Costs orders against non-party insurers are not common in Australia. However, the English authorities highlight the risk of direct cost orders against insurers whose insureds cannot satisfy a successful claimant's costs. Plymouth & South West Co-Operative Society Ltd v Architecture Structure & Management Ltd1 demonstrates that insurers may not be protected by the fact that the policy limit of indemnity has been exhausted.
The plaintiff in Plymouth sued the defendant for negligent architectural services. The defendant insured had ceased trading and was facing liquidation. The insured's professional indemnity insurers defended the plaintiff's claim. The plaintiff succeeded and was awarded damages of ₤2.07 million plus costs of around ₤1 million.
The insured's professional indemnity policy was subject to a ₤2 million limit of liability. Insurers paid out the full limit of liability which effectively left the insured responsible for the plaintiff's costs. With the insured declared insolvent following judgment the plaintiff sought an order that insurers pay its costs.
Insurers were held liable for the plaintiff's costs on the basis that:
- insurers had decided to defend the claim in an attempt to limit their own liability;
- insurers had funded and conducted the unsuccessful
- insurers had fought the claim exclusively to defend their own interests;
- the plaintiff had incurred and increased its costs in response to this defence; and
- the defence had failed entirely.
The Position In Australia
Plymouth is one decision in a line of English cases in which non-party insurers have been held liable for costs2. However, applications for costs orders against non-party insurers are rare in Australia despite Australian courts having similar discretionary powers to order costs3.
The significance of orders of this nature was acknowledged by the Victorian Supreme Court in Akedian Co Ltd v Royal Insurance Australia Ltd4. Akedian successfully sued its insurance broker for negligence in placing certain insurance. The broker's defence was conducted by its professional indemnity insurer. After obtaining judgment Akedian sought orders that the insurer be jointly and severally liable for Akedian's costs. Although the court did not ultimately rule on the application, Byrne J was prepared to entertain the application but cautioned that the "question of the liability of the underwriter to pay costs in this case is a difficult one and...a decision on it will be of considerable significance generally".
Plymouth should trigger warning bells for professional indemnity insurers, and liability insurers generally, in Australia. This is because Australian courts may well ultimately be guided by the English decisions.
Insurers in New South Wales will be pleased to hear that the Uniform Civil Procedure Rules5 restrict the courts' discretion to order costs against non-parties to circumstances where a non-party insurer's conduct amounts to an abuse of process or contempt of court. The courts have recognised that "establishing an abuse of process...is a relatively difficult obstacle for a party wishing to obtain costs against a non-party to overcome"6.
Nevertheless, all insurers should bear the Plymouth decision in mind when defending proceedings on behalf of an insured which might ultimately not be able to satisfy an adverse costs order, even where the policy limit of indemnity has been exhausted.
1  All ER (D) 248 (Dec)
2 see also Chapman Ltd v Christopher  1 WLR 12
3 See for example section 24 of the Victorian Supreme Court Act 1986 and section 98 of the Civil Procedure Act 2005 (NSW)
4  1 VR 80
5 Rule 42.3(2)(c)
6 per Ipp JA in Project 28 Pty Ltd v Tim Barr Pty Ltd &Ors  NSWCA 240
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.