The Court of Appeal has upheld a costs order against an insurer relating to uninsured claims. The insurer, jointly with the insured, had defended claims brought under a Group Litigation Order in litigation relating to defective breast implants.

Legal decision

The issue for the Court of Appeal was whether, following the insured’s insolvency, the court should make a non-party costs order against the insurer under section 51 of the Senior Courts Act 1981 to cover the claimants’ costs of successfully bringing sample cases by way of a trial of preliminary issues where the claims were uninsured.

Group litigation had been brought by 623 claimants against the insured manufacturer of PIP breast implants. 197 claims for implants that had ruptured were covered under the product liability policy but the insurer advised that there was no cover in relation to claims by 426 so-called “worried healthy” claimants, who had not yet experienced damage to their implants. The insured claims had been settled, and so the costs in issue were only in respect of the uninsured claims.

The Court of Appeal noted that section 51 third party costs orders will only be made in “exceptional” circumstances, in the sense that the case must be outside the ordinary run of cases where parties pursue or defend litigation for their own benefit. Courts have a wide discretion when making such orders and there is no fixed test.

In reaching the conclusion that this case fell within the ‘exceptional’ category, the Court of Appeal noted that, if the defence had succeeded, the insurer would have been able to recover defence costs from the claimants. Applying the principle of reciprocity, the insurer should be liable for the claimants’ costs when the defence failed.

It was significant that the lack of insurance cover for the “worried healthy” claims had not been disclosed. The Court of Appeal were of the view that if this had been disclosed, those claims would have been abandoned. The Court identified a conflict of interest between insurer and insured, who had been represented on a joint retainer. The insured had an interest in reducing the number of claims as much as possible. The insurer, on the other hand, believed itself liable only for the proportion of costs incurred by insured claimants. It therefore was to the insurer’s benefit for as many uninsured claimants as possible to continue to pursue litigation.

The Court of Appeal noted that the decision not to disclose the insurance coverage was due to flawed legal advice given to the insured, especially by counsel acting on a joint retainer. It held that it was correct for the insurer to bear some responsibility for advice given under the joint retainer, having funded the costs of the preliminary issues and standing to benefit from a successful outcome.

The Court of Appeal were at pains to stress that it was the overall circumstances of the case that made this case “exceptional” so that such a costs order was appropriate for the judge to order. The material circumstances were, namely, that the insurers funded the costs of the substantive preliminary issue and stood to benefit from a successful outcome; upon application of the long standing principle that he who takes benefit must also accept the burden, the order made was an order that the court was entitled to make.

When considering litigation strategy, this is a reminder that insurers should always be aware that adverse cost consequences could arise.

Insurers will also be well advised to assess throughout litigation whether conflicts arise between insurer and insured, as they may ultimately suffer costs consequences for advice given by lawyers instructed on a joint retainer.

Further reading:

Travelers Insurance Company Ltd v XYZ [2018] EWCA Civ 1099.