Abstract
In recent years, indemnities and reverse indemnities have risen in significance. This article examines reverse indemnities and evaluates their usefulness to Claimants.
An indemnity requires a Defendant to pay the Claimant further monies should there be a shortfall in public funding. The onus is on the Claimant to enforce the indemnity. A reverse indemnity operates so that the Claimant is paid the full amount of their damages but is under a duty to account or give ‘appropriate credit’ to the Defendant should they be paid benefits or direct payments in the future.
By order or consent?
Until very recently, the orthodox approach was that indemnities of either sort could not be ordered by the Court and could only be utilized by consent. In the report of the Master of the Rolls' Structured Settlements Working Party (chaired by Brian Langstaff QC as he then was) it notes:
‘[The] rules of court appear to provide for the grant of an indemnity by order of the court … only in third party (Part 20) proceedings between defendants, or between defendants and third parties. There is no express recognition in the Supreme Court Act 1981 of any power generally to award an indemnity to a claimant in addition to or in substitution for damages, or injunctive relief.’
The report noted that courts arguably had the power to grant an indemnity under their inherent powers which had been preserved by the Supreme Court Act. However, if that was the case then they would also have had the power to award provisional damages. It had been considered necessary to legislate to enable courts to award provisional damages. Therefore, legislation would also be necessary to enable courts to grant an indemnity. Furthermore, they considered that there was no case law to support the granting of an indemnity in primary proceedings ‘as an adjunct to damages’.
However, Burton v Kingsbury [2007] EWHC 2091 (QB) evidences a novel approach. In Burton, the Claimant argued for a reverse indemnity. HHJ Flaux rejected this, noting the mistrust between the Claimant and the Defendant's insurers. He also stated that he did not believe that he had the power to order it. However, he agreed with the Defendant's alternative proposal: he ordered them to pay whatever proportion of the annual payment awarded by the court for care and case management was not funded by the state.
Fundamentally this is an indemnity in all but name. Somewhat surprisingly, it does not appear that this issue was fully argued. There is no reference to Firth v Geo Akroyd Junior Ltd [2001] PIQR (Q4) as authority that a Claimant is not entitled to an indemnity, in that case against consequences of any change in the law which might make him liable to reimburse the local authority.
In contrast, in Iqbal v Whipps Cross University Hospital NHS Trust [2006] EWHC 3111 (QB) it appears that the point was argued, particularly as to whether an indemnity could be ordered against the Claimant's wishes. Sir Rodger Bell doubted that he would be able to order such an indemnity but did not have to decide the point (at para 73).
While the issue does not appear to have been argued in Burton and the judgment does not explicitly impose an indemnity against the Claimant's wishes, the approach taken is of concern for Claimants. There are numerous possibilities for extending this principle and all the practical and policy concerns surrounding indemnities and reverse indemnities come into play.
Policy objections
The major policy objection to indemnities and reverse indemnities is that of certainty. A core concept in all litigation is its finality. In Firth, HHJ Robert Taylor accepted that ‘it is an important general principle of the law relating to damages for personal injuries that … “damages must be assessed as a lump sum once and for all ...”’. He refused to grant an indemnity because the declaration sought ‘would seriously infringe this principle, as it would add to the lump sum awarded against the first defendant at trial a liability to make periodical payments of an unknown amount for an unknown period in the event of a change in the law occurring at some unknown future date … if this general principle is to be breached, it should really be a matter for legislation’. Again he drew an important parallel with the need for legislation to introduce the power to award provisional damages.
Indemnities are also a major concern because they crucially change the position of the Claimant as the victim of the Defendant's tort. A fundamental principle in tort is that the victim should be put back in the position in which he/she would have been had the tort not taken place. An indemnity requires the Claimant to seek state support, where before the accident they would not have needed to. This represents a significant change of position for the Claimant: from someone independent from state help to being required to be dependent upon it. Therefore, such an indemnity represents a key exception to the normal tortious principles.
A further difficulty lies in where the boundaries of indemnities are. An example is given in Firth of an indemnity awarded to a Defendant that should a certain precedent be overturned at some future date, beyond the time permitted for an appeal, a certain element of the damages should be repaid. The prospect of such extensive indemnities is concerning and they would significantly detract from legal certainty.
Finally, indemnities are conceptually difficult. Where a Defendant is held only partially liable for the accident, then a shortfall in damages for the Claimant will inevitably result. For example, where the Defendant is only 50% liable, then the state will be looked to to fund the other 50% of the Claimant's care. However, if there is an indemnity in operation, the Defendant may be able to claim that the state funding reduces its own liability to pay or, in the case of a reverse indemnity, must be accounted for by the Claimant. It is conceptually difficult to see how an indemnity would operate in such circumstances and not leave a shortfall in funding.
Practical objections
There are numerous practical difficulties with indemnities, whether as normal indemnities or reverse indemnities.
The major question is whether the local authority will accept the working of an indemnity. If an indemnity is agreed, the wording of course is essential. However, what is more fundamental is how the local authority will approach the situation. Indemnities usually, though as noted below not always, apply to direct payments and benefits. Direct payments are made with conditions requiring that they are used for a particular purpose. The Community Care, Services for Carers and Children's Services (Direct Payments) Guidance 2003 provides:
‘Councils are able to require some or all of the money they have paid out to be repaid if they are satisfied that it has not been used to secure the provision of the service to which it relates… Councils should bear in mind that repayment should be aimed at recovering money which has been diverted from the purpose for which it was intended.’ (paragraphs 160 and 161)
Direct payments which are paid over to the Defendant have clearly been ‘diverted from the purpose’ for which they were intended. In those circumstances, it is likely that the local authority would then seek their repayment, leaving the Claimant with a shortfall in funding.
A similar issue is that it is impossible to know what social services will be like in the future, particularly as many of the cases where an indemnity is sought deal with future care stretching over 40–50 years. Will direct payments be replaced by direct care? Where an indemnity is in place will a Claimant have to account for that care or will it cover only monetary funding?
While indemnities usually relate to benefits or direct payments, Defendants have on occasion simply sought an indemnity for ‘funding’ without specifying its nature. Where such an indemnity is agreed to then even charitable funding may be included which would not otherwise have been accounted for during proceedings. That funding may be of a very minimal nature unless a specific clause is inserted requiring credit to be given only for funding over a certain level.
A reverse indemnity is usually framed as requiring the Claimant to give ‘appropriate credit’ for funding received. The inevitable question arises as to what ‘appropriate credit’ is. Where there is significant antagonism between the parties, which is sadly the norm, such an issue is almost certain to end up before the courts. Furthermore, undertakings are given on the Claimant's behalf to give that appropriate credit but who practically can give them and who would be bound by them? The role of the Claimant's litigation friend ends with the litigation and receivers and deputies may well change. The practical outworking of those duties is likely to become complex and fraught.
Another practical difficulty is whether the duty on the Claimant to give appropriate credit includes a duty actively to look for funding, possibly even extending to challenging any refusal to fund by way of judicial review or just to account for that which they receive. They are usually put under a duty to look for funding. However, that duty will need to be closely defined, particularly as to what the Claimant is required to do and who will pay for the time spent looking for and applying for funding. Where funding includes directly provided care, further questions arise as to whether the Defendant could require the Claimant to use local authority care rather than private care so that the Claimant would have to account for that provision. This would effectively result in a re-run of the case insofar as the Claimant's requirements would have to be re-assessed and whether the local authority care was adequate or not. Where a Claimant is required to account for, but not look for, funding, this will act as a significant disincentive to Claimants to seek the best possible care and support available to them.
The final practical difficulty is how issues would be resolved and who would pay for their resolution. The scope and extent of the indemnity would almost inevitably be disagreed upon and would result in litigation. However, who would fund that litigation and who would fund the Claimant's care in the meantime? If the normal costs rules apply, the risk is yet again put on the Claimant as to whether or not to litigate or simply put up with the requirements of the Defendant. The Claimant is inevitably in the weaker position. The ordinary costs rules rarely adequately cover all of the work involved. Furthermore, the litigation would be extensive, perhaps requiring numerous expert reports to assess the Claimant's needs and the appropriateness of the particular care/funding obtained.
Conclusion
Indemnities and reverse indemnities have little to recommend them to Claimants. However, they can be a useful tool in a claim where there are significant litigation risks and the only basis of settlement that a Defendant will agree to is an indemnity or reverse indemnity. An indemnity may be particularly useful where the Claimant is already receiving first-rate local authority care and a court would be unlikely to award damages for private provision of care. A reverse indemnity may be useful where the Defendant is arguing that the Claimant has failed to mitigate by not applying for State funding. Where there are other difficulties in the case, such as poor prospects on liability, a reverse indemnity may enable a settlement to be reached.
Claimants should only agree to an indemnity of any sort as a last resort in negotiations where settlement is necessary. However, the court's recent approach to ordering indemnities is a concern for the future.