The UK Supreme Court has, in a landmark judgment, laid down the precise criteria to be applied by a court in determining whether a costs order should be made against a liability insurer who has defended the assured against a claim.
The facts of XYZ were atypical. The assured, TMS, supplied breast implants. The implants had a tendency to rupture and many did so. 623 claims were brought against TMS and a Group Litigation Order was made by the Court on the basis that each participant would be responsible for 1/623 of the common costs. TMS had product liability insurance from Travelers covering liability for bodily injury occurring in the period 31 March 2007 to 30 March 2011.
Four sample cases were selected for early determination of issues of liability and remedies, and the remainder were stayed. By the middle of 2013 TMS had encountered financial difficulties, but its insurance arrangements were not disclosed until May 2014. At that point it became apparent that only 197 of the claimants fell within the policy coverage: of the others, some had suffered injury at times when there was no cover in place, and others had not suffered injury but feared doing so (the "worried well"). Fortuitously, it proved to be the case that: Claimants A and B were amongst the 197 whose claims against Transform fell within the insurance period; Claimant C's injuries occurred at a later date; and Claimant D was a "worried well" claimant.
Substantial common costs had been incurred by that time, and the uninsured claimants continued the proceedings in the belief that if they won then they would secure a third party costs order against Travelers. A settlement was reached in June 2015, and the 197 insured claims, plus costs, were paid. The present action was brought by the uninsured claimants against Travelers for a third party costs order.
In June 2015 the 197 claims falling within the policy were settled and paid, but the remaining 426 claims were not paid. The costs of the 197 successful claims were also paid, but the costs of the other 426 claimants were left unpaid other than to the limited extent that they were common costs incurred along with the 197 successful claimants. Transform went into administration and the 426 claimants obtained judgment in March 2016. On those facts the question was whether Travelers should pay the costs of the uninsured claimants.
The Supreme Court
The Supreme Court dismissed the claim. In so doing, it laid down the following criteria.
- First, a costs order would be made only where the insurer had either become the real defendant in relation to an insured claim or had intermeddled in an uninsured claim.
- Secondly, an insurer would have become the real defendant against whom an order could be made if: (1) the insurer determined that the claim would be fought; (2) the insurer funded the defence of the claim; (3) the insurer had the conduct of the litigation; (4) the insurer fought the claim exclusively to defend their interests; (5) and the defence failed in its entirety.
- Thirdly, it was necessary for the applicant to show a causative link between the conduct of the insurer and the incurring by the claimant of the costs sought to be recovered. The Supreme Court has on this reasoning thus confirmed the pre-existing law on the point. Lord Sumption, who agreed with his brethren on the principles, took a much stricter view of what was required to satisfy them, and on his approach it would be a very rare case where an insurer would have crossed the line into becoming the real defendant.
The criteria were applicable where the claims were insured. The Supreme Court held that the position was different where there were both insured and uninsured claims, and common costs were incurred by the claimants.
The Supreme Court held that the insurer would more readily be found to be intermeddling, although such intermeddling would be justified where there was a close connection between the insured and uninsured claims and decisions in respect of the former impacted on the latter. The present case was of the latter type, and the Supreme Court was satisfied that Travelers had done nothing to justify a costs order against it. There was a very close connection between the insured and uninsured claims, raising common issues to be tried together in the test cases in group litigation. Travelers had had very limited involvement in the conduct of the insured claims. Further, there was no causal link between Traveler's conduct and the costs incurred by the claimants: there was no duty on Travelers to disclose the existence or nature of insurance coverage, and the uninsured claimants had commenced proceedings independently of any knowledge of insurance.
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