UK: Subrogated Claims - Costs Orders Against Insurers and Orders for Disclosure

Last Updated: 28 October 2010
Article by Anthony Menzies

Owners of the Dredger "KAMAL XXVI" and the Barge "KAMAL XXIV" v. Catlin (Five) Ltd [2010]

Under section 51(3) of the Senior Courts Act 1981, the English High Court has the power to determine by whom, and to what extent, the costs of the litigation are to be paid. Typically, the requirement is simply that the costs of the wining litigant be paid by the loser, but not always. What happens, for example, where the loser is insolvent, or perhaps a shell company with no assets? In many cases, the nominal litigant will in fact be supported in the litigation by a third party interest, most obviously in the case of subrogated actions pursued by insurers. In such cases where third parties have maintained the litigation, they can be made subject to a costs order under section 51(3), where it is considered "just and equitable" to do so, even though they are not themselves a party to the litigation.

In the present case, the Respondent insurers (Catlin) had paid a claim to their assureds, the owners of the dredger KAMAL XVI and the barge KAMAL IV (together, "Kamal"), following a collision with the vessel ARIEL, owned by the Claimants. Having indemnified Kamal, Catlin became subrogated to the claim against Ariel, and jointly with their assured they instructed solicitors, Ince & Co, to pursue the recovery, both for their subrogated interest and for the uninsured losses of Kamal.

As is common in collision cases, the litigation was split into a trial of liability and a separate trial as to quantum. In a judgment handed down in 2007, the Commercial Court concluded that ARIEL was the vessel at fault for the collision, and hence liable in principle for the claim. Accordingly, Ariel was ordered to pay the litigation costs of Kamal to date.

Matters then proceeded to quantum, which came on for trial in the Commercial Court in January 2009. From Kamal's point of view, the trial did not go well. Having found their factual evidence to be entirely unreliable, and their expert witness in breach of his duties to the court, the Judge dismissed almost the entirety of Kamal's alleged claim for damage arising from the collision. At a separate hearing, he went on to determine that Kamal's claim was indeed fraudulent from the outset, containing fraudulent statements as to the extent of the damage and concealing other matters highly relevant to the litigation. Accordingly, he reversed the earlier costs order made in favour of Kamal, following the liability trial, and ordered that the costs of the litigation be paid instead by Kamal to Ariel, on an indemnity basis.

With a costs order in its favour, Ariel then sought to pursue Catlin for the said costs, or at any rate for such of the costs award as remained unpaid by Kamal. In the course of that application, they asked the court to order disclosure of various documents probative of Catlin's participation in the action, and in particular their involvement in the instructions given to Ince & Co. The requested documents encompassed correspondence with solicitors and counsel, including reports of advice to insurers from Ince & Co.

It was common ground between the parties that, upon a section 51(3) application against insurers, the following features may justify a costs order against insurers:

  • if the insurers determined that the claim would be fought;
  • if the insurers funded the litigation;
  • if the insurers had the conduct of the litigation;
  • if the insurers fought the claim exclusively, or in the alternative, if they fought it predominantly to defend their own interests;
  • if the litigation failed in its entirety.

Relying upon the judgment of Blake J. in Thomas v. Berkhamsted Collegiate School [2009], Ariel argued that disclosure of the relevant documentation was necessary in order to determine many of the above points, and generally to assist the court in determining whether it was "fair and equitable" to award costs against Catlin. Moreover, Ariel contended positively that Catlin had failed to investigate the claim properly, or to give proper consideration to its merits before proceeding. Again, the documentation sought was said to be necessary to determine this question.

For its part, Catlin described itself as merely the innocent victim of its assured's fraud, and it rejected "the inference" that it should have been suspicious of the claim. As to the Ince & Co reports, Catlin argued that these were subject to privilege, and ought not to be disclosed. While it accepted that claims of privilege could be defeated in cases of fraud, it contended that the privilege in this case belonged to Catlin (not Kamal) and so was not tainted by the latter's fraud.

The court rejected Catlin's arguments and found for Ariel. There was at least an arguable case, said the court, that Catlin could and should have been alive to the fraud, and this argument could only be resolved by disclosure of the documents sought. As to privilege, while it was true in principle that Catlin enjoyed privilege, independent of that of its assured, the reality was that the insurers and the solicitors were together being used as the mechanism by which Kamal carried out the fraud. Consequently, the fraud exception applied to all of the documents, and hence the protection of privilege was not available to the insurers or their solicitors.

Result: Judgment for the Applicant, Ariel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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