We hope you enjoy reading this month s edition and, as always, welcome your feedback. Nick Williams, Partner Head of Insurance Division

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1 29 July 2011 Insurance Brief Welcome to this month s edition of Insurance Brief. In this issue, we report on a recent Court of Appeal decision focusing on the construction of an arbitration clause in a public liability insurance policy (in which Kennedys represented the successful appellants) and a High Court case concerning the use of evidence from social networking sites when alleging fraud. We also include two feature articles. The first is by Joti-Penrose Stevens and Sheena Raikundalia and examines legal expenses insurance. The second is by Christopher Malla, who reviews the current position surrounding Part 36 offers: following a succession of court decisions, it is evident that changes are on the way. I am pleased to welcome a new partner, James Melvin, who joined our London office on 11 July from Mills & Reeve. James originally qualified in Australia and then in the UK in 2004 and specialises in advising insurers on policy related matters and defending claims against professionals including solicitors, surveyors (valuation and quantity), architects, engineers, financial services, brokers and, more recently, IT professionals. Our next issue will be published in September. In the meantime, if you also have an interest in liability issues, please subscribe to our dedicated, monthly Liability Brief. We hope you enjoy reading this month s edition and, as always, welcome your feedback. Nick Williams, Partner Head of Insurance Division Case reviews Fraud: using evidence from social networking sites High Court considers, for first time, how evidence from social networking sites can lawfully be used in insurance fraud cases - Daniel Locke v (1) James Stuart (2) AXA Corporate Solutions Services Ltd [ ] Daniel Locke bought a claim against James Stuart for personal injury arising from a road traffic accident in He was awarded 1,500 in damages in September Mr Stuart s insurers, AXA, became a party to the proceedings in order to protect its interests, as it was concerned the claim was a conspiracy to defraud as part of a series of nine seemingly related claims, seven of which were insured by AXA. Page 1 of 8

2 The burden was on AXA to show that, on the balance of probabilities, Mr Locke had been dishonest. AXA relied on the fact that Mr Locke (and other witnesses) had been very vague about the details of the accident, and had given different details as to the cause of his injury to different medical practitioners. In addition, Mr Locke s mother was a witness in this case but also a passenger in one of the other impugned cases. The Judge was not satisfied on the basis of these concerns alone, that there had been a fraud, so AXA was required to present evidence of systemic fraud, which included: 1. The claims were all referred to solicitors by the same claims management company for 450 per case. 2. The guilty vehicles had all been taken out on short term hire (in this case, hired by the first defendant on the day of the accident). 3. All of the vehicles were full of people, a total of 106 for all claims, meaning there were nine guilty drivers, and 97 claimants worth a total of 40,500 in referral fees. 4. There was a commonality of parties involved and AXA proved a number of the links by using Facebook. 5. The geographical location of all nine claims. Decision: The Judge made a finding of dishonesty against Daniel Locke on a number of grounds, finding for AXA and the first defendant - a somewhat perverse result, where the first defendant was found complicit in the fraud! The Judge suggested that the large amount of documentation put forward in evidence (three files of Facebook print-outs) could have been summarised in a single document or Scott Schedule, and this could be used in any case involving this class of evidence. As a final comment, the Judge noted that insurers who make these kinds of allegations must do so with care and ensure that there are proper grounds to assert fraud. Comment: This case shows that the contents of social network sites can be a valuable tool when investigating fraud and that the judiciary are becoming alert to the significance of such evidence. Such evidence may not prove to be the smoking gun required to prove fraud but it can be compelling when taken with other suspicious circumstances. To the extent that insurers are not carrying out these investigations already, they should now do so and can be confident of using this evidence in support of their case. For further information, contact Laura Hurst (l.hurst@kennedys-law.com) Kennedys, Page 2 of 8

3 Decision on accrual of liability for limitation purposes Court of Appeal rules insurers able to pursue Quinn under Third Party (Rights against Insurers) Act 1930, despite arbitration clause with time-bar in policy - William McIlroy (Swindon) Ltd & others v Quinn Insurance Ltd [ ] Kennedys successfully acted for the appellants who appealed against a first instance decision that their claims were time-barred under the policy. The underlying claim arose from a fire in September 2006, which occurred during works carried out by Quinn s insured, Lenihan. Lenihan notified Quinn, who declined indemnity under the policy in February Judgments were entered and damages assessed against Lenihan in December 2009 and January Lenihan was subsequently wound up. Lenihan s rights were then vested in the Claimants, pursuant to the Third Party (Rights against Insurers) Act Proceedings were issued against Quinn in April Quinn then raised a new ground for declinature, namely that Lenihan should have instituted arbitration proceedings within nine months of February 2009, when Quinn s refusal of indemnity was first communicated to Lenihan. Quinn argued that the actions were now time-barred. Decision: The Court of Appeal considered general condition 16 of Quinn s policy, which required any dispute between the insured and the insurer regarding the insured s liability in respect of a claim to be referred within nine months of the dispute arising to an arbitrator or be deemed abandoned. At first instance, the Judge constructed the clause to require Lenihan to initiate proceedings within nine months of Quinn purporting to repudiate liability, which is when it held that the dispute arose. On appeal, the Court of Appeal found it was trite law that liability under an indemnity policy only accrued after the existence and amount of a liability to a third party is established. The court referred to Post Office v Norwich Union [1967] and considered that no dispute in respect of a claim could have arisen between Lenihan and Quinn unless Lenihan s liability to McIlroy or others had been established by judgment. Claim in this context meant cause of action. Normally, a time-bar operates in respect of a cause of action and not before the cause of action has actually accrued. Comment: In the Court of Appeal s judgment, it stated that, the judge s conclusion seemed remarkably unfair, since his construction of the clause would require Lenihan to have initiated proceedings within nine months of Quinn purporting to repudiate liability under the policy, even though Lenihan were contending that the fire was not their fault, and even though their liability to the present claimants might not have been established... This must be right. If the first instance decision had stood, in many instances an insured would have lost its right to claim under its policy before its cause of action had arisen. Where such a clause was present, it would have eroded the ability of Page 3 of 8

4 others to pursue insurers who had declined indemnity on unmeritorious grounds, under the Third Party (Rights against Insurers) Act For further information, contact Nick Rouse Kennedys, or William Evans Kennedys, Feature articles Legal expenses insurance reviewed The law in relation to legal expenses insurance is set out in EU Directive 87/344/EEC ( the Directive ), which is implemented in the UK by the Insurance Companies (Legal Expenses Insurance) Regulations 1990, as amended. The Directive provides a general and obligatory freedom for the insured to choose a lawyer where any inquiry or proceedings have been issued. This right to choose has been recently examined in the case of Gebhard Stark v DAS Österreichische Allgemeine Rechtsschutzversicherung AG, when the European Court of Justice considered whether local lawyer clauses in legal expenses insurance were contrary to Article 4 of the Directive. In this case, the legal expenses insurer sought to limit the cover for costs to those normally invoiced by a lawyer established in Vienna, rather than to the higher costs of the local lawyer instructed by the Claimant. Austrian civil procedure provides for a single flat rate for the remuneration of certain services provided by a lawyer in civil law disputes but the rate is doubled where the lawyer provides the service at a place other than his chambers. Decision: Despite the clear wording of Article 4(1) that the insured is free to choose any lawyer or other appropriately qualified person in any inquiry or proceedings, the court held that the local lawyer clause did comply with Article 4. In particular, the court considered whether the restriction imposed on the payment of those costs effectively rendered impossible a reasonable choice of representative by the insured. Whether or not there was any restriction was held to be an issue for the national courts. In this case, as the Claimant would be deemed to bear only the costs relating to the distance between the chambers of his lawyer and the place of the court having jurisdiction, it did not appear to be such as to hinder the Claimant s freedom to choose his own lawyer. Comment: This decision was a clear victory for insurers and was welcomed by the International Association of Legal Protection Insurance (RIAD) as, it clearly shows that the insured s interests, consumer protection and cost management measures of insurers can be attuned. Page 4 of 8

5 Whilst this short Directive on legal expenses has not given rise to much case law over the last 20 years, with the proposed cuts in the Legal Aid budget, it is likely that more people may turn to legal expenses insurance, making it vital to ensure that the Directive, and in particular Article 4 regarding the right to choose a lawyer, is being properly implemented. Insurers should be wary of practices which could be construed as restricting the insured s choice of lawyers, as these may fall foul of the Directive. For example, in Germany, claimants are referred to a call centre where lawyers who have entered into an agreement with the insurance company are recommended. A recent instance of the Directive being applied in the UK resulted in the Claimant being granted a declaration allowing her to choose her own legal representative, namely a public access barrister, rather than being obliged to comply with the insurer s insistence that the barrister be instructed through a solicitor of her choice. For further information, contact Joti Penrose-Stevens (j.penrosestevens@kennedys-law.com) Kennedys, or Sheena Raikundalia (s.raikundalia@kennedys-law.com) Kennedys, Part 36 where are we and where are we going? Part 36 is not set in stone. Changes are on the way. We review the current position following a succession of judicial decisions. Part 36: the future Lord Justice Jackson stated in the Court of Appeal in Fox v Foundation Piling Ltd [ ] that a new Rule 36.14(1A) will be introduced with effect from 1 October 2011, which will reverse the effect of Carver v BAA Plc [ ] (see below). A more significant redraft of Part 36 is expected in late 2012 to reflect the recommendations made by Jackson LJ in his Final Report - Review of Civil Litigation Costs (dated January 2010). He recommended claimants be given an incentive to make Part 36 offers, on the basis they stand to gain 10% more damages if the offer is not beaten. The Ministry of Justice has already commenced the process with the publication on 21 June 2011 of the Legal Aid, Sentencing and Punishment of Offenders Bill 2011 ( Justice Bill ). View our full report on the Justice Bill in the July special edition of Liability Brief. Part 36: Key features of current regime A Part 36 offer is an offer made strictly in accordance with Part 36 of the Civil Procedure Rules. Part 36 is a procedural mechanism and is not subject to contract law. Page 5 of 8

6 Once made, it can only be withdrawn within the relevant period (of at least 21 days) with leave of the court, which will not be easy to obtain. Accordingly, even if a key piece of evidence is received during the relevant period which radically alters the value of the claim, this may not be considered to be a sufficient change in circumstances to allow the offer to be withdrawn, in particular if this is evidence that had already been commissioned when the offer was made. If the offeree has, however, been fraudulent this may be sufficient. A Part 36 offer can be withdrawn after the relevant period has expired. If it has not been expressly withdrawn it will remain open for acceptance, even if it has previously been rejected (Gibbon v Manchester City Council ). A Part 36 offer should relate to damages only - it cannot include an offer in relation to costs. How do you beat a Part 36 offer? Is it all about the figures? In Carver the Court of Appeal held the changes to Part 36 introduced on 6 April 2007 permitted a more wide-ranging review of all the facts and circumstances of deciding whether the judgment, which was the fruit of the litigation, was worth the fight. Accordingly, where the Claimant in that case beat a Part 36 offer, but only by 51, she failed to obtain a more advantageous judgment. This decision was criticised by Jackson LJ in his Final Report. He recommended removing the uncertainty caused by Carver. In addition, in Gibbon the Court of Appeal criticised the approach in Carver, placing the emphasis back on the figures, subject to the courts general discretion under CPR Part 44. The uncertainty introduced by Carver is likely to be brought to an end by a change to Part 36 in October It is, however, vital any new rules are drafted clearly and without ambiguity if satellite litigation is to be avoided. Key case law The courts have over recent months reviewed and clarified aspects of Part 36: Litigants in person: if you are acting against a litigant in person you should be careful to explain the costs consequences of Part 36 offers. In this case, the Defendant reminded the Claimant, who was a litigant in person, that a Part 36 offer remained open for acceptance but did not explain the consequences of late acceptance. The Court of Appeal held that each party should bear its own costs from the end of the relevant period Kunaka v Barclays Bank Time limited offer: in this case the letter setting out the offer included reference to it being open for 21 days from the date of the letter. The Court of Page 6 of 8

7 Appeal held this was not a time limited offer. What had been meant by the wording was the offer could not be withdrawn within 21 days but that after 21 days it may be promptly withdrawn. The offer had been an effective Part 36 offer. Lord Justice Stanley Burnton stated Any ambiguity in an offer purporting to be a Part 36 offer should be construed so far as reasonably possible as complying with Part 36. C v D Offers made pre-proceedings: the High Court held the costs consequences of Part 36 as set out in Part were intended to apply where both offer and acceptance occur prior to issue of proceedings - Thompson and Thompson v Bruce Successful party: the Claimant recovered 2,000 in a case initially valued at over 500,000. The Court of Appeal held the reality was the claim failed and the Defendant should receive 75% of its costs. Jackson LJ dissented. In his view, as the Defendant had made no Part 36 offer, it should accept the consequences and pay the Claimant s costs. Jackson LJ stated: There is an acute need for clarity and certainty in the field of Part 36. Parties need to understand (a) the consequences of making or not making Part 36 offers and (b) the consequences of accepting or not accepting such offers. - Marcus v Medway Primary Care Trust and Hussain Costs where Part 36 offer withdrawn: in this shipping case, it was held a Part 36 offer that had been withdrawn did not, in the circumstances of the case, make it unjust to order that the offeror should get all their costs from the date the offer expired. These costs were caused by the unreasonable conduct of the offeree - Owners and/or Bareboat Charterers and/or Sub Bareboat Charterers of the Ship Samco Europe v Owners of the Ship MSC Prestige Impact of exaggeration: the Court of Appeal held where a claimant is alleged to have exaggerated his claim, but has recovered more than he had been offered by the defendant, he is entitled to his costs. Jackson LJ stated: I hope that the forthcoming amendment to rule will point the way to a more clear cut approach to the costs rules in future. In the context of personal injury litigation where the claimant has a strong case on liability but quantum is inflated, the defendant s remedy is to make a modest Part 36 offer. If the defendant fails to make a sufficient Part 36 offer at the first opportunity, it cannot expect to secure costs protection. Different considerations may arise in cases where the claimant is proved to have been dishonest, but (on the judge s findings) that is not this case. Fox v Foundation Piling Ltd Comment: Part 36 offers are a very powerful tool to a litigant s disposal but it is essential there is certainty in this area of law. It is clear from the above judicial decisions that the courts are looking at the application of Part 36 from every angle. Changes are on the way, which will hopefully achieve greater clarity and certainty Page 7 of 8

8 and reduce satellite litigation on the issue of costs. We will be continuing to monitor developments and provide commentary. As an alternative to making a Part 36 offer, it is possible to make a Calderbank (or Part 44.3) offer. This is a contractual offer which is expressed to be without prejudice save as to costs. A Calderbank offer has some advantages over Part 36 offers in that it can be withdrawn at any time and can include an offer in relation to costs. Such an offer may still be relevant to costs, as it is an attempt to settle the claim, but does not achieve the same certainty as a proper use of the Part 36 regime. Whatever approach is selected in a particular case, those involved in litigation should be fully alert to the importance of appropriate and timely offers as an important means by which to achieve settlement and, where the case does not settle, provide costs protection. For further information contact Christopher Malla (c.malla@kennedys-law.com) Kennedys is a trading name of Kennedys Law LLP. Kennedys Law LLP is a limited liability partnership registered in England and Wales (with registered number OC Page 8 of 8