Related author: Fraser Wylie, Trainee Solicitor
The Supreme Court's judgement in the closely-watched case of Travelers Insurance Company Ltd v XYZ1 , which set aside a non-party costs order against a liability insurer, will be welcomed by many, as it provides insight into, and increased certainty around, the principles governing when a non-party costs order might be made pursuant to the court's broad jurisdiction under section 51 of the Senior Courts Act 1981. While this arises in the context of insurance, and consequently will be of particular interest to commercial insurers, the principles laid out by Lord Briggs are potentially of far wider significance and application to those with a financial interest in any litigation.
The judgment is particularly pertinent at a time when collective proceedings, often with liability insurers involved to some degree, are increasingly prevalent. The central question to be borne in mind by liability insurers funding the defence of such actions, in light of Travelers, will be whether they are pursuing a "legitimate interest" as opposed to "intermeddling" in uninsured elements of the group litigation.
In April 2012 a Group Litigation Order ("GLO") was granted by Mr Justice Williams in respect of approximately 1,000 claims regarding defective silicone implants used in breast surgery. 636 of the claims subject to the GLO were brought against a single defendant, Transform Medical Group (CS) Ltd ("Transform"), which operated a medical clinic supplying and fitting the implants.
Travelers Insurance Co Ltd ("Travelers") provided product liability insurance to Transform, which covered liability for bodily damage, on an occurrence basis, during the period of insurance (31 March 2007 to 30 March 2011). Of the claims against Transform, only 197 were covered by the insurance policy, on the basis that the claimant had suffered injury during the period of insurance (the "Insured Claims"). The remaining 426 claimants were ultimately determined either not to have suffered injury (described as the "worried well"), or had suffered injury outside of the policy period (together the "Uninsured Claims").
Four "test claims" were identified in respect of which the litigation was fast-tracked in the interest of obtaining an early determination in respect of which common issues could then be applied to the remainder of the claimants. Coincidently (as the details of the insurance coverage were not at the time known to the court or claimants), the test claims included two Insured Claims and two Uninsured Claims. The GLO provided that the costs associated with issues common to both the Insured Claims and the Uninsured Claims should be borne on a several-only basis (i.e. each claimant was only liable for their own costs, not those of the group). Details of Transform's insurance cover and its limitations in respect of the Uninsured Claims were voluntarily disclosed to the claimants in June 2014, by which time it was clear that Transform had no money to pay compensation or costs in respect of those Uninsured Claims. The relevant claimants continued to pursue the Uninsured Claims pursuant to the GLO, however, largely in the hope of obtaining a section 51 non-party costs order against Travelers if their claims were successful overall.
Travelers, which was funding all of Transform's defence costs, notwithstanding the fact that Transform was defending two Uninsured Claims, took control of the defence of the litigation, as it was contractually entitled to do under the policy.
The Insured Claims were settled at a mediation in June 2015, by which time Transform was in administration. Following that settlement, Travelers' obligation to fund the defence ceased. Subsequently, the claimants in the two Uninsured Claims were awarded summary judgement in May 2016, with the other Uninsured Claims having been determined in the claimants' favour by default judgement earlier that year.
Thereafter, the claimants in the Uninsured Claims made an application for a non-party costs order against Travelers, in respect of which Lady Justice Thirlwall ruled in early 2017, granting the order. Addressing what she considered to be the general principles relating to non-party costs orders, Thirlwall LJ noted the key considerations of (a) whether the case was exceptional and (b) whether the making of a non-party costs order would accord with fairness and justice. Partly on the basis of her view that the Uninsured Claims and the Insured Claims were wholly separate and distinct, Thirlwall LJ considered that Travelers had no business involving itself in the Uninsured Claims. She was also strongly influenced by her conclusion that, had the limitations of the cover provided by Travelers been disclosed at an earlier stage, the claimants would not have pursued the Uninsured Claims and incurred the associated costs. Furthermore, there was an "asymmetry" or lack of reciprocity in respect of costs risk as between Travelers and the claimants in the Uninsured Claims; Travelers was not at risk of having to pay the claimants' costs if the Uninsured Claims were successful, whereas those claimants were at risk of having to pay Travelers' costs if Travelers prevailed.
The Court of Appeal dismissed Travelers' appeal of the first instance non-party costs order, stating that the twin issues of justice and exceptionality had been correctly applied. The Court was less convinced by the proposition that the Insured Claims and Uninsured Claims were unrelated, based on the obligation on Travelers under the policy to fund the defence of the test claims. However, the Court placed greater emphasis on the asymmetry of costs risk, which the Court considered satisfied the necessary thresholds for exceptionality and justice. The Court of Appeal agreed with Thirlwall LJ's analysis. Travelers appealed again.
Applicable points of law
In reversing the decisions of both the High Court and the Court of Appeal, the Supreme Court reviewed the emerging case law concerning non-party costs orders pursuant to section 51 of the Senior Courts Act, and confirmed certain principles of law that should be used as guidance in such cases. Lord Briggs considered that exceptionality was not a useful test and stated that "a loose requirement for exceptionality was an insufficient protection from exposure to a particular judge's after the event perception of the just result"2 . Summarising the points of law, Lord Briggs noted that insurers should consider the following principles:
- There are two bases on which the court might order non-party costs, the "real defendant" basis and the "intermeddling" basis. Broadly speaking, an insurer will be the "real defendant" when it takes over the conduct of the defence of a claim covered by the insurance policy, whereas the insurer will be "intermeddling" where, for example, some part of the claim lies outside of the insurance coverage (i.e. in defence of wholly uninsured claims), and the insurer involves itself in that claim.
- In making an order on a "real defendant" basis, the Courts will apply the principles from TGA Chapman Ltd v Christopher3 ("Chapman principles"), namely that (1) the insurer determines that the claim would be fought, (2) the insurer funds the defence, (3) the insurer conducts the defence, (4) the insurers fought the claim exclusively to defend their own interest, and (5) the defence failed in its entirety.
- In making an order on an "intermeddling" basis, the Chapman principles will be of little assistance. Instead, the Court will be required to give proper application of the principles of maintenance and champerty, requiring the non-party to have a justifiable and legitimate interest in being involved in the litigation. In addition to demonstrating illegitimate involvement, the intermeddling should also be shown to have caused the claimant's incurred costs in order to make an order on this basis.
- Causation is an important element to making of a non-party costs order, if the costs would have been incurred in any event, it is unlikely that a section 51 order ought to be made.
- Where there is a close connection between insured claims and uninsured claims, there may be some legitimate interest if the insurer can justify its involvement. Such a justification will very likely arise in cases where an insured and uninsured claims are tried together in a single litigation, as the insurer will typically be an involuntary rather than voluntary funder of that litigation.
- The non-disclosure of the limits of the cover of an insurance policy is currently legitimate as a matter of law and therefore unlikely to amount to illegitimate conduct.
- Asymmetry of costs risk as between an uninsured claimant and a defendant's insurer alone is unlikely to be a basis for making a non-party costs order. Any such asymmetry would have to be a result of illegitimate conduct on the part of the insurer, not a result of other factors to meet the threshold of illegitimacy.
As a result, Travelers' appeal was allowed on the following bases:
- The analysis of whether a non-party costs order should be made in this matter was based on an "intermeddling" basis of claim (as opposed to any notion of exceptionalism). The "real defendant" basis was not appropriate in this circumstance.
- The non-disclosure of the insurance policy to the claimants, while it had causative effect, did not amount to unjustified meddling as it was a legitimate and supportable legal position for the defendant to have taken.
- The insurer's involvement in the decision regarding the settlement offer and admission of liability to the uninsured claimants had no causative effect on their decision to continue to pursue litigation. The drop hands offer made would have resulted in each party paying its own costs and the claimants, who knew of their uninsured position by this time, had decided to continue as members of the group litigation for the purpose of recovering those costs pursuant to Section 51 of the Senior Courts Act.
Insurers should take comfort in this decision, reducing, as it does, the potential for non-party costs order applications under Section 51 in circumstances where the defence is being maintained for legitimate reasons. However, it would be incumbent upon insurers to make sure that they are clear in their own minds as to whether there is in fact a legitimate interest and what that interest may be. Furthermore, while this decision will be of particular interest to insurers, the principles applied in Lord Brigg's reasoning will have wider application and may also be relevant to litigation funders, receivers or any party with a financial interest in litigation.
Originally published November 19 2019
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2019. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.