summer 2015 hilldickinson.com Cyber insurance and aggregation – a catastrophe waiting to happen? Page 8 The cost of litigation - Supreme Court stuck between a ‘rock and a hard place’ Page 10 Welcome relief - for solicitors who receive funds from third parties Page 6 professional and financial risks update Royal Assent has now been given to the Insurance Act 2015, the most significant statutory change to UK commercial insurance law in over 100 years. Andrew Schütte offers this succinct guide covering the essentials you need to know. The Insurance Act 2015: a bullet point guide What is the timeframe? The Act will come into effect on 12 August 2016. Given the lead time for the placement process – many months on larger accounts – both insurers and insureds will need to prepare for the changes in good time before then. What contracts will be affected? The Act will apply to all commercial insurance and reinsurance placements, renewals and endorsements that are agreed after 12 August 2016. Certain provisions also have (limited) application to consumer contracts. Some in the insurance market may, in addition, want to ‘contract in’ to the Act before it comes into effect. This ought to be done with care, and with appropriate legal advice, to minimise the risk of contractual uncertainty. Can parties agree not to apply the new law? Yes, for non-consumer contracts regarding the key provisions of the Act – but only if any terms less favourable to the insured than the terms of the Act are drawn to the insured’s attention and are clear and unambiguous in effect. Duty of fair presentation What is a ‘fair presentation’? Disclosure made in a manner that would be reasonably clear and accessible to a prudent insurer. Representations of facts must be ‘substantially correct’ and representations of expectations or belief must be made in good faith. The requirement that disclosure be reasonably accessible to insurers is intended to prevent the practice of ‘data dumping’ i.e. swamping insurers with data without highlighting the key aspects. What disclosure needs to be made to insurers? An insured will need to disclose either (a) every material circumstance the insured knows or ought to know or (b) sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. >>> continues on page 2 >>> continued from page 1 What are ‘material circumstances’? Any circumstances (including information held by or communications made to insureds) that would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms. These include special or unusual facts about the risk, any particular concerns which led the insured to seek cover and ‘… anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of the risks of the type in question’. The Law Commission’s vision in drafting the Act was that insurers, brokers and policyholder bodies should ‘work together to develop guidance and protocols setting out what a standard presentation of the risk should include in particular circumstances’. This is a challenge for the risk community to address over the next 18 months. If only material circumstances that are known or ought to be known by the insured have to be disclosed, whose knowledge at the insured is relevant? To be disclosable, material circumstances either have to be known or ought to be known by: a) the insured’s senior management, i.e. individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised; or b) individuals who participate on behalf of the insured in the process of procuring the insurance (including brokers and other agents). Can risk managers adopt a ‘don’t ask don’t tell’ approach to internal investigations of material circumstances ahead of placement? No. Material circumstances which are ‘suspected’, or which would have been known if the relevant individual had not deliberately refrained from confirming them or enquiring about them, will have to be disclosed. How extensive a search must insureds make for material circumstances? Insureds have to make a ‘reasonable search’ of the information available to them, including information held by their agents or others who will be covered by the insurance. Any material circumstances that a ‘reasonable search’ would have revealed are disclosable. 2 Welcome Welcome to the latest professional and financial risks update from Hill Dickinson. We hope that you find this both an informative and enjoyable read. Our headline feature in this edition is written by Andrew Schütte, a partner in our London market team. He updates us on the news this year that proposals for reform of non-consumer insurance law have finally reached fruition with the enactment of legislation – the Insurance Act – which will come into force in August 2016. That may yet seem some way away but time to prepare for the changes will soon evaporate. Andrew provides you with answers to some of the essential questions. Andrew Schütte has also teamed up with Andrew Hill to write about another area of expertise, aggregation in the context of cyber insurance – is there a catastrophe waiting to happen? Two members of our team have written articles looking at disciplinary issues for professionals. Gillian Nevin considers the prospects of solicitors and veterinary surgeons being restored to the professional register after being struck off. Claire Wilks reviews findings from a recent audit of the General Dental Council’s initial stages fitness to practise process. Looking to the courts, head of costs Paul Edwards updates us on the latest from the Supreme Court on recoverability of disproportionate additional liabilities. Do these breach EU law? There has been a further hearing and we all now await a decision later in the year. Also focussing on costs, Janet McWhinney considers a recent case in which indemnity costs were awarded against a defendant. When will such an award prove ‘unjust’? Fleur Rochester and Andrew Hill review a case that they were involved in considering the scope of a solicitor’s duty to third parties who pay funds into a client account. Welcome relief has been granted by the Court of Appeal. Finally, in this edition, Sarah Naylor reviews another piece of legislation passed recently before the end of the pre-election Parliamentary term, the Social Action, Responsibility and Heroism Act. How might this be relevant to some of our professional clients and their insurers? We do hope that this publication will be warmly received. If you would like any more information about the areas covered, would like to discuss the issues featured in more detail or make suggestions for what you would like to see covered in future editions, please do not hesitate to get in touch. Best wishes, Christopher Stanton Head of Professional and Financial Risks email@example.com 3 Would you like to know more? Hill Dickinson will be discussing the impact of the Insurance Act at forthcoming seminars and events. Please get in touch if you would be interested in attending one of these events, or if you would like to arrange a training session for your team. professional and financial risks summer 2015 What if the duty of fair presentation is breached? If the breach was either deliberate or reckless, the insurer can avoid the contract (i.e. treat the contract as if it never existed), keep the premium and refuse to pay all claims. If the breach was not deliberate or reckless, the remedy depends on what the underwriter would have done if a fair presentation had been made. If the insurer: i. would not have entered the contract at all... ...it can return the premium, avoid the contract and refuse all claims. ii. would have entered the contract on different terms... ...the contract is treated as if those different terms applied. iii. would have charged a higher premium... ...the insurer can proportionately reduce the amount it pays on a claim. Warranties Will warranties still exist? Yes, but it will be harder to create them, they will be more limited in scope and the effect of a breach of warranty will be softened. Why will it be harder to create a warranty? Clauses in proposal forms that turn an insured’s representations into warranties (so-called ‘basis of contract’ clauses) will no longer have any effect. Proposal forms and wordings will need to be revised to take this into account. Why will warranties be more limited in scope? Breaches of warranty that are irrelevant to the loss that occurs will no longer discharge insurers from liability (one of the key complaints insureds have with the existing law). If the insured can show that failure to comply with any term in the contract (including warranties) would not have increased the risk of the loss which actually occurred in the circumstances in which it occurred, insurers will no longer be able to rely on the breach to exclude, limit or discharge its liability. For example, if the insured breached a warranty that it would have a working fire alarm and suffers a fraud loss, insurers cannot rely on the breach. What are the changes to the remedy for breach of warranty? A breach of warranty will discharge the insurer from liability for losses occurring, or attributable to something happening, after the breach occurs. It will not discharge the insurer from liability for anything that happens before the breach – or after the breach has been remedied. So an insured can now remedy a breach of warranty? Yes. If the breach of warranty is remedied before the loss occurs, the insurer cannot rely on it. What counts as ‘remedying’ the breach? If the warranty requires something to be done by a certain time, or a condition to be fulfilled, or something to be the case (e.g. installing a sprinkler system to prevent fires) then a breach of that warranty is ‘remedied’ if the risk to which the warranty relates becomes essentially the same as the risk originally contemplated by the parties (e.g. installing a comparable sprinkler system). For other warranties, a breach is deemed to be remedied simply if the insured ceases to be in breach of the warranty. Remedies for fraudulent claims What will change? Insurers will be entitled to treat the contract as having been terminated from the date of the fraudulent act and need not return any premiums paid under the contract provided they give written notice to the insured. Of course, insurers will still not be liable for any fraudulent claim and will be able to recover any payments made to the insured in respect of fraudulent claims. What about valid claims made before the fraud? These will be unaffected – which clarifies some potential confusion arising from the case law. In many respects the new Act codifies existing case law rather than effecting wholesale revisions to the status quo, although some changes - such as the new law on warranties - will be significant. The Act will, however, take time to bed in and there are bound to be test cases in years to come about what some of the new provisions mean. Andrew Schütte firstname.lastname@example.org 4 The audit The PSA reviewed a sample of 100 cases which had been closed without proceeding to a final hearing before a GDC FTP panel. 50 of those cases were from categories considered more likely to be ‘higher risk’, i.e. in their view there was a higher risk to public protection if proper procedures were not followed. The structure of the GDC’s FTP process means that there are two stages at which cases may be closed without referral to a hearing in front of a FTP panel, by either: 1. GDC FTP staff - if the case does not amount to an allegation that a registrant’s fitness to practise is impaired; or 2. an investigating committee panel - if there is no ‘real prospect’ of the facts, as alleged, being found proved or if there is no ‘real prospect’ of a finding of current impairment being made. In March 2010 the PSA led a meeting with representatives from the health and care professional regulators to agree a ‘casework framework’ describing the key elements common to the initial stages of an effective FTP process that is focused on protecting the public. It was against this framework that the audit was carried out. Findings were made under the relevant sections of the framework: (i) receipt of initial information; (ii) risk assessment; (iii) gathering information/evidence; (iv) evaluation and giving reasons for decisions; (v) customer care; (vi) guidance; (vii) record keeping; and (viii) timelines and monitoring of progress. Conclusions The PSA has confirmed that it did not see any decisions to close cases in this audit which it considered risked patient safety. However, it is of the opinion that 25 instances across 22 of the cases raised questions about the maintenance of public confidence in the profession or the regulatory system. This included an error by the investigating committee to refer a case to the Professional Conduct Committee despite finding no real prospect of current impairment, premature decisions to close cases, avoidable delays, failures to progress cases, poor handling of complaints about the Investigating Committee (IC) process, failure to complete investigations in some voluntary removal cases and data protection breaches. The PSA also had concerns about delays in publishing warnings on the online register and some failure to share information about FTP complaints with other regulators. The PSA’s overall conclusion from the 2014 audit was that the inadequacies with the system of quality assurance and management oversight at the GDC identified in its 2013 audit largely remain and its findings reveal a decline in some aspects of the GDC’s performance. While it did not identify any decisions to close cases which it considered risked patient safety, it did consider that some decisions risked undermining confidence in the professions. They remain concerned that aspects of case handling and decision making by the GDC continue to risk undermining confidence in the regulator. The PSA also recognises that it saw evidence of some improvements that had been implemented since the publication of its 2013 audit report. The primary improvement it identified was in relation to cleansing of data on the case management system and enhanced storage of documentation on case files in respect of IC decisions and Rule 10 cases. However some improvements are still required in these areas. In response to this audit, the GDC has confirmed that it has implemented a number of measures that have improved the quality and timeliness of its case handling. The PSA will review the evidence of improvements made by the GDC in its 2014/15 annual performance review. Claire Wilks email@example.com Audit of the General Dental Council’s initial stages fitness to practise process During May and June 2014, the Professional Standards Authority (PSA) audited the initial stages of the General Dental Council’s (GDC) fitness to practise (FTP) process for the period 1 November 2013 to 30 April 2014. As Claire Wilks discusses, the results of the audit demonstrate the ongoing difficulties experienced by this regulator in fulfilling its FTP processes. A series of hurdles The first hurdle that each professional has to overcome is the minimum period before an application can be made. A veterinary surgeon can make an application for restoration after just ten months while a solicitor has a six year wait. The applicant must demonstrate that they have maintained professional competence and kept themselves updated in terms of knowledge and developments in practice since removal. A solicitor is permitted to continue to work within a law firm with the consent of the SRA, but in reality, there will be few employers who will engage a former colleague who has been issued the ultimate sanction by their regulator. The applicant may have to consider alternative ways to show a continued commitment to their chosen profession. This could involve concentrating on best practice policies or studying under distinguished professional mentors, as one successful veterinary surgeon applicant was able to demonstrate. Acceptance To have a chance of being restored, a professional must acknowledge and fully accept the judgment following their original disciplinary hearing. Any denial or failure to accept the decision of the regulator is likely to prove fatal to the application. Dishonesty A solicitor against whom dishonesty has been proven will not be restored to the Register. The introduction of the Suitability Test by the SRA Handbook 2011 is a considerable obstacle which many applicants may not overcome. For the veterinary surgeon, a finding of dishonesty does not mean that there is no way back into the profession. If the professional can demonstrate that they have ‘changed their ways’ and made considerable efforts towards rehabilitation, the Regulator will give this weight. Impact on the profession A paramount concern for the Regulators is the impact that the professional’s misconduct has had on the reputation of the profession as a whole. The Court of Appeal in Bolton -v- The Law Society identified three characteristics which a professional should hold above all others: integrity; probity; and trustworthiness. The Regulator must be satisfied that the profession will not be harmed and that public confidence would not be diminished should the professional be restored. Prospects of success Out of 21 applications to restore since 2002, the Solicitors Disciplinary Tribunal has granted 10. The Royal College of Veterinary Surgeons has heard seven applications since 2012, granting four. Recent examples of successful applications made to the RCVS include Denis Cronin, who was restored in 2014 almost nine years after being struck off having been found guilty of seven separate charges of misconduct. James Main was restored in 2012 after being struck off in 2011, following his administration of a prohibited substance to a racehorse and subsequent attempts to conceal his actions. Comparing the professions Veterinary surgeons appear to have fewer obstacles to overcome to obtain restoration than solicitors, most likely due to the level of trust which the public places in solicitors, not only to conduct their affairs, but to handle client money. The recipe for restoration appears to be simple - good evidence of rehabilitation, continued professional development and an unreserved acceptance of the original disciplinary findings. The absence of dishonesty is essential for a solicitor. The statistics indicate that more veterinary surgeons are inclined to make an application for restoration than solicitors, presumably because they are more confident of being restored to the register. In any event, any application will have to be thorough and meticulously compiled for the best prospects of success. Gillian Nevin firstname.lastname@example.org Joe Orme email@example.com Our team has a great deal of experience in this area and can offer expert advice for any professional needing assistance. 5 Following erasure from a professional register professionals have the option to apply for restoration although it is unlikely that any professional indemnity insurer will provide cover which will fund an application. There are similarities between the regulators with regard to their approach to restoration, but there are also important differences. Gillian Nevin and Joe Orme review the position for two professions - solicitors and veterinary surgeons - and considers the obstacles they face when applying for restoration. Recipe for restoration professional and financial risks summer 2015 Welcome relief for solicitors who receive funds from third parties 6 Welcome relief for solicitors who receive funds from third parties The scope of a solicitor’s duty to third parties who pay funds into a client account can create uncertainty. Fleur Rochester and Andrew Hill examine the guidance provided recently in the Court of Appeal decision in Bellis & Ors -v- Challinor & Ors1 . At first instance, the High Court broadened the scope of a solicitor’s duty to third parties by holding that the solicitor owed a duty to third parties when they paid monies into the client account. The Court of Appeal, overturning that decision, held it was the objective intention of the parties that monies paid into the client account would be held by the solicitor as her client’s agent and there was no duty owed to the third parties. 7 professional and financial risks summer 2015 Background In late summer 2007, a group of 21 investors were invited to invest in the ‘Fairoaks scheme’ which involved the purchase of Fairoaks Airport via an SPV company, Albemarle Fairoaks Limited (AFL), which had acquired the land. Juliet Bellis & Co acted for AFL in connection with the transaction. AFL paid the £31 million purchase price for the land in full. The acquisition was funded by a loan from RBS. The investors were then invited to invest immediately (i.e. prior to formal fundraising) in the scheme, by transferring money to the Bellis client account. The investors advanced the aggregate sum of £2.28 million. Bellis used the investors’ funds to partly repay the RBS loan. The Fairoaks scheme was unsuccessful as insufficient investors were found. The investors’ equity investments were not returned by Bellis, who by that time had already transferred the investors’ funds to RBS. In November 2010, the investors commenced proceedings against Bellis for breach of the terms of an escrow agreement or, alternatively, for breach of trust. The investors argued Bellis was liable to repay the released funds. First instance decision Hildyard J at first instance found Bellis was liable. He held that a resulting trust had arisen in favour of the investors. In reaching this conclusion, he considered the elements of a Quistclose2 trust and other similar forms of trust. He reaffirmed that, in order for a Quistclose type of trust to arise, there needs to be: (1) money lent by one party to another for an exclusive purpose; (2) the purpose has to be sufficiently defined and communicated to the recipient of the money; and (3) there must be an express or implied direction for the return of the money to the payer if the exclusive purpose can no longer be satisfied which negates any intention of the payer to part with the beneficial interest in the monies in the meantime. Hildyard J held that this retention of the beneficial interest until the investors’ purposes could be fulfilled gave rise to a resulting trust in favour of the payer (Twinsectra Ltd -v- Yardley3 applied). The investors’ money was immediately impressed with a trust on receipt into the client account and Bellis had breached their duties as trustee in paying out that money to RBS without the investors’ instructions. The Court of Appeal decision The Court of Appeal unanimously allowed Bellis’ appeal. Contrary to the first instance decision, Briggs LJ held that the money paid to Bellis was an immediate loan to AFL and that no trust existed. This conclusion was reached by focusing on the objective common intention of the parties and on the documents known to both parties. The use of Bellis’ client account was simply a method of payment which did not specify a requirement for any protection for the investors or the retention of a beneficial interest. Bellis was acting as AFL’s agent. The Court of Appeal therefore concluded that no restriction was placed upon Bellis that would prevent the immediate payment of the investment monies, either to AFL, or for AFL’s benefit. No trust existed. The Court of Appeal also dismissed a claim in restitution. Comment Had the first instance decision been upheld by the Court of Appeal, it would have significantly widened a solicitor’s duty when dealing with funds coming into client account. The effect of that decision was that, where monies are paid into client account by a third party, a solicitor is under a duty to that third party to establish who is the beneficial owner of monies paid into client account. This would have been an incredibly onerous obligation for solicitors. The lower court inferred that the very provision of access to a firm’s client account to a third party indicated an intention that monies should be kept separate from the solicitor’s own client’s monies. This outcome could have resulted in solicitors acting contrary to their own client’s instructions. The Court of Appeal decision should come as welcome relief to solicitors who receive funds from third parties, given the scope for conflict that would likely have arisen had the High Court’s decision been upheld. Nevertheless, the issues in this case should serve to reinforce the importance of clarifying any uncertainty that may arise when receiving funds from a third party. Fleur Rochester firstname.lastname@example.org Andrew Hill email@example.com Hill Dickinson acted for the excess layer insurers in this case. 1 Bellis & Ors -v- Challinor & Ors  EWCA Civ 59 2Quistclose Investments Limited -v- Rolls Razor Limited  AC 567 3Twinsectra Ltd -v- Yardley  UKHL 8 What would a cyber catastrophe look like? Imagine a cloud-computing platform is hacked or taken down by a denial of service attack. Of course the insurer of the cloud provider would expect to be hit with countless claims, but less obvious perhaps are claims from insureds who may have had client data stored in the cloud exposed. The wider application of the technology, the greater the aggregate risk. An often quoted example would be a disruption of a GPS satellite, which could result in ships and other vehicles going off course causing collisions, late deliveries of goods, business interruption and potentially other losses. Another example might be a computer system controlling oil rig production. If a virus destroyed such a system, it could result in blowouts, suspension of operations and some very large claims indeed. Has the cyber market yet seen a true catastrophe loss? In 2011, Sony PlayStation Network was hacked and the personal data of some 77 million of its customers was exposed. In 2014, hackers stole the records of 83 million JP Morgan customers. There have been several other data breaches on a similar scale in recent years. These ‘mega’ breaches are perhaps the closest the cyber market has come to seeing a ‘catastrophe’ loss. The ultimate cyber catastrophe loss could be ‘taking down’ the internet. While it is rumoured there have been unsuccessful attempts, the internet has thus far been very resilient. Should such an attack be successful, however, a significant multi-line CAT loss is foreseeable. Which lines of insurance business could be affected by cyber exposures? Cyber exposures, just like the term ‘cyber’ itself, are not easy to pin down. They all generally arise from computer networks or sensitive information, but the exposures are incredibly broad. Several lines of ‘non-cyber’ business could be faced with cyber-related claims. A property insurer might pick up a business interruption claim arising out of a ‘Stuxnet’ type attack designed to destroy hardware by introducing a virus into an operating programme. A financial institution’s insurer might get a claim for fraud under a computer crime policy. A D&O insurer could be faced with a claim where proceedings are commenced by shareholders against the directors for failing to protect the company’s IT security following a data breach. There are many more examples. Cyber exposures do not exist in vacuum and arguably should not only concern specialist cyber underwriters. How much overlap is there between cyber and other lines of business? One might be forgiven for thinking that the insurance market is in the midst of a cyber ‘land grab’. As well as specialist cyber entrants, there has also been a trend in recent years for ‘traditional’ lines to write incidental cyber business. Whether cyber insurance is best written by specialists on a standalone basis or, because it is so all pervasive, as an extension to ‘traditional’ lines of business, is a burning issue in the cyber market. There is no clear consensus at present, although policyholders’ requirements may be the decisive factor and may incline towards incorporating cyber into standard commercial policies. What should insurers do? The uncertainties surrounding aggregation should prompt insurers to consider how their client portfolio is structured and in particular how resilient their book of business across all lines might be in the event of significant cyber loss. This requires an understanding of what insurers’ cyber exposures really are and that, in turn, requires a structured approach. The Lloyd’s market has set out its stall with the introduction of specialist ‘CY’ codes for cyber, which are aimed at giving underwriters visibility on their aggregate exposures in this area. There is no one easy solution to minimising exposure to potential aggregated losses in what is an incredibly fluid area of risk. The tried and tested principles of good underwriting remain relevant, however; understanding the risk that is being taken on and ensuring that the policy language is sufficiently tight that losses not accounted for in the premium are not covered. Andrew Schütte firstname.lastname@example.org Andrew Hill email@example.com While many insurers are signing up to the cyber race in pursuit of much-needed premiums, some say the aggregation exposures faced by cyber insurers are the elephant in the room. Andrew Schütte and Andrew Hill consider whether this is the case. Cyber insurance and aggregation – a catastrophe waiting to happen? Kate Vernon introduces the new CDM Regulations, which came into force on 6 April 2015. New law Construction professionals will be familiar with the requirements of the Construction Design and Management (CDM) Regulations 2007. The Regulations came into effect in April 2007 and aimed to improve the management and co-ordination of health and safety issues in commercial construction projects by laying down the health and safety obligations of clients and construction team members. However, the 2007 Regulations have been criticised in the industry for being too complex and placing an onerous and expensive bureaucratic burden on construction projects. In March 2014, the Health and Safety Executive (HSE) opened a public consultation into its proposals for the revision of the CDM Regulations 2007. Further to the report which followed that consultation, the HSE has now published the draft CDM Regulations 2015. These new Regulations came into force on 6 April 2015. Appointment of a ‘Principal Designer’ One of the most talked about changes proposed under the new Regulations is the replacement of the CDM coordinator with a ‘Principal Designer’. Under the 2007 Regulations, an independent third party CDM coordinator must be appointed on all projects notifiable to the HSE. CDM consultants are often brought in to fulfil this role at considerable expense and an oft-cited criticism is that they are not well embedded into the pre-construction team. It is intended that an existing member of the construction team will fulfil the new role of ‘Principal Designer’, who must be a ‘designer’ within the meaning of the new Regulations. In the majority of cases, the role will be undertaken by the lead designer on the project, usually the architect. The impact of this change will be made greater by the extension of aspects of the new Regulations to domestic projects. Under the 2007 Regulations only ‘notifiable’ projects (i.e. those expected to last 30 days or more, or expected to involve 500 person-days of labour) trigger CDM requirements, including the appointment of a CDM coordinator. Under the new Regulations, any project involving more than one contractor will trigger the requirement for the appointment of a ‘Principal Designer’, regardless of the size of the project. ‘Principal Designers’ may therefore need to be appointed even on small domestic projects. Professional indemnity insurance considerations As ‘Principal Designers’ take on responsibility for health and safety issues on construction projects, their professional indemnity insurers will need to consider whether a claim in respect of a breach of the new Regulations will be covered under the terms of the existing professional indemnity policy. Whether or not the professional has the requisite health and safety experience and knowledge to fulfil the CDM requirements is also likely to be a concern, as even those ‘Principal Designers’ who subcontract their duties will still be liable for breaches in the first instance. Kate Vernon firstname.lastname@example.org New Construction Design and Management (CDM) Regulations in April 2015 9 professional and financial risks summer 2015 Further information You can review the HSE’s draft guidance on the new Regulations at http://www.hse.gov.uk/pubns/ books/l153.htm. 10 The cost of litigation - Supreme Court stuck between a ‘rock and a hard place’ on Coventry -v- Lawrence In the last edition of professional and financial risks, Ruth Lawrence commented on a potentially landscape changing development from the Supreme Court. Coventry and others -v- Lawrence and another (2014) had raised a question over whether disproportionate additional liabilities - success fees and after the event insurance premiums – claimed within the pre-civil justice reform regime, may constitute a breach of the right to a fair trial enshrined in article 6 of the European Convention on Human Rights (ECHR). If this were the case, there was the possibility of UK law being declared incompatible, and, taken to the logical extreme, of parties who had paid disproportionate additional liabilities being able to seek damages from the Government. Head of costs, Paul Edwards, provides an update on the latest position following a further Supreme Court hearing in February 2015. Hearing Submissions were heard by a panel of seven Supreme Court justices, with the President, Lord Neuberger, at the helm. No less than 23 advocates represented the parties and interveners. During the tightly timetabled hearing written submissions were supplemented by oral argument focused on discrete issues, allowing the justices to interrogate the advocates. Submissions Those at risk of having to pay additional liabilities re-iterated that those costs alone are worth more than the value of the diminution claim brought in the underlying case, which considered the effect of noise nuisance on the value of the appellants’ property. The legal fees overall amount to more than the value of that property. They submitted that: • the pre-Jackson system was ‘fundamentally flawed’ and ‘grotesque’ and made paying parties responsible for the costs of other failed claims; • a new ‘scheme’ is needed to cover pre-Jackson run-off cases because the old regime was unfair, and any order that allowed recovery of any additional liability would be in breach of article 6 of the ECHR; and • if the receiving party wishes to recover any sum for additional liabilities then its rights could be exercised against the Government or by taking the case to the European Court of Human Rights in Strasbourg. The respondents and interveners were also heard from in response. Interveners included the ATE providers who argued that both the old and new regimes are reasonable, the Government arguing that there was no evidence that justice had been stifled under the old regime and the Law Society and Bar Council who argued that the pre-reform regime was capable of producing fair results. Where next? No judgment date is available, although some commentators suggest a date in July 2015. Those who suggest that the appeal will simply be dismissed out of hand are likely to be disappointed, as it is clear that the justices of the Supreme Court have the bit between their teeth on these issues and will properly consider what can and should be done to combat what are acknowledged to be high legal costs. Much may hinge on analysis of the consideration given to the rights of paying parties when the Woolf reforms and the Access to Justice Act were introduced. All parties noted that the implications of a finding of incompatibility could be significant, with the Government facing a potentially huge bill from parties in other cases who had paid additional liabilities. However, upon questioning by Lord Neuberger, it seemed to be accepted that any decision made in this case would not impact claims that have already been settled, only those that remain in the system. While there are still a considerable number of these filtering through, if already settled cases are not affected then the Government will certainly breathe a sigh of relief. However, even if this particular challenge is dismissed, there may still be strong words of concern about the level of costs within the judgment, with direction to costs judges to be firmer on the quantum of success fees and ATE premiums going forwards. If there is merit in the challenge that the recovery of additional liabilities breaches European law, then a very carefully worded solution will be required to avoid substantial satellite litigation. Paul Edwards email@example.com Judgment The central issue was the claimant’s prognosis and the extent to which there was likely to be any significant improvement in his condition. It was decided that the only realistic prognosis was a pessimistic one and thus the judge awarded the claimant damages of £1,508,534. The claimant had made a Part 36 offer on 26 September of £1.2 million (inclusive of interest) plus costs; however the defendant had rejected it. The judge awarded the claimant his costs and stated that unless ‘unjust’, the court is obliged to award those costs on an indemnity basis in this scenario. The defendant’s counsel argued that it would be punitive to award costs on an indemnity basis as the defendant’s failure to accept the offer was due to the late change in the opinion of one of their experts to a less optimistic view of the claimant’s prospects of recovery than previously stated, however, this was not considered to be a significant enough reason for the award to be ‘unjust’. The judge was satisfied that the change in the expert’s opinion was rational, rigorous and evidence-based in comparison to his earlier ‘vague’ comments. It was indicated that each case should be judged on its own merits; nevertheless ‘unjust’ would include circumstances where a Part 36 offer was rejected on the basis of inaccurate or misleading information on the part of the claimant. Comment Indemnity costs were also considered in Ted Baker Plc -v- AXA Insurance UK Plc (2014) where the judge described the burden of establishing injustice as a ‘formidable obstacle’. As a result, defendants should be aware of the risks of not considering realistic Part 36 offers. The imposition of indemnity costs was put in place to encourage settlement of litigation and to minimise costs by avoiding trial, therefore the bar for what can be classified as ‘unjust’ is much higher than might first have been anticipated. However, some protection is afforded to defendants in the changes to Part 36 introduced at the start of April 2015, which seek to address the issue of claimants making high Part 36 offers in order to claim the costs benefits. Under the new rule the court must take into account when considering the justice of an indemnity award ‘whether the offer was a genuine attempt to settle the proceedings’. High Part 36 offers by claimants which offer little in the way of concession, i.e. 95%/100% liability, may not be genuine attempts to settle the claim, an argument which could assist a defendant in opposing the application of the indemnity costs principle. Janet McWhinney firstname.lastname@example.org Richard Peter Downing -v- Peterborough & Stamford Hospitals NHS Foundation Trust Part 36 consequences Background The claimant underwent an operation to improve his snoring; however it led to what the judge described as ‘catastrophic’ consequences. Following the surgery, the claimant suffered an infection resulting in reactive arthritis and, eventually, a disabling pain disorder making him unable to return to his duties as a warrant officer in the Army Air Corps. Further, as well as failing to ameliorate the condition, it was later discovered that the operation could not have achieved the outcome that he sought. The recent case of Richard Peter -v- Peterborough & Stamford Hospitals NHS Foundation Trust (2014) deliberated the circumstances in which it could be deemed ‘unjust’ to apply the indemnity costs principle set out in CPR 36.14 to a costs order. Janet McWhinney considers the case and whether recent changes to Part 36 are likely to provide increased protection for defendants in such cases. 11 professional and financial risks summer 2015 professional and financial risks summer 2015 The information and any commentary contained in this newsletter are for general purposes only and do not constitute legal or any other type of professional advice. We do not accept and, to the extent permitted by law, exclude liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. While every effort has been made when producing this newsletter, no liability is accepted for any error or omission. If you have a particular query or issue, we would strongly advise you to contact a member of the professional and financial risks team, who will be happy to provide specific advice, rather than relying on the information or comments in this newsletter. Liverpool Manchester London Sheffield Piraeus Singapore Monaco Hong Kong hilldickinson.com ® About Hill Dickinson The Hill Dickinson Group offers a comprehensive range of legal services from offices in Liverpool, Manchester, London, Sheffield, Piraeus, Singapore, Monaco and Hong Kong. Collectively the firms have more than 1250 people including 190 partners and legal directors. If you have any queries about matters raised, please contact: Ruth Lawrence +44 (0)151 600 8266 email@example.com Christopher Stanton +44 (0)151 600 8332 firstname.lastname@example.org Jamie Monck-Mason +44 (0)207 280 9263 email@example.com New legislation - Social Action Responsibility and Heroism Act 2015 In a final push before the end of the Parliamentary session a flurry of legislation received Royal Assent at the start of February 2015. One such Act was the Social Action Responsibility and Heroism Act (known popularly as SARAH) which aims, according to the government press release, to provide ‘legal reassurance’ to ‘volunteers, community groups and good deed doers’ should they be sued, requiring courts to take into account the fact that they may have been acting to ‘help society’. The Justice Secretary, Chris Grayling, also suggests that the act will assist ‘responsible small businesses’. Sarah Naylor examines the new legislation. The Act came into force on 13 April 2015. The legislation was subject to much criticism in the Houses of Parliament, for being ‘pointless’ and likely only to muddy the waters. However it has received support from volunteer organisations, including the St John Ambulance, and may also be of interest to medical and veterinary professionals who perform so called ‘Good Samaritan acts’ outside of their employment, or professionals who provide their assistance voluntarily to charities and other voluntary organisations. Such acts are not always covered under malpractice or professional indemnity policies or are subject to an additional premium. The Act states that when a court is considering a claim that a person was negligent or in breach of statutory duty and determining the steps that the person was required to take to meet a standard of care, it must have regard to whether the person’s actions were taken in circumstances dealt with in sections of the Act including social action, responsibility and heroism. The Act has been criticised as populist and unnecessary legislation, and we anticipate that it will be something of a damp squib. However, should a professional find themselves at risk of litigation when doing a good deed, for example voluntary work or responding to an emergency, it may go some way to informing the court’s attitude in the face of a claim, or encourage insurers to provide wider cover for such acts at lower cost. Sarah Naylor firstname.lastname@example.org For social action the court must have regard to ‘whether the alleged negligence or breach of statutory duty occurred when the person was acting for the benefit of society or any of its members’. For responsibility the court must have regard to ‘whether the person, in carrying out the activity in the course of which the alleged negligence or breach of statutory duty occurred, demonstrated a predominantly responsible approach towards protecting the safety or other interests of others’. For heroism the court must have regard to ‘whether the alleged negligence or breach of statutory duty occurred when the person was acting heroically by intervening in an emergency to assist an individual in danger’.