​In a judgment that will be of interest both to insurers and those who represent them, this decision focusses on the court’s discretion to make a non-party costs order against an insurer in relation to claimants’ costs.

Summary

In Travelers Insurance Company Ltd v XYZ the Court of Appeal upheld the trial judge’s decision to make a non-party costs order against an insurer in a group litigation situation, in circumstances where, on the advice of solicitors acting on a joint retainer, the insured (which was later placed into insolvency) had not disclosed to certain claimants that their claims were not insured.

Background

The insured, Transform, was a co-defendant in a group action brought by a number of claimants about the supply of defective breast implants. Transform had liability cover with Insurers for only 197 of the claims made against it, with a further 426 claims not being insured (either because the claims fell outside of its insurance policy periods, or because the claimants were the “worried well”, for whom cover did not attach).

Insurers and Transform were represented by solicitors acting on a joint retainer in defence of the claims. Transform had wanted to disclose to the uninsured claimants that their claims were not covered, however, solicitors and counsel advised that they should not do so.

All claimants were party to a group litigation order (GLO) which made them liable for a share of costs. A preliminary issue hearing was held involving four claimants as a “test” of certain issues, at which the claimants were successful. Shortly thereafter Transform was placed into administration. Subsequently Insurers settled with the 197 insured claimants. While it was not in dispute that the uninsured claimants’ claims were not covered under the policy, the uninsured claimants obtained default judgment against Transform, and also sought a non-party costs order against Insurers for their share of the costs of the preliminary issue hearing, under the GLO.

Non-party costs orders against insurers

Even where a claim or part of it is not covered under an insured’s liability policy, or if damages awarded exceed a policy indemnity limit, the court has a discretion under s51 Senior Courts Act to make a non-party costs order that an insurer pay a claimant’s costs, in exceptional circumstances.

A number of decisions relate to instances where such awards have been made against insurers and consider what might comprise “exceptional circumstances” for that purpose (eg TGA Chapman Ltd v Christopher [1998] 1 WLR 12; Citibank International Plc v Kessler [1999] Lloyd’s Rep. IR 122; Cormack v Excess Insurance Co Ltd [2002] Lloyd’s Rep IR 398; Palmer v Palmer [2008] EWCA Civ 46; Legg v Sterte Grange Ltd [2016] EWCA 97).

The Court of Appeal in XYZ undertook a useful review of the previous authorities and found that there are no particular conditions or rules which must be met before a non-party costs award might be made against insurers (and that to the extent that the 1999 Citibank decision purported to find to the contrary, it was wrongly decided). Further the court made it clear that whether a case was “exceptional” should not be judged against what was usual or expected in the insurance industry, but against the whole range of litigation before the courts.

In the present case, the Court of Appeal upheld the order, for the following reasons (while commenting that the factual position was perhaps unique):

  • Insurers’ interest in defending the trial was to avoid claims falling within the policy cover. Insurers had funded the defence costs of the preliminary issue trial and stood to benefit from a successful outcome. Given the operation of the GLO, all claimants (even those who were uninsured) would have been liable to contribute to the insured’s costs in that event. Conversely, however, on the Insurers’ case, they were only liable for the costs incurred by the insured claimants. That asymmetry was unjust.
  • It could also not be said that the uninsured claimants were “nothing to do with Travelers”: - the preliminary issue trial related to matters common to all claims, both insured and uninsured. Further, the issue of the proportion of insured vs uninsured claimants was relevant and important: the greater the number of insured claimants, the increased exposure of Travelers, for instance.
  • Transform had wanted to disclose the lack of cover to the uninsured claimants from an early stage. Advice was given that it should not do so. This appeared to be, at least in part, reflective of insurers’ desire not to reveal the details of its insurance policy. As such, Travelers’ interests therefore “were in play even when the uninsured claims were being considered.”
  • The claimants’ solicitors had (wrongly) concluded that because Insurers were funding the defence of all of the claims, that all of the claims were in fact insured. The court rejected insurers’ argument that, since they had no obligation to disclose policy limits, they should not be penalised for not doing so, and found that:
    • the failure to disclose had a direct bearing on costs: had the lack of insurance been disclosed the uninsured claimants would not have pursued their claims
    • the non-disclosure related not to the cover limit, but to the existence of any cover at all, and
    • as it was a personal injury matter, the pre-action protocol required details of the policy to be included in any response to any letter of claim - thus Insurers would have had some expectation that details regarding insurance would be disclosed.
  • The “flawed” advice given to Transform not to disclose the lack of cover, was, on balance, something which should affect Insurers’ liability: the advice was given under a joint retainer, and not under any separate retainer to Transform alone. The court considered that it was difficult to see how the solicitor managed to avoid the conflict of interest, and that it was not unjust for Travelers to bear some responsibility for advice given under the joint retainer.

Implications

While the court was keen to stress particular facts of the XYZ case which made it “exceptional”, the decision is a useful reminder both in relation to the situations in which Insurers may potentially be exposed to non-party costs awards, and of the difficulties which may arise for solicitors when acting for insurers and insureds under a joint retainer. Matters to keep in mind could include:

  • An increased risk may exist in group litigation: under both claims made and occurrence-based policies, group litigation with multiple claimants clearly creates a risk that there may ultimately be a mix of insured and uninsured claimants in the group. For example, as in the XYZ case, claimants may fall outside the scope of cover. A claims-made policy with an aggregate indemnity limit and a block notification in a particular policy year may also quickly see the limit theoretically exhausted if there are a high number of claims. If any such circumstances arise, when it is clear that the insured would not otherwise be able to pay claims falling outside the indemnity, there is an increased likelihood that certain claimants will assert that they would never have progressed their claims and incurred costs, and thus an increased risk that defending the group litigation as a whole could lead to a similar result for insurers as in XYZ.
  • Conflict of interest issues: as the court noted, these issues will be difficult for solicitors to manage. Consideration should be given to potential conflict issues at an early stage if there appears to be any risk. Matters to consider include the possibility of uninsured claimant(s) or uninsured claimant costs), the insured’s potential inability to meet claims absent policy cover, and any divergence of insurer-insured interest in defending claim(s). Separate retainer(s) should be clearly established if advice needs to be given to one party in their interest only.