UK: Supreme Court Rules On Non-Party Costs Order Against Insurer

Last Updated: 11 November 2019
Article by Sam Tacey

In Travelers Insurance Co Ltd v XYZ [2019] UKSC 48, the Supreme Court considered the application of the discretion under s 51 of the Senior Courts Act 1981 to make a non-party costs order against a liability insurer, where that insurer, here Travelers Insurance Co Ltd (Travelers), was both funding and largely directing the conduct of the litigation in question.

The underlying group litigation which gave rise to the costs order in issue in this case concerned the supply of defective PIP silicone implants. One of the defendants in that action, Transform Medical Group (CS) Ltd (Transform) operated clinics which supplied and fitted these implants. Travelers provided product liability insurance to Transform for the period 31 March 2007 to 20 March 2011. The insurances in question were standard form product liability policies, which provided indemnity for costs (and costs liability) where the claims made giving rise to those costs fell within the scope of cover. The policies contained standard claims control clauses, allowing Travelers to conduct the litigation on Transform's behalf. Of the 623 claimants bringing a claim against Transform, 197 suffered injury during the period covered by the Travelers policies; the remaining 426 did not and were referred to as the "uninsured claimants".

In the underlying litigation, test cases were selected by the court involving four claimants, two of whom were insured and two of whom were not. During the litigation process, an application was made by the claimants in order to attempt to obtain details of Transform's insurance cover, due to concerns as to its solvency (and, in fact, Transform subsequently entered insolvent administration). Transform eventually voluntarily provided the claimants with this information and the uninsured claimants decided to continue with their claim against Transform with the express hope of obtaining a non-party costs order against Travelers if they were successful in the claim. Their evidence was, however, that had they known the insurance position at the outset, they would not have proceeded against Transform. In the meantime, Travelers was paying all of Transform's legal costs, as it was obliged to do under the policy and in accordance with settled law.

Subsequently the insured claims were settled, at which point Travelers ceased to fund Transform's defence. The uninsured claimants then obtained default judgment against Transform, and made s51 applications for a costs order against Travelers.

At first instance, Mrs Justice Thirlwall made a costs order against Travelers, on the basis of a number of factors including: that the uninsured claims were distinct such that Travelers had no business in defending them; that had the claimants been aware of the insurance position, they would not have proceeded against Transform in the first case and would have avoided incurring the costs to which they were now exposed; and that there was an asymmetry in the costs position as between Travelers and the uninsured claimants.

The Court of Appeal reached the same conclusion as the first instance judge, albeit for slightly different reasons. They focussed on the issue of asymmetry: the fact that if Travelers were successful in defending the action, they would have the benefit of seeking costs from all the claimants (including the uninsured claimants) but if they were unsuccessful, Travelers would have no exposure to the costs of the uninsured claimants, absent an order under s51. This exceptional circumstance, in the Court of Appeal's judgment, justified the making of a s51 order against Travelers.

The Supreme Court unanimously overturned the decisions below, holding that no costs order should be made against Travelers. Having reviewed the existing authorities on the issue (including TGA Chapman Limited v Christopher [1998] 1 WLR 12 and Citibank NA v Excess Insurance Co Ltd [1999] Lloyd's Rep IR 122), Lord Briggs made a number of general comments concerning the application of s51 to non-party liability insurers. At the outset, it was observed that cases where s51 would be of relevance would be unusual, since in the normal course, any cost award would be payable by the insurer, either indirectly through the indemnity to its policyholder, or directly in the case of the insolvency of its policyholder via the Third Parties (Rights Against Insurers) Act 2010. The test for the imposition of a costs order should, therefore, be based on something more than "exceptionality" or a set of unusual circumstances.

There were two possible bases for the imposition of a non-party cost order against insurers which could be derived from the authorities: the "intermeddling" test, which required some form of unjustified interference in a matter in which the insurer had no real interest; and the "real defendant test" which arose from the combination of the insurer's interest in the outcome of the proceedings, its contractual obligation to indemnify the defendant for its costs liability and its exercise of control over the conduct of the defence. In either case, the key issue in determining whether a non-party costs order was appropriate was likely to depend on the extent to which the insurer was conducting the defence for its own purposes, rather than in the interests of the insured.

Applying these principles to the present case, the Supreme Court held that the courts below had erred in their judgment. In the present case, where the costs being sought arose out of a claim not covered by the insurance at all (as opposed to a claim beyond the limits of cover), the correct test to be applied was the intermeddling test, which required some unjustified invention in the claims by the insurers. There was no such conduct in the present case. The close connection between uninsured claims and claims for which the insurer did provide cover was such that the legitimate interests of Travelers justified their involvement in decision making and funding of the defence of the uninsured claims without exposing Travelers to liability to pay the successful claimants' costs. The issue of asymmetry, which was heavily relied upon by the first instance judge and the Court of Appeal, was not sufficient to justify a non-party costs order and was not, in reality, the result of any conduct of the insurers, but rather of circumstance (including the insolvency of Transform and the fact that as a matter of English law, there is no requirement on defendants or their insurers to disclose details of their liability insurance).

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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