This article considers costs escalation in increasingly lengthy energy insurance disputes and analyses the benefits and risks associated with the various types of settlement offers to mitigate costs exposure
Lengthy and complex disputes
The value and complexity of energy insurance claims is broadly increasing alongside the tendency for parties to invest more resource in pursuing and defending claims. Several decades ago, the duration of a trial in an energy insurance claim was far shorter than current durations e.g. the trial at first instance in the NUKILA in 1996 was just two weeks whilst the YME MOPUstor litigation, which was settled prior to trial, had been scheduled for a 12 week trial in 2018. The scheduling of such long trials, usually at least two or three years after proceedings have commenced, is becoming increasingly commonplace.
The shift to longer and more complex trials is reflective of the way in which energy insurance litigation is becoming more heavily engineered, both procedurally and substantively. The disclosure burden (usually falling more heavily on the insured), including electronic disclosure, often spanning relevant periods of several years is added to the numerous niche and detailed expert evidence disciplines that are often in dispute. The fact is, the trials need to be long to cover all of the complicated points of factual and expert evidence.
Consequence of longer trials = cost
One obvious consequence of this complexity is cost. Liability for a party's own costs and possible adverse costs has not traditionally been a primary driver in energy insurance claims where the sums at stake are often hundreds of millions of dollars, sometimes exceeding a billion dollars.
However, where large legal teams are heavily engaged for a period of several years to pursue or defend an energy insurance claim with a long trial, the costs of doing so can be very significant, running to millions of dollars and occasionally tens of millions. On any view, therefore, legal costs are increasingly becoming an aspect of litigation on which parties are beginning to focus.
Costs recovery rules
The general rule in litigation in England is that a successful party recovers a large proportion of its costs from the losing party. This rule incentivises the likely losing party to settle prior to trial. However, where the merits are not clear-cut, the risk of becoming the losing party ought to incentivise both parties to explore pre-trial settlement.
Types of settlement offer
In order to encourage this, there are mechanisms which can disrupt the usual "loser pays" principle. Where a party to English court proceedings makes a settlement offer under Part 36 of the Civil Procedure Rules, there will be specific consequences resulting from that offer. The formulaic costs consequences encourage a party making the offer (either the claimant or the defendant) to pitch its Part 36 offer as close as possible to what it considers to be its best case at trial. Therefore, even if a party that has made an offer proceeds to "lose" at Court in the broadest sense, it will not necessarily pay all of the other party's costs if it made an offer which the other party did not beat at trial.
The vehicle of Part 36 is rigid and offers must generally be damages offers which are framed in a very specific way. However, the reality of complicated claims is that they sometimes do not easily fit within this rigid structure. In an energy insurance context, factors such as a large subscription market, fronting arrangements and loss load premium issues mean that a Part 36 offer is sometimes unsuitable. There are, in such circumstances, alternative ways to settle claims.
The idea of using a straightforward settlement offer to seek to appeal to a judge's discretion on costs pre-dated Part 36 offers, such an offer commonly being referred to as a Calderbank offer, after the 1975 case Calderbank v Calderbank which established the principle of marking an offer "without prejudice save as to costs". An offer which is "without prejudice" i.e. cannot be seen by a judge so that it does not influence his view on the substantive claim in the absence of settlement. However, the addition of the words "save as to costs", means that the judge will be able to see the offer after making his/her substantive judgment but prior to awarding costs. Therefore, reasonable conduct of a party (even if it is the losing party) in trying to settle a dispute prior to trial can be used to appeal to the judge's discretion on costs. There are, however, no guarantees that a judge will exercise his/her discretion and that is why Part 36 offers are often preferred.
The references above to Part 36 and Calderbank offers are in the context of court proceedings but sealed offers of a similar nature are also common in arbitrations, appealing to the discretion of the tribunal on costs.
The key benefits of Calderbank offers (in Court) and sealed offers (in arbitration) are:
the fact that the offering party has certainty over the precise amount it is offering (whereas Part 36 offers may come with some costs consequences on a defendant if the claimant accepts the offer); and
other non-monetary conditions can be attached to the offer.
In relation to this second point, the recent costs decision of Zagora Management Limited v Zurich Insurance Plc and Others  EWHC 257 (TCC) has, however, highlighted some of the uncertainties which are created from a costs-liability perspective, when other conditions are attached to non-Part 36 offers. A full analysis of the issues in the case were reported by Clyde & Co on 8 February 2019 here, but we summarise below some of the headline issues which should be considered by parties to energy insurance disputes when making settlement offers with non-monetary conditions, e.g. requests for an indemnity (hold harmless) provision from the principal assured in respect of claims by all additional insureds (contractors etc).
Zagora v Zurich – trifling amount
There were multiple defendants to the proceedings and two separate defendant offers were being considered in the context of the judge awarding costs.
The key question surrounding one of the offers was whether it was a realistic offer or a "trifling amount". The Court does not generally exercise its discretion favourably (even under Part 36) unless the offer was more than a trifling amount, in other words, that it was a true attempt to settle the claim. This is relevant to insurers in the context of energy insurance claim where coverage arguments are often "all or nothing" defences. There may, therefore, be no prospect of an insured recovering a fraction of its claim, the only realistic options being zero recovery or full recovery. In such circumstances, an offer by insurers at say 1-5% of the claim may be a true attempt to settle the claim based on its assessment of the merits but there may be concern that a judge would view this as a "trifling offer".
In the Zagora case, the offer under consideration was described as being an offer for "at least a significant proportion of the costs incurred as against [the relevant Defendant] up to that point". The offer was held to be admissible even though the indication in the judgment is that it was an offer relating only to a proportion of costs rather than the substantive claim.
Zagora v Zurich – non-monetary issues
Another issue in the case was that the defendant which made the offer described above was, at trial, held liable for deceit. The judge held that the settlement offer from that defendant did not need to include an admission of deceit to be a reasonable offer. The party receiving the offer has no immediate right to demand an admission of guilt as part of the settlement.
A settlement offer from another defendant was also considered. The offer was described by the defendant as being a "near miss" as it was held liable for a policy limits loss and the offer was made just below the policy limit. The defendant therefore appealed to the judge's discretion on costs.
The judge was not persuaded by the defendant:
the offer had contained multiple conditions, including requests for indemnities against future claims from certain non-parties.The judge held this to be unreasonable;
the offer was held not to be a "near miss" because it did not account for the fact that interest awarded on the claim would have taken it far in excess of the policy limit.
Insurers should exercise caution, therefore, not to overlook accrued interest when pitching its settlement offer but, also, not to over-reach and seek additional indemnities from non-parties as part of the settlement offer process.
Zagora v Zurich – claimant conduct
Despite the judge not being persuaded by the "near miss" argument, he also criticised the claimants' conduct in ignoring the offer. The judge stated that the claimants should instead have reviewed the merits of their own case and responded to the offer realistically and pragmatically. The claimants should also have appreciated that their claims may have been limited by the maximum liability cap (as they ultimately were).
As a result, and even though the claimants were not unreasonable in rejecting the offer, their costs were reduced by 12.5% because of the way they handled it. This should be a warning to insureds that, irrespective of the merits of a defendant offer succeeding on a costs argument, there is a duty on all parties to seek to resolve their dispute and an insured should not simply ignore an insurer's settlement offer.
Whilst an amicable resolution to a claim is the ideal result which should be aimed for, where such resolution is not possible, the deployment of written settlement offers on a "without prejudice save as to costs" basis is a very useful tool to try and mitigate the risk of adverse costs liability after trial.
The suitability of the type of settlement offer to be selected will depend on the nature of the dispute, the parties' costs liability up to the point at which the settlement offer is made and the relevance of non-monetary considerations.
However, English case law, including the recent case of Zagora v Zurich, shows that the Court will look closely at whether an offer is a genuine attempt to settle, whether the terms of the offer are reasonable and the parties' broader conduct before deciding whether to disrupt the "loser pays" principle.
In particular, even where an offer is not deemed to be a reasonable offer, another party can still be penalised for not countering that offer. Similarly, an offeror should seek to insist on onerous and ancillary conditions if they are aiming for costs protection as these could be deemed to be unreasonable. It remains the case that the highest degree of certainty in the consequences of a settlement offer will usually be achieved by using the vehicle of Part 36 but even Part 36 does not come with a guarantee.
However, with the increasing levels of costs associated with energy insurance disputes, this is an area which parties to such disputes must become more familiar.
 PROMET ENGINEERING (SINGAPORE) PTE LTD. v. STURGE AND OTHERS (The “NUKILA”).  1 Lloyd's Rep. 85
 SBM v Zurich (and others)
  3 All ER 333 (EWCA)