Subrogation & Recovery Law Blog : Insurance Subrogation Lawyer & Attorney : Cozen O'Connor Law Firm : Property Damage & Insurance Commentary

On 29 March 2011, following a period of consultation, the government announced that the civil cost reforms proposed by Lord Justice Jackson in his January 2010 report will be implemented in full.

In his report, which followed a year-long review of rising civil litigation costs in England and Wales, Jackson proposed, amongst other things, that the recoverability of success fees and associated costs through ‘no win, no fee’ conditional fee arrangements be scrapped and replaced by (currently unlawful) contingency fees.

Justice Secretary Ken Clarke has now confirmed that Jackson's reforms will be fully implemented, marking the first major overhaul to litigation funding arrangements in the UK in 15 years.  For the first time, lawyers will be permitted to take their fees from their clients' damages.

The use of such contingency fee arrangements, whereby the lawyer takes a percentage of the monies recovered for its client as fees, has to date remained unlawful in England & Wales. Based on the ancient rule of champerty, the thinking has always been that lawyers with a significant financial stake in the outcome of a case might lose their ability to give impartial advice.

With conditional fee arrangements and the after the event insurance regime set to go, contingency fees are now considered by the Ministry of Justice to be the acceptable means by which to “promote access to justice at proportionate cost”. However, Jackson has suggested that contingency fee arrangements require proper regulation and should not be valid unless the client has received independent legal advice. He has further recommended that there be a set maximum percentage of damages that can be recovered in fees from the amount awarded, however he gave no indication of what that percentage should be in commercial cases.

The introduction of contingency fees will constitute a substantial change to the litigation landscape and has sparked controversy in some areas of litigation in England & Wales. However, the ability to offer them will increase the options available for commercial clients seeking more creative fee arrangements and will also allow the risk of litigation to be shared by clients with their lawyers.

When the contingency fee arrangements are implemented in England, Cozen O’Connor’s London subrogation team will be able to combine its expertise with that of litigators in other jurisdictions which allow for contingency fees and where Cozen clients have pending claims (including Italy, Spain and Germany) under a single contingent fee structure.

We await the draft primary legislation and guidance needed to bring the government’s proposals into being, which are expected next year.
 

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What is a Limitation Period?

All legal proceedings, including subrogated recovery actions, must be commenced within a certain period of time set out by legislation. The time period in which an action can be brought is called a limitation period. It is also sometimes called a prescription period. If an action is not brought within the applicable limitation period, the claim will be forever lost. Even the most meritorious subrogated claim will disappear because of the expiry of a limitation period.

What is the Purpose of a Limitation Period?

The essential purpose of a limitation period is to place a reasonable limit on the amount of time which a party may take to commence an action. This serves a number of important purposes:

• It creates an incentive for plaintiffs to bring their lawsuits in a timely fashion.
• It defines a period of time in which a defendant can know with certainty that it will be free of ancient obligations.
• It prevents plaintiffs from bringing old claims in which evidence has been lost by the passage of time

When Does a Limitation Period Start to Run?

Each province has different rules about when a limitation period begins to run. For example, in some provinces, time will start to run as soon as the facts which give rise to the claim take place. In other cases, the limitation period may not begin to run until the plaintiff discovers that he or she has been wronged. In some cases, a limitation period may temporarily stop running while parties are attempting to reach a settlement agreement. A party’s conduct may also affect the running of a limitation period. Additionally, where a plaintiff is a minor or under a disability, the limitation period may not start to run until after that person reaches the age of majority or is represented by a litigation guardian.
 

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In his address to Parliament today, David Cameron announced that those suffering losses as a result of the recent outbreaks of violence, destruction and looting in London and other cities across England will have 42 days, rather than the 14 days prescribed by statute, to claim compensation from the relevant police authorities.

Under the Riot (Damages) Act 1886, those with losses arising from "people riotously and tumultuously assembled" are entitled to lodge a claim with the relevant police authority for their losses, regardless of whether there has been any negligence on the police’s part. However, under the Act, such claims must be submitted "within fourteen clear days after the day when such injury, stealing, or destruction took place", otherwise the right to bring a claim against the police will be lost.

Given that many of the properties, businesses and residences involved remain crime scenes and/or structurally unsafe, assessing the damages and submitting a claim in such a short period of time would have presented huge challenges. That being so, the Association of British Insurers (ABI) called on the Home Secretary, Theresa May, for the 14-day period to be extended to 42 days. Those calls were answered in the House of Commons this morning when, shortly before midday David Cameron confirmed that the Government had extended the time period for bringing a claim to 42 days.

However, the announcement will come as a blow to the Association of Police Authorities (APA), who now face the prospect that an even larger percentage of the estimated £200 million costs arising out of the recent chaos will land at their feet.

Although it is anticipated that insurers will cover most of these losses, the Act expressly recognises an insurer’s right to a statutory recovery in respect of payments made to its Insureds as a result of riots (section 2 (2) of the Act). The Act also provides a route to compensation for uninsured individuals and businesses.

It is important to note, however, that claims under the Act are limited. An insurer will be able to claim for loss or damage to domestic and business premises, as well as property within them, but claims for business interruption or other consequential losses are excluded.

While the Prime Minister’s announcement today equates to a relaxing of the legislation in favour of claimants, by way of contrast, the police authorities have renewed their calls for the Victorian legislation to be repealed. This is not surprising considering the bill they face. Indeed, the 125 year-old Act has long been considered arcane (ten years ago - in April 2002 - a House of Commons Home Affairs Committee Report considered calls by the APA for its repeal.  However, even if the Act were swiftly repealed, it is unlikely that the repeal would have retrospective effect, so Insurers are likely to be safe for now (but may need to review the cover they provide in the future).

As for the affected police authorities' own cover? The APA has claimed that authorities were unable to access affordable insurance to cover the recent level of damage. This lack of adequate cover is almost certainly a knock-on effect from the case of Yarl's Wood Immigration Ltd v Bedfordshire Police Authority [2009]. Here, whilst the Bedfordshire Police Authority were found to be responsible under the Act for picking up the £42 million cost of the 2002 disturbance, they were able to pass these costs to their insurers. Given the same level of cover does not appear to exist today, the police may need to meet the damages from their own reserves (or a special Home Office grant). These reserves may not be sufficient: their 2010/11 accounts showed that in March the reserve, funded by the taxpayer, was only £70.6 million.

Finally, an important point to note for those lodging claims against the police: under paragraph 11 of the Statutory Instrument 1921/1536, which deals with the procedural requirements when making a claim "No costs will be allowed to any claimant". As such, claimants will need to bear their own costs in bringing a claim.
 

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In the 1850's, a prominent frontier lawyer, disturbed by what he saw, felt compelled to offer the following advice in a speech to aspiring lawyers:

“Discourage litigation. Persuade your neighbors to compromise whenever you can.”

In England & Wales, the Civil Procedure Rules (“CPR”) are the rules which govern the conduct of litigation. Most readers will be aware that there is a “loser pays” regime, meaning that there are often costs consequences for the losing party. As a result (and although there is no prohibition against a party making an offer to settle in any way it chooses) there are costs, interest and tactical advantages in making an offer to settle that complies with these rules (Part 36). Part 36 is, therefore, an effective way in which to try to resolve your litigation in England & Wales. For the avoidance of doubt, the term “costs” in this article, follows the English meaning where recoverable costs include fees and charges of the lawyer (attorney) as well as disbursements (including court fees, barristers’ fees and experts’ fees).

Part 36 Offers

A Part 36 Offer is a formal attempt by a party to settle a matter and provides a method to apply pressure to your adversary since it sets out the costs consequences a party will face if it fails to beat the offer. CPR 36.14 determines the costs and interest consequences of a Part 36 offer following judgment (the Court does not normally learn of the existence of offer(s) until the end of the trial (when it takes them into account when determining who should pay the legal costs of the action)).
 

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In Zurich v. Ison T.H. Auto Sales, 2011 ONSC 1870, the Ontario Superior Court of Justice was faced with a dispute between an insurer and insured over who had control over a recovery action. The loss arose from an explosion and fire that occurred at an apartment building. The insured, an automobile dealer, was storing 71 new cars in rented space in the underground parking lot of the building. The cars were damaged and could not be sold as new. The insured made a claim under its policy and was paid approximately $1.9 million. This represented the factory invoice price of the vehicles, less a deductible of $10,000. The insurer was subsequently able to recover about $900,000 in salvage for the cars, so it had a net subrogated claim of about $1 million. In addition, the insured claimed that it had suffered a loss of profits as a result of the damage to the cars – namely, the difference between the manufacturer’s price and the price at which the vehicles could be sold to customers. As well, the insured lost the ability to service the 71 new automobiles and the opportunity to resell trade-ins on those vehicles. It also claimed a loss of goodwill. The insured then commenced an action and included the insurer's subrogated portion. The insurer did not commence its own action. Shortly prior to discoveries commencing in the insured's action, the insurer appointed its own lawyers and asked to be added as counsel of record. The insured denied this request, and the insurer then brought an application seeking carriage and control over the action.

The Court examined the subrogation clause in the policy, which stated the insurer’s subrogation right arose on making any payment or on assuming liability to make payment. The insurer argued that the clause overrode the common law rule that the insurer does not have control over the action until the insured has been fully indemnified. The Court agreed that the clause altered the common law by allowing the insurer to subrogate prior to fully paying the loss, and permitted the insurer to share the amount recovered with the insured, on a pro rata basis, where there has been less than a full recovery. However, the clause was silent on who had control over the action. There was no reason to imply a provision giving the insurer the right of control in order to give business efficacy to the contract. Further, the effect of the clause, including the right of the insurer to share proportionately in recoveries, coupled with the duty of good faith, required the insured, although in control of the litigation, to consider the insurer’s interests, to keep the insurer informed concerning the status of the litigation and concerning major issues in the litigation, and to consult with the insurer with respect to the prosecution of the litigation. Thus, the Court ruled in favour of the insured and dismissed the application. Of note, the Court also considered the fact that the insured had been diligent in advancing the claim, the action was well advanced, the insurer had waited a year and half before discussing subrogation with the insured, and the lack of any prejudice by leaving carriage with the insured. However, the Court did state that there may be cases where the insurer’s interest is so vastly disproportionate to the insured’s interest that it would be unreasonable to allow the latter to have control of the litigation (this did not apply in the present case as the insured's claim was $700K and the insurer's claim was $1M).

Zurich v. Ison T.H. Auto Sales clarifies the impact of subrogation wording commonly used by insurers and thought, based on obiter dicta by the Supreme Court of Canada, to afford the insurer control over an action prior to full indemnity by the insured. In the wake of Zurich v. Ison T.H. Auto Sales, insurers should be diligent in appointing subrogation counsel at the earliest opportunity. This will allow the parties the opportunity to enter into joint recovery agreements, and at a minimum document at an early stage the insurer's desire to pursue its subrogated claim. Thought should also be given by underwriters to expressly provide for the insurer's control over subrogation in cases of partial indemnity, as it is clear the Court is unwilling to imply such a right.
 

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 The prevailing laws in the Middle East are generally based on, and utilize elements of, Shari’ah, The Koran and the Hadith together with what is termed as Latin law, influenced by Egyptian Napoleonic Code style law. The concept of insurance is not contradictory to Islam, the payment of blood money by an individual to a deceased’s family has been common through the ages. Further, the concept of risk mitigation, by using what can be termed as the law of large numbers, is common practice in Islam. One of the explanations often cited for the low uptake for conventional insurance (or what is termed as Islamic insurance or Takaful) in the Middle East is that insurance is viewed by many to be considered impermissible. It inherently contains elements of gharar (uncertainty) or, to put it into context, trading in risk, which is addressed in Shari'ah law.

Insurance law in the UAE was codified following the enactment of Federal Law No.6 of 2007 (the "2007 Law”), which created the UAE Insurance Authority ("IA"). The precise application of the 2007 Law is ongoing, and is adopted from Jordanian insurance law.  Currently, the 2007 Law is very grey in its application and far from an all-encompassing regulatory system for conducting insurance activities in the UAE.

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As Lord Mansfield ruled in one of the oldest English authorities on subrogation, payment of the loss by an insurer to its insured does not affect the liability of the wrongdoer. He set forth the basic principle as follows:

“Every day the insurer is put in the place of the insured … The insurer uses the name of the insured … I am satisfied that it is to be considered as if the insurers had not paid a farthing”.

So what was a sophisticated Court in South Africa thinking when, earlier this year, it came to the conclusion in Nkosi v. Mbatha (AR 20/10) [2010] that a third party is able to raise the insurer’s indemnification as a defence to the related proceedings brought in the name of the insured?

In Nkosi, the plaintiff, having been involved in a car accident, was indemnified by her insurers in the sum of SA Rand 16,000 (approximately £1,500). A subrogation action was started but only during cross-examination did the plaintiff declare to the Court that she was proceeding on behalf of her insurers. When asked to give particulars, she refused (no doubt with her Lord Mansfield “Book of Quotes” in hand) on grounds that such information was irrelevant.

It seems that both the first instance Magistrate’s Court and then the Court of Appeal in Pietermaritzburg – both of which would be familiar with English common law as South African law is partly based on its principles – were annoyed by the plaintiff’s conduct finding – incorrectly in our submission - that subrogation was a fact that had to be specifically pleaded and proved to the court.

Fortunately, a very recent decision of a South African court suggests that there has been an appropriate judicial reaction to the Nkosi case. In Smith v Banjo (AR290/10) (12th November 2010) the KwaZulu-Natal Provincial Appeal Court ruled that the involvement of the insurer in a lawsuit is irrelevant and it is, therefore, not necessary to plead such involvement. It found Nkosi to be “clearly wrong” and “not binding on future courts”. Whilst it is pleasing that the South African Courts have remedied a poor decision the fact that the decision in Nkosi was ever made (and supported on appeal) goes to show how there is always a litigation risk. Thankfully now, the South African courts are again “satisfied that it is to be considered as if the insurers had not paid a [Rand]”.
 

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As in the United States, experts in England and Wales often play a fundamental role in litigation. Their opinions influence whether a case is brought, case strategy and settlement decisions. Experts currently have limited immunity for claims of professional negligence. This immunity extends to evidence given by the expert in court and to work which is preliminary to giving such evidence. This immunity has applied even where an expert has been dishonest with the parties or the court. The rationale is that an expert witnesses should be free to give evidence in court without fear of being sued by a party whose case is lost.

This issue recently came under scrutiny in Jones v Kaney [2010] EWHC 61. The extent of immunity will be considered by the Supreme Court in January 2011, after permission was granted for a “leap-frog appeal”.

In Jones, Dr. Kaney was hired by the claimant, Mr. Jones, to prepare an expert medical report regarding personal injuries he suffered following a traffic accident. Dr. Kaney initially opined that Mr. Jones suffered from post traumatic stress disorder (PTSD). The defendant’s expert disagreed, believing that Jones had exaggerated his physical symptoms. The experts later discussed the case and prepared a joint statement, signed by both experts, saying the claimant was deceitful. Although Dr. Kaney later tried to retract the statement, the court refused and the claim settled for a considerably smaller sum than originally sought. Jones then brought proceedings for negligence against Dr. Kaney, who sought to have the case struck out on grounds of her immunity from suit, applying the Court of Appeals’ decision in Stanton v Callaghan [1999] 2 WLR 745.

Mr. Jones argued that Stanton is no longer good law for two reasons: (1) the immunity can no longer survive in light of the House of Lords’ decision in Arthur Hall v Simons [2000] 3 WLR 543 (where a barrister’s immunity from suit was abolished); and (2) the expert witness immunity is inconsistent with Article 6 of the European Convention on Human Rights, the right to a fair trial.

The Judge found in Dr Kaney’s favour, considering himself bound by Stanton, but said:

“although I conclude that Stanton v Callaghan remains good law, I have doubts as to whether it will continue to remain so for the reasons canvassed by the Claimant…. I conclude that there is a substantial likelihood that on re-examination by a superior court, with the power to do so, it will emerge that public policy justification for the rule cannot support it”.

With permission for the appeal having been granted, there is a possibility that experts’ immunity will be severely curtailed, if not altogether abolished.
 

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Since 1401, English common law has treated fire damage caused by an escape of fire as being actionable by an adjoining owner without proof of fault. This liability was based on custom and on the special duty imposed on house holders to keep their fires safe. The strictness of this liability was the result of a land based feudal economy with closely knit domestic housing arrangements that were susceptible to catastrophic loss from fires that got out of control. 

As people moved out of agricultural communities and into towns and cities, the harshness of the rule became clear. Following the Great Fire of London in 1666, Parliament wanted to redress the imbalance, making man not liable for fire damage that was not caused by his fault. This lead to section 86 of the Fires Prevention (Metropolis) Act 1774, which granted an immunity from liability for accidental fires. The defendant must show that the fire occurred “accidentally,” but the word is not defined in the statute. 

In the case of Filliter v. Phippard (1847) Lord Denman CJ tried to provide guidance on the meaning of the word “accidentally” when he said that such fires should be started “unintentionally” but also “without negligence”. Over the years, this Act and the subsequent case law have been problematic for many claimants.
 

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“Dangerous and generally a fruitless occupation.”- Justice Akenhead

No, Justice Akenhead was not talking about being a lawyer, but stating that it is inappropriate to rank possible causes of a fire in terms of probability in order to select the most probable. 

In Fosse Motor Engineers Ltd v Conde Nast (2008), Fosse, the owner of a warehouse, asserted negligence against its tenant and an employment agency that supplied workers in the building for that tenant. A fire occurred at the warehouse when only the workers and a security guard were present. Expert evidence could not identify which of several possible causes led to the fire. The possible causes were: a cigarette discarded by either Fosse’s employees or the agency workers; an electrical fault; or arson by an intruder. Fosse claimed the fire was caused by one of the agency workers carelessly discarding a cigarette or, if it was an intruder, because a door had been left open by the agency workers allowing the intruder access.

The Judge held that although the Court might eliminate all but one of the causes of the fire, it still had to decide that the remaining cause was the most probable. The judge accepted the evidence of the agency workers that the fire was not caused by their actions and discounted the electrical cause as being improbable. That left either someone working earlier or an intruder (entering before the agency workers). The Judge found that as it was not possible, on the balance of probabilities, to determine which of the two remaining feasible scenarios was the cause, Fosse had failed to prove its case.

What’s all the Fosse about?

Fosse provides a reminder that in England & Wales the burden rests upon the claimant to overcome the evidential burden. In some respects the fact that the Judge did not choose to decide between (what he regarded as) the remaining feasible causes was academic since, in either scenario, Fosse would not have been successful. However, the fact that the Judge chose not to decide may be useful in defending claims where the exact circumstances that gave rise to the allegation are unclear: It is therefore always worthwhile looking into causation issues with a critical eye. 

In Drake v Harbour (2008), the lack of proof of an exact cause did not prevent recovery. The claimant engaged the defendant electrician to rewire her home. She was away from the property during the work when a fire started in the loft where Harbour had been working. The Court of Appeal held that the fact that the claimant was unable to demonstrate the precise mechanism that led to the fire was not a bar to recovery; if a claimant proved that a defendant was negligent and a loss was caused that was of a kind likely to have resulted from such negligence, that would ordinarily be enough to infer that it was probably so caused. Further, as Harbour was suggesting that it was not his negligence that caused the fire, then it was his burden to suggest what the probable cause was, and to properly plead it.

Harbouring doubts?

Drake suggests that where negligence can be established you do not necessarily have to show the precise mechanism as an English Court might infer that it was the defendant's negligence that caused the loss; the onus then shifting to the defendant to prove that alternative causes are at least “as likely”.

Causation considerations
These two cases highlight the importance of considering the cogency of the factual (and expert) evidence in proceedings. Drake suggests that even if you don't know the precise mechanism, if you can show that the likely causes all would have emanated from the negligence of a specified person, that suffices. If an English Court can be satisfied that a party was negligent it may not always be necessary to show the most likely cause. In Fosse, though, because the causes may have had different culprits, and because negligence could not necessarily be shown, the causation hurdle could not be overcome.

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Unlike in the United States, one of the most frustrating problems for subrogators in England is that they are not able to obtain a third party’s insurance policy in order to ascertain how deep their opponents pockets are before pursuing a recovery action. 

This tactical advantage was effectively nailed closed (for now) following the court’s decision in the West London Pipeline and Storage Limited v. Total UK Limited (2008).  In that case, Total was seeking contribution from a third party (TAV) following the largest peace time explosion in Europe at the Buncefield oil depot in 2006.  Relying on the court’s controversial decision in Harcourt –v- Griffin (2007), Total made an application to the court under CPR Part 18 for information and the disclosure of TAV’s insurance information.  Total argued that the information was relevant to the issues in dispute and necessary for the efficient management of the case. 

Unfortunately for subrogators, TAV successfully argued that the court did not have jurisdiction to order disclosure of its insurance information, as it was not relevant to any issue in the case.  Agreeing with TAV, the court took the view that although they understood the claimant’s desire to know whether a Defendant is worth suing, the court was also keen to avoid the promotion of “deep pocket” or “speculative” litigation before English courts.   

Although the Total decision has been adopted by most courts in England, the argument that an insurance policy is a private matter between the insured and insurers has not extended to After-The-Event (“ATE”) insurance policies.  These are specific policies which some claimants take out to combat the loser pays rule, which is embedded in English litigation.  Claimants use ATE policies to cover their liability to pay a Defendant’s legal fees and disbursements, if their case is unsuccessful.   In the recent decision of Barr & Oths –v- Biff Waste Services Ltd [2009], the court took the view that such insurance policies are disclosable.  Among other things, the court held that there was a difference between liability insurance, which may have been in place for many years before the event giving rise to the litigation, and an ATE insurance policy that was probably taken out for the sole purpose of allowing a claimant to pursue litigation, which would otherwise not be possible.  As an ATE policy is a vital component to the litigation itself, its disclosure can be distinguished from the court’s decision in the Total case.

While the theory surrounding both decisions may seem sound, one cannot help but feel that just as a Defendant in England does not want to defend a claim for fear of being unable to recover its costs, a claimant does not want to obtain an empty judgement.  Surely as the “cards on the table” approach is the overriding objective of the Civil Procedure Rules, wouldn’t it be in all parties interest to save time and costs by knowing where they stand from the outset of any case?

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