The Supreme Court yesterday handed down an insurer-friendly judgment in the case of Travelers Insurance Company Ltd v XYS overturning earlier decisions by the High Court and the Court of Appeal which held insurers liable for third party costs. It held that a liability insurer is not obliged to pay a third party's costs in respect of uninsured claims against an insolvent insured.
In 2012 a group action comprising 623 claims arising from the supply of defective silicone breast implants was brought against Transform Medical Group (CS) Ltd (“Transform”), a medical clinic. Transform was insured by Travelers Insurance Co Ltd (“Travelers”) in respect of 197 the 623 claims brought against it. The remainder were uninsured.
The claims were pursued together within a single group action, by the same solicitors, and all raised common issues. They were to be tried together by way of four sample test claims, two of which were insured and two uninsured. Travelers did not disclose that a substantial number of the claims against Transform were uninsured. They paid the costs of Transform’s whole defence.
Transform entered insolvent administration half-way through the litigation. The insured claims were settled and paid by Travelers in August 2015. Travelers also paid an agreed proportion of the damages and costs attributable to those insured claims. The 426 uninsured claimants obtained a judgment in their favour but recovered no damages or costs from Transform at all. They therefore applied to the Court for an order that Travelers should pay their costs.
The High Court and the Court of Appeal both held that Travelers should be ordered to pay the costs of the uninsured claimants. Travelers appealed to the Supreme Court.
Section 51 of the Senior Courts Act 1981 gives the court the power to order non-parties to pay costs. The application of this provision to liability insurers has historically centred on two main principles – (1) whether the third party insurer took control of the litigation and became “the real defendant” and (2) whether the third party insurer engaged in “unjustified meddling”.
The case of TGA Chapman Ltd v Christopher  set out useful guidance as to the application of the “real defendant” test (known as the Chapman principles) and was considered by all three courts in the Travelers case. The Court held that the “real defendant” test remains relevant in situations where insurance cover exists for the claim, but some of the claim lies outside the limits of cover (for example, where legal costs fall outside of a policy limit of indemnity). In such a situation an insurer may be deemed to have such interest in the outcome of the proceedings and/or to have exercised such control over the defence of the claim, so as to have become the “real defendant” and thus taken on responsibility for payment of all costs, whether insured or not.
However, the Court noted that the situation in the Travelers case is different from that in Chapman and the subsequent cases that followed it. The relevant claims against Transform were wholly uninsured (it was not just a case of the claim for costs falling outside the scope of cover). In such cases, the Court concluded that the applicable test is whether or not the insurer has engaged in “unjustified meddling” in litigation to which it is not a party.
It followed that the question to be considered by the Court in this case was not whether Travellers had become the “real defendant” but whether or not its involvement in the uninsured claims amounted to “intermeddling”.
The Court noted the contractual relationship between insurers and an insured and the public policy element of liability insurance: “If the non-party [the insurer] has not gone beyond the confines of those contractual obligations and attendant rights…liability as an intermeddler may be very hard to establish.” In considering Travelers’ conduct, the Court considered, in particular:
1. Non-disclosure of the limits of cover. The solicitors acting jointly for both Travelers and Transform advised Transform not to disclose the limits of its insurance cover. The Court noted that parties are not legally obliged to disclose details of their insurance; as such, the advice fairly reflected Travelers’ rights relating to the claims that were insured and did not constitute “intermeddling”.
2. Offers and admissions. Travelers was involved in Transform’s decisions not to make offers of settlement or admissions of liability in respect of the uninsured claims. In particular, Travelers withheld consent to the making of a drop-hands offer to the uninsured claimants and participated in a decision not to admit liability. The Court held that, although it considered such conduct to be justified, it was irrelevant in any event as it was not causative of any loss – the uninsured claimants would have pursued their claims to a judgment with costs in any event, regardless of any offer to settle ‘drop hands’.
3. Asymmetry of risk. The Court of Appeal had been concerned with the asymmetry between the uninsured claimants failing to recover costs if they won, and Transform being able to recover its costs if it had failed. The Supreme Court felt that this asymmetry was not down to Travelers “intermeddling” but was instead simply due to the fact that Transform was insolvent and uninsured, and each claimant’s several liability for a small proportion of the overall costs. The uninsured claimants had taken on that costs risk regardless of whether or not their claims were uninsured. The Court observed Travelers’ legitimate interest in the defence of both insured and uninsured claims and noted that the “legitimate interests of the insurer will justify some involvement by the insurer in decision making and even funding of the defence of the uninsured claims”. It concluded that Travelers involvement was not “unjustified meddling” but, rather, “the involuntary engagement which arose from their status as insurers under the policies”.
The Court therefore allowed Travelers’ appeal and concluded that the lower courts were wrong to order Travelers to pay the costs of the uninsured claims.
This case provides useful clarification that the “real defendant” test (and the Chapman principles) will apply only in cases where some part of the claim is or may lie outside the limits of cover. It will not assist in cases where insurers have become involved in the funding and conduct of wholly uninsured claims.
In the latter case, the applicable test is whether insurers’ conduct has amounted to “intermeddling”. The Court’s observations as regards liability insurers’ contractual arrangements, their legitimate interests under the policy, and the close connection between insured and uninsured claims suggest that such “intermeddling” will be hard to prove. It follows that the approach adopted by the Supreme Court is wholly in insurers’ favour.