Court of Appeal upholds payment of costs by non-party insurer

In Travelers Insurance Company Ltd v XYZ [2018] EWCA Civ 1099, the Court of Appeal upheld an order for costs against an unsuccessful Defendant’s insurer, under section 51 of the Senior Courts Act 1981. Even though the claims in issue were uninsured, the insurer had paid the costs of the defence and influenced the conduct of the claims. Further, the insurer had effectively dissuaded the insured from disclosing its lack of insurance to the Claimants, which prolonged the Claimants’ involvement in the litigation.

Background

In 2012, a number of claims were brought under a Group Litigation Order (GLO) in respect of defective breast implants. About 1,000 claimants joined the GLO. 623 of those claims were brought against Transform Medical Group (CS) Ltd (Transform), a private hospital which had supplied the defective breast implants.

Transform had a product liability policy in place with Travelers Insurance Co Ltd (Travelers) in relation to 197 claims made against it, but was uninsured in respect of the remaining 426 claims.

In December 2013, the Chief Executive Officer of Transform provided a witness statement, which satisfied the Court that Transform had confirmed that it had insurance adequate to fund its participation in litigation.

In April 2014, Transform’s insurance position was revealed to the Claimants’ solicitors, by which time expert evidence showed that it was likely that the Claimants would be successful against Transform.

In June 2015 Transform entered insolvent administration and in August 2015, the covered claims were settled, with Travelers paying both damages and an agreed portion of common costs referable to the covered claims. The action in respect of the uninsured claims led to judgment in default being entered in May 2016. Transform was insolvent and unable to pay damages or costs. The Claimants therefore sought to recover the balance of their common costs (ie costs common to the insured and uninsured claims), from Travelers.

First instance decision

In January 2017, Lady Justice Thirwall (as she by then was) who had managed the GLO in the High Court, made an order that Travelers pay the Claimants’ costs under section 51 of the Senior Courts Act 1981. Amongst other things, section 51 provides that the costs of and incidental to all proceedings in the High Court shall be in the discretion of the Court, and the Court has full power to determine by whom and to what extent the costs are to be paid.

In making the order that Travelers pay the Claimants’ costs, even though they did not provide insurance in respect of such Claimants, Thirwall LJ emphasised the following facts:

• Litigation funding: Travelers funded the unsuccessful defence of the 426 claims.
• Prolonged proceedings: Thirwall LJ was satisfied that, but for Travelers’ involvement: (i) Transform would have disclosed its insurance position to the Claimants at an early stage; and (ii) the claims would not have been brought (or would have been discontinued), and therefore the costs in issue would not have been incurred by the uninsured Claimants.
• Reciprocity: had the Claimants failed in their claims, they would have been liable for Travelers’ costs. Travelers had the potential to receive the benefits of a costs award in its favour, but would have taken no risk itself.

Court of Appeal decision

Travelers appealed the High Court’s decision. It argued that, in order to establish liability under section 51, it must be established that the insurer controlled the litigation in its own interest, and without paying appropriate regard to any inconsistent or contrary interest of its insured, such that the insurer can be said to be the “real party” to the litigation.

Travelers argued that liability under section 51 could not be established in this case because it had not acted contrary to the interests of the insured. In defending the issues common to both the insured and uninsured, Transform and Travelers gave a joint retainer to the solicitors on the record as their joint solicitors; and Transform was closely involved in all the decision-making. In Travelers’ submission, the operation of the joint retainer appropriately balanced the interests of insured and the insurer, such that that it could not be said that Travelers had overstepped the mark.Therefore, Travelers argued, it was entitled to insist on its rights under the policy, which did not encompass liability for the costs of the uninsured claims.

Lord Justice Lewison in the Court of Appeal upheld the decision of the High Court. In his judgment Lewison LJ reviewed the line of authorities following TGA Chapman v Christopher [1998] 1 WLR 12 which consider the circumstances in which the court will exercise its broad discretion under section 51 to order costs against a non-party insurer that has funded the defence of litigation. It was held that the court has a wide discretion in such circumstances and to the extent that Citibank NA v Excess Insurance Co Ltd [1999] 1 Lloyd’s Rep IR 122 purported to lay down a series of conditions before an order could be made, it was wrongly decided.

Lewison LJ found that Thirwall LJ had directed herself to the correct question, that is, whether it was just to make the order under section 51, which required consideration of whether the circumstances of the present case were exceptional. In this context exceptional is to be judged by reference to the range of cases which come before the courts; not by reference to the expectations of liability insurers. The Court would also regard as important the principle of reciprocity, that is the principle that if a person funds and stands to benefit from proceedings justice requires that if they fail they should pay the successful party’s costs.

Travelers sought to challenge Thirwall LJ’s finding that, but for Travelers’ involvement, Transform would have disclosed its insurance position to the Claimants at an early stage. Travelers submitted evidence showing that the advice given to Transform by the solicitors on the joint retainer was given in Transform’s interest and that the decision not to reveal that lack of insurance was Transform’s own decision. Although Lewison LJ agreed with Travelers’ interpretation of the evidence, he nevertheless found that:

“Travelers’ desire not to reveal the details of the insurance policy inevitably affected the advisers’ approach to the uninsured claims; and Travelers’ interests were in play even when the uninsured claims were being considered”.

Lewison LJ agreed that this case was exceptional for the reasons emphasised by Thirwall LJ at first instance, accepting that she had directed herself to the correct question, namely whether it was just to make the order and had made a value judgment on that question which as trial judge she was entitled to make.

Comment

Although the facts of this case were characterised as unique relative to the previous authorities considering whether a non-party insurer should be ordered to pay costs under section 51, the judgment will serve as something of a warning to liability insurers. The Court of Appeal’s judgment makes plain that the court’s discretion under section 51 is a broad one and that previous cases serve primarily to illustrate when, in the event of similar facts, it would not be wrong for the court to exercise discretion in a similar way. However, even similar facts would not preclude another judge reasonably exercising the discretion differently and the previous cases do not lay down rules or principles which should be followed inflexibly.

Liability insurers will doubtless be somewhat concerned with the decision but nevertheless take heed of the Court of Appeal’s focus on the reciprocity of costs orders. If insurers conduct the defence expecting to benefit from a successful defence and recover costs from the unsuccessful claimant, they can also expect the court to focus attention on them where defendant insured is impecunious and cannot meet the judgment or costs orders.