The Court of Appeal has today handed down a judgment in the case of Legg & Ors v. Aviva [2016] EWCA Civ 97. The case concerned the scope and application of the rule relating to a party’s ability to secure an adverse costs order against a third party who funded the unsuccessful claim by a claimant /defence of a defendant. Additionally it concerned the proper interpretation of a “costs” term in the Defendant’s “Public Liability” policy. The successful Claimants/Respondents were represented by John Ross QC and Geoffrey Weddell

Proceedings for damages for negligence and nuisance, and under the rule in Rylands v Fletcher, brought by adjoining householders against a garage company in November 2008 were defended by its public liability insurers until September 2010. The insurers then ceased to conduct the defence, and judgment in default of defence was entered against the garage company. It transpired that the garage company was, at all material times, insolvent and unable to meet either any liability under the judgment or the costs order made against it. The claimants applied for an order that the insurers, as third party funders, pay their costs, which the insurers resisted. The District Judge ordered the insurers to pay the claimants’ costs of the proceedings.

The judge made the order on two separate grounds. First, he made it in exercise of the court’s discretion to order costs to be paid by a non-party, pursuant to section 51(3) of the Senior Courts Act 1981. Secondly, he made it on the basis that the insurers were liable under the policy to indemnify the garage company against its liability for costs to the claimants and, as a result of the liquidation of the garage company, the claimant succeeded to the garage company’s rights under the Third Party (Rights Against Insurers) Act 1930. On this appeal, the insurers contend that the order should not have been made on either basis.

Section 51 of the 1981 Act: The relevant authorities were reviewed by this court in Palmer v Palmer [2008] EWCA Civ 46; [2008] Lloyds Rep IR 535. Rimer LJ, with whom Pill and Sedley LJJ agreed, said that a critical issue was whether the insurers were “motivated either exclusively or at least predominantly, by a consideration of its own interest in the manner in which it conducted the defence of the litigation.”

Taking first the critical question whether the insurers were acting exclusively or predominantly in their own interests in defending the claims, the Court of Appeal considered that there was ample material on which the judge could conclude that they were. As the insurers knew from the start of the proceedings, Sterte would be unable to meet any award of damages if it was not covered by the policy. The purpose of the insurers in defending the claim as originally pleaded was not to protect Sterte against an award of damages that it would otherwise be unable to meet, but was to seek to defeat a claim which, as pleaded, fell within the narrow class of pollution incidents covered by the policy. The insurers had no interest in defending the claim if and to the extent that it was based on any other polluting causes, as they made clear when they withdrew their support of the defence in September 2010. There was no doubt that the claimants’ property had been damaged by the presence of diesel oil and no real grounds for doubting that it was caused by leakages from Sterte’s property. Sterte asserted no grounds for defending the claims against it. The only reason for the conduct of the defence by the insurers, and their only interest in it, was to avoid a claim falling within the cover provided by the policy.

The insurers would have had a good answer to the claim for a non-party costs order against them if, following the Firth report, the claimants had in fact abandoned their claim based on the 1997 incident. In substance, then, the insurers would have funded the successful defence of such claim. But the claimants did not abandon that claim. The court referred to the way in which the particulars of claim in the action brought by Mr and Mrs Legg were amended and the way in which the particulars of claim in the other action were framed. Both specifically plead the 1997 incident. DDJ Baehr had refused to strike out the claim based solely on that incident precisely because the claimants might be in a position to establish that it had caused loss within the limitation period. Neither in form nor in substance was this claim abandoned.

The Court held that there was no foundation in the evidence for the insurers’ assertion that if they had not funded the defence, Sterte would have done so. The only reasonable inference from the precarious financial position of Sterte and from its failure to defend the claims once the insurers withdrew their support is that, but for the insurers’ support, Sterte would not have defended the claims and the claimants would have avoided the bulk of the costs they were forced to incur. There could be no serious doubt that the conduct of the defence by the insurers was causative of those costs.

In order to challenge successfully the exercise by the judge of his discretion to make an order for costs against the insurers as a non-party, the insurers had to show that the judge had regard to irrelevant considerations or failed to take into account relevant considerations or reached a decision which was not justified on the material before him, having regard to the breadth of the discretion to be exercised by him. In the Court of Appeal’s judgment, the insurers are unable to demonstrate that the judge’s exercise of his discretion was flawed in any way. On the contrary, there was in the judgment of the Court of Appeal ample material to justify the order which he made.

Policy Construction: The Court stated that, given that an insured will usually wish to be covered