In this case the Court of Appeal held that a judge had been entitled to make a non-party costs under s.51(3) of the Senior Courts Act 1981 against insurers which had (so the court held) determined that a case would be fought by their insured against a third party, exclusively to defend the Insurers’ own interests.
The substantive proceedings in this case related to the contamination of certain residential properties caused by diesel oil escaping from an adjacent garage. As originally pleaded, the claim was that the contamination was the result of a spillage from an above-ground tank. If made out, liability for such a claim would have been within the cover under the insured’s liability policy with the insurers, which excluded liability for losses caused by pollution or contamination “other than caused by a sudden identifiable unintended and unexpected incident which occurs in its entirety at a specific time and place during a period of insurance.” On this basis, insurers, despite denying that the contamination was in fact caused by the above-ground spillage, nonetheless appointed solicitors to defend the claim on behalf of the insured.
Having obtained an expert report on the cause of the contamination, the claimants subsequently amended their case to include an alternative plea that the contamination had been caused by the gradual escape of diesel oil from underground tanks on the Insured’s property. Liability for such a claim was, in view of the exclusion described above, not within the scope of the Insured’s policy with the Insurers. The original claim based on a sudden spillage from an overground tank remained intact.
Shortly after service of the amended claim, the Claimants’ solicitors were informed that insurers had“confirmed that the policy of insurance does not respond to the claims” and that the solicitors appointed by insurers were no longer instructed to act on behalf of the insured.
The defence of the claims was abandoned by the insured, damages were assessed and judgment was entered for a total sum of £191,654, with the insured being ordered to pay all of the claimants’ costs. In the meantime, the insured had gone into creditors’ voluntary winding-up.
The insurers were subsequently ordered to pay the claimants’ costs both in exercise of the court’s discretion to order costs to be paid by a non-party pursuant to s.51(3) of the Senior Courts Act 1981, and under the Third Party (Rights Against Insurers) Act 1930.
In considering an appeal by the Insurers against this order, the Court of Appeal noted that, as per TGA Chapman Ltd v Christopher2, the following features justified the “exceptional course” of making a costs order against insurers:
- The insurers determined that the claim would be fought.
- The insurers funded the defence of the claim.
- The insurers had the conduct of the litigation.
- The insurers fought the claim exclusively to defend their own interests.
- The defence failed in its entirety.
The Court of Appeal determined that the crucial question in this case was whether the insurers were acting“exclusively or predominantly in their own interests” in defending the claims. The Court of Appeal held that they were so acting because as the insurers knew from the start, the Insured would be unable to meet any award of damages if it was not covered under the policy. The purpose of the insurers in defending the claim was therefore not to protect the insured. The only reason for the conduct of the defence and the Insurers’ only interest in it was to avoid a claim falling within the cover provided by the policy. In addition:
- Had the claimants abandoned their claim based upon the spillage from an above-ground tank, the insurers would have had a good argument that they had in substance funded the successful defence of such a claim. However, the claimants had not abandoned that claim.
- There was no foundation in the evidence for the Insurers’ suggestion that, if they had not funded the defence, the insured would have done so.
- The insurers’ suggestion that the judge should have determined the issue of fact as to whether the contamination was caused by the above-ground tank spillage was wholly unrealistic, there being insufficient evidence upon which this issue could have been determined.
Insurers were therefore unable to demonstrate that the judge’s exercise of his discretion was flawed in any way. On the contrary, there was ample material to justify the order made.
The Court of Appeal also held that, on a construction of the policy, liability for the claimants’ costs was within the cover, meaning that the claim against the insurers under the Third Party (Rights Against Insurers) Act 1930 (which gives a third party certain rights to claim directly against an insurer in circumstances in which the insured is insolvent) also succeeded.
The case is an important reminder to insurers of their potential exposure to third party costs orders in circumstances in which they determine that claims made by third parties should be defended. As the reasoning described above illustrates, a crucial factor will be whether or not the decision to defend the claim has been taken purely in the insurers’ own interests. This potential exposure is accordingly one of the factors that insurers must have in mind in deciding whether or not to defend a claim on behalf of an insured. The case suggests that an important factor may be the question of whether or not the insurers are protecting the insured from any exposure, or are simply acting to prevent a claim under their policy.