
insurance premium tax
232.	The Claimants have throughout claimed insurance premium tax on the whole of the amount payable by each individual Claimant, ie £62.50 in respect of the premium of £1,250. The Defendants argue that insurance premium tax is payable only on the true premium and that VAT should be paid on the balance. Mr Doona stated in evidence that the matter had been raised with HM Customs & Excise who had confirmed that it was appropriate to apply IPT to the whole £1,250. Since, in this decision, I am dealing only with the recoverable element of the premium it must follow that the insurance premium tax which is recoverable will be the proportion applicable to that element. It is not necessary for me to decide how the balance of the £1,250 should be treated for tax purposes. 
RESULT
233.	Drawing together the various threads of these issues I arrive at a total premium of £621.13 made up as follows: 
Payment to Underwriters £451.55 (£140 plus £311.55)
Claims Direct commission £110
MLSS for insurance services £30
IPT on £591.55 £29.58
234.	It is necessary to consider both whether the figure which I have come to is proportionate and also whether, if Mr Charlton’s argument is correct, the £1,250/£1,495 is proportionate. I was given no evidence of comparable products or alternative products available on the market. Mr Raincock’s schedule was on his own admission very out of date and Master O’Hare’s Report contains a very wide spread of figures. I am aware that current premium rates for ATE insurance policies are published in the legal press but these figures were not put before me. Therefore taking as the starting point the decision in Callery v Gray, ie an ATE insurance premium of £350 plus IPT (£367.50) plus a success fee, it is instructive to consider the base costs claimed in these test cases. It is possible in eleven of the cases to extract, from the details given in bundle 5, what the actual base costs claimed were. (These costs have not yet been assessed and it cannot therefore be assumed that the costs claimed will be allowed). The costs claimed range from £1,033 to £3,884.50 an average of £2,097 per case. If one applies a 20% success fee (as in Callery) to that figure it produces £419 giving overall additional liability costs of £786.50 (£367.50 + £419). If on the other hand one takes the 5% success fee suggested by the Court of Appeal as a preferred alternative (see Callery v Gray (No.1) para 106 to 115) this produces a success fee of £105, giving overall additional liability costs of £472.50 (£367.50 plus £105). Whilst I do not suggest either of these figures should be taken as a benchmark of what is proportionate they do at least give some indication of the likely level of additional liability in the test cases had they been funded in that way and settled at the pre action protocol stage. The figure which I have come to at paragraph 233 falls almost exactly halfway between the two figures for additional liability costs which I have set out above. Accordingly, in the absence of any other evidence, if this case has to be decided purely on the basis of the reasonableness and proportionality of a premium of £1,250/£1,495, I would find that £621.13 inclusive of IPT was appropriate. Using the breakdown of premium which I have thought it right to adopt I allow £621.13 for the reasons which I have given. 
235.	I should make it clear that the negotiations which led to reallocation of the premium led to a number of increases to which I have referred in the course of the judgment. The increase of £311.55 applies, as I have found, to all policies issued in the years 1999 and 2000. This appears to include all the test cases with the possible exception of case number 2, Benton v Fetsum Meles, in respect of which I will hear further submissions if necessary. For the avoidance of doubt I make it clear that in my view the figure of £621.13 inclusive of IPT is a cap on what is reasonable, regardless of subsequent increases brought about by any agreement to pay greater amounts to the Underwriters. 
236.	Although the issues dealt with in these test cases arise from a specific piece of legislation, the test cases themselves demonstrate a far greater underlying problem. The test cases (particularly the RTA cases) are factually simple resulting in modest awards of damages for the Claimants. In nearly every case the cost of obtaining those damages, even when agreed before proceedings with the Defendant insurer, is greater than the amount of damages involved. This is so even before taking the recoverable insurance premium into account. The Civil Justice Council has set up a Working Party to examine the possibility of establishing a predictable costs regime for low value road traffic claims but unless and until a scheme of fixed, predictable or capped costs is introduced, satellite litigation of this type seems inevitable. 
ANNEX TO JUDGMENT
IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE
BEFORE CHIEF MASTER HURST, SENIOR COSTS JUDGE
RE: CLAIMS DIRECT TEST CASES
SCHEDULE OF TEST CASES
Case No.	Tab	Case Name	Accident
(date/category)	Representation	
1	B5
Tab 1	Arnold v Prentice Furniture 
Manufacturers Ltd	14.12.99
(accident at work)	2nd Defendant	
2	B5 
Tab 2	Benton v Fetsum Meles	5.8.98
(RTA)	2nd Defendant	
3	B5
Tab 3	Clifton Suspension Bridge Trust v Morgan	30.10.99
(occupiers liability)	2nd Defendant	
4	B5
Tab 4	Hitchen Foods v Gore	22.3.99
(trip/slip accident 
at work)	2nd Defendant	
5	B5
Tab 5	Johnstone v Kaur-Randhawa	11.5.99
(RTA)	2nd Defendant	
6	B5 Tab 6	Larkin v Kelly	1.6.00
(RTA)	2nd Defendant	
7	B5 
Tab 7	Norfloat UK Ltd v Goodfellow	9.2.98
(accident at work)	2nd Defendant	
8	B5
Tab 8	Pretoria Working Mans Club v
Thompson-Ward	5.6.00
(slip/trip occupiers
liability)	2nd Defendant	
9	B5 
Tab 9	Strachen v Booth	11.2.00
(RTA)	2nd Defendant	
10	B5
Tab 10	Susan Adele Wilson v 
Peter Carmichael	17.1.00
(RTA)	2nd Defendant	
11	B5
Tab 11	Brooks v L G Electronics	19.3.99
(accident at work)	2nd Defendant	
12	B5
Tab 12	Adegbite v McDonalds Restaurant Ltd	18.7.99
(assault at work)	1st Defendant	
13	B5
Tab 13	Kimber v Legoland	19.12.99
(slip/trip)	No Defendant
representation	
14	B5
Tab 14	Laing v Woking Borough Council	14.1.00
(slip/trip)	1st Defendant	
15	B5
Tab 15	Lees v Jackson	23.4.98
(attack by dog)	Withdrawn 
by consent	
16	B5
Tab 16	McAvoy v Jett UK Ltd	29.11.99
(accident at work)	1st Defendant	
17	B5 
Tab 17	Norton v Spitfire Technology
Group Ltd	31.3.00
(accident at work)	Withdrawn by direction	
18	B5
Tab 18	Sly v Powers	16.10.99
(RTA)	3rd Defendant	
19	B5
Tab 19	Tucker v Coupe Foundry Ltd	11.3.99
(accident at work)	1st Defendant	
20	B5
Tab 20	Warner v Wrekin Steel Ltd	18.6.99
(accident at work)	1st Defendant	
21	B5
Tab 21	Woodward v Miles	16.12.99
(RTA)	1st Defendant