Kerry Underwood

NON-PARTY COSTS ORDERS: SUPREME COURT HOLDS INSURERS WILL RARELY BE LIABLE

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The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

These principles, and the whole issue of Qualified One-Way Costs Shifting, is dealt with in my book – Qualified One-Way Costs Shifting, Section 57 and Set-Off – Available from me here for £15.

 

In

Travelers Insurance Company Ltd v XYZ [2019] UKSC 48 (30 October 2019)

the Supreme Court held that product liability insurers were not liable under section 51 of the Senior Courts Act 1981 to pay the costs of claimants, who had unknowingly proceeded against an uninsured defendant.

The Supreme Court overturned the Court of Appeal decision in [2018] EWCA Civ 1099 , which I dealt with in my blog –

NON-PARTY COSTS ORDERS .

The Supreme Court also held that generally there had to be a causative link between the conduct of the non-party and the costs which are being sought against that non-party.

This decision, both in its tone and content, casts doubt on the accuracy of the recent decision in

Kazakhstan Kagazy Plc & Ors v Zhunus & Ors [2019] EWHC 2630 (Comm) (08 October 2019)

which I dealt with in my blog –

NON-PARTY COSTS ORDER AGAINST FAMILY MEMBERS: A VERY STRANGE DECISION ,

which I had in any event described as a poor decision which was likely to be distinguished by any other court.

Here 623 claimants sued a medical clinic in relation to defective silicone breast implants and Travelers Insurance Company Ltd funded the whole of the defendant’s defence and disclosed late in the day that the defendant was only insured in relation to 197 of the claimants.

The trial court made a section 51 costs order against Travelers in relation to all of the claimants, including those not insured by them, and that decision was upheld by the Court of Appeal, but overturned by the Supreme Court here.

The Supreme Court held that the issue of whether the insurer has either become the real defendant in relation to an insured claim, or has intermeddled in an uninsured claim, is fundamental to the court’s exercise of its section 51 jurisdiction in insurance cases.

Here, there was a very close connection between the insured and uninsured claims, raising common issues to be tried together in this group litigation.

Consequently, the legitimate interests of the insurer justified some involvement in the decision making and funding of the defence of the uninsured claim.

The control which insurers exercise over their insured’s defence arises from a pre-existing contractual entitlement and not from a freely made decision to intermeddle.

They are involuntary funders of litigation as they are typically required by the policy to fund the defence and, as a result, have the right to exercise substantial control over the conduct of the defence.

The Supreme Court also said that causation remains “an important element in what an applicant under section 51 has to prove, namely a causative link between the particular conduct of the non-party relied upon and the incurring by the claimant of the costs sought to be recovered under section 51. If all those costs would have been incurred in any event, it is unlikely that a section 51 order ought to be made.” (Paragraph 80).

The Supreme Court also commented on the so called “exceptionality test” saying that “exceptionality can scarcely be in itself an intelligible criterion for the making of a non-party costs order”, and is of little, if any significance. (Paragraph 109).

The Supreme Court also said that asymmetry, or lack of reciprocity in costs risk, as between the uninsured claimants and the defendant’s insurer, is unlikely on its own to be a reason for the making of a non-party costs order against the insurer where, as here, the asymmetry arises because a claimant sues an uninsured and insolvent defendant and incur several-only costs liability in group litigation. (Paragraph 82).

In practice it will now be difficult to obtain a section 51 order against an insurer.

 

Below is the Supreme Court’s own Press Summary.

 

Background to The Appeal

This appeal is about who should pay the legal costs of 426 claimants who successfully sued a medical group for the supply of defective silicone breast implants. It allows the Supreme Court to review the principles concerning third-party costs orders.

623 claims were brought against Transform Medical Group (CS) Ltd (“Transform”), a medical clinic which had supplied implants manufactured by Poly Implant Prothèse (“PIP”). Transform had insurance cover with Travelers Insurance Co Ltd (“Travelers”) in relation to claims brought against it.

Travelers funded the whole of Transform’s defence. It did not disclose until a relatively late stage that a substantial number of claimants were uninsured. The insurance policy only covered the claims of 197 claimants who suffered from a rupture of their implants between 31 March 2007 and 30 March 2011. Transform was uninsured in respect of the claims of the remaining 426 claimants. The uninsured claimants are the Respondents to this appeal.

Transform entered insolvent administration half-way through the litigation. The insured claims were settled by an agreement made in August 2015 and Travelers paid an agreed proportion of the damages and costs attributable to those insured claims. This left the insured claimants in a much better position than the uninsured claimants – who had obtained a judgment but recovered no damages or costs from Transform at all.

The 426 uninsured claimants applied to the court for an order that Travelers pay their costs. Lady Justice Thirlwall, sitting in the High Court, held that Travelers should be ordered to pay them. The Court of Appeal (Lord Justice Lewison and Lord Justice Patten) reached the same conclusion for slightly different reasons. Travelers appealed to the Supreme Court.

 

Judgment

The Supreme Court unanimously allows Travelers’ appeal. Lord Briggs gives the main judgment, with which Lady Black and Lord Kitchin agree. Lord Reed and Lord Sumption each give a concurring judgment.

 

Reasons for the Judgment

The court has a general power to order non-parties to pay costs under section 51 of the Senior Courts Act 1981 [25]-[26]. In the context of liability insurance, it is important for the courts to apply clear and reasonably detailed principles so that liability insurers can understand their position. It is not enough for the courts to ask whether the case is “exceptional” because this would not provide adequate certainty [33]; [51].

Broadly speaking, the authorities reveal two approaches to deciding whether a third party should pay costs: (1) whether the third party took control of the litigation and became “the real defendant”; and (2) whether the third party engaged in “unjustified intermeddling”.

The “real defendant” test, as explained by the Court of Appeal in TGA Chapman Ltd v Christopher [1998] 1 WLR 12, provides useful guidelines for cases where insurance exists but some part of the claim (including the claim for costs) lies outside the limits of cover [48]-[53]. However, it is inappropriate in cases like this where the claims are wholly uninsured [54]. In such cases, the appropriate question is whether the insurer engaged in “unjustified intermeddling” in litigation to which it was not a party. If the insurer has acted within a framework of contractual obligation, it may be very hard to establish that it has “intermeddled” [55]-[56]; [78]. It will usually be necessary to establish a causative link between the insurer’s involvement and the claimants’ incurring of costs [65]-[67]; [80].

In this case, all the claims were pursued within a single group action by common solicitors. They involved common issues which were being tried together in four test claims (which, as it turned out, comprised two insured and two uninsured claims) [68]; [79]. Travelers had a legitimate interest in Transform’s defence of the insured claims and, consequently, in Transform’s defence of the test cases and common issues. Travelers’ involvement was the natural result of its status as an insurer and did not amount to unjustified intermeddling [69].

 

The courts below relied on a number of specific instances of Travelers’ conduct. However, none of them crossed the line into unjustified intermeddling:

 

(1) Non-disclosure of the limits of cover. Travelers’ and Transform’s solicitors advised Transform not to disclose the limits of its insurance cover. However, as the law stands, parties are not legally obliged to disclose the details of their insurance [59]. The advice about nondisclosure fairly reflected Travelers’ rights relating to the insured claims [63]-[64]; [81].

 

(2) Offers and admissions. Travelers was involved in Transform’s decisions not to make offers of settlement or admissions to the uninsured claimants [70]-[71]. If necessary, the court would conclude this involvement was justified but in any event, it did not cause the claimants to incur costs. By 2015 the uninsured claimants were determined to pursue their claims to a judgment with costs, and an offer to settle without paying their costs would have made no difference [73]-[74].

 

(3) Asymmetry of risk. The Court of Appeal was concerned by the fact that the uninsured claimants faced failing to recover their costs if they won, whereas Transform could have recovered its costs if they had failed [58]. However, this “asymmetry” was not the product of Travelers’ intervention. It resulted from the fact that Transform was insolvent and largely uninsured, and the claimants’ liability for costs was several-only (i.e. each claimant was independently liable for a small proportion of the overall costs) [61]-[62]; [82].

Therefore, the courts below were wrong to order Travelers to pay the uninsured claimants’ costs [83].

Concurring judgments of Lord Reed and Lord Sumption

Lord Reed reviews the historical position in England, Australia and New Zealand relating to third party costs orders [85]-[93]; [106]-[112] and compares this to Scotland, where the courts may order expenses against a third party who has acted as the “real master of the litigation”, and where there is no equivalent concept to “intermeddling” [94]-[103]. Lord Reed adds that the suggestion that a costs order must be “exceptional” has little, if any, significance [106]-[112].

Lord Sumption discusses the “intermeddling” and “real defendant” approaches. He suggests that cases in which an insurer has engaged in “intermeddling” are likely to be rare, and an insurer who acts in good faith in relation to insured claims should not incur liability in costs [113]-[116].

 

References in square brackets are to paragraphs in the judgment.

Written by kerryunderwood

November 5, 2019 at 7:25 am

Posted in Uncategorized

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