Insurers occasionally fund the defence of claims which include both insured and uninsured elements. In pursuing such cases, insurers and insureds will usually agree a split of defence costs to reflect the insured/uninsured position. The recent decision in XYZ v Travelers Insurance Company Ltd [2017] EWHC 287 (QB) serves as a warning to insurers that it may not be as simple as that - funding such litigation may come at a price for insurers in terms of exposure for claimants' costs of uninsured claims.

Facts

The claimants in group litigation alleged that several companies running private hospitals had supplied defective breast implants.

One defendant, Transform Medical Group, had the benefit of product liability cover relating to 197 claims. Insurers funded the defence and subsequent settlement of these claims, the latter based on expert evidence that the implants were not of satisfactory quality.

There were an additional 426 uninsured claims which were ultimately successful at trial, but damages and costs remained unpaid as Transform was in administration by this stage. These claimants therefore applied for a non-party costs order against insurers under section 51 of the Senior Courts Act 1981.

Non-party costs order application

The decision in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Associated Industrial Finance Pty Ltd, third party) [2004] 1 WLR 2807 summarised the position as follows: costs orders against non-parties should be regarded as exceptional and should only be granted where, in all of the circumstances, it is just to make such an order.

The following issues combined in XYZ to result in the court finding that it was just to make a costs order against insurers:

  • Insurers had taken the unusual step of funding Transform’s unsuccessful defence of the uninsured claims in circumstances where the insured claims had been settled.
  • Insurers had withheld consent to a proposed settlement of uninsured claims
  • But for the involvement of insurers, the court was satisfied that Transform would have disclosed at an earlier stage that there was no insurance cover for the uninsured claims and these claimants would not have incurred costs in pursuing the claims
  • The court took the view that these claimants would have been liable for all of insurers’ costs had they been unsuccessful in the uninsured claims against Transform. This left a situation where insurers took no risk in paying the defence costs but could have reaped a significant reward.

Comment

Whilst insurers may have good grounds for assisting/funding the defence of uninsured claims, in doing so there is a fine line they may find themselves crossing. Lady Justice Thirlwall summarised the issue as follows:

"The fact that [the insurer] insured other claims did not entitle it to be involved in, still less

influence, the conduct of the uninsured claims, both of which it did."