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This Report is referred to in: Atack v Grecham [10], Ku v Liverpool City Council [57].
[2002] EWHC B717 (temporary reference)

  IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE

Supreme Courts Costs Office
Cliffords Inn
Fetter Lane
London
EC4 A 1DQ

19 July 2002

 

Before:

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)

Crown Copyright ©

  

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 Directionpdp-43 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 (No.1) [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 2142in 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:
  
   The proposal to change part of the Retention Account to a Claims Fund is postponed.
   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.
   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.
   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):
  
   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:
   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.
This Paragraph is referred to in: Ku v Liverpool City Council [57].
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