In Travelers v XYZ the Court of Appeal upheld an order made pursuant to s.51 of the Senior Courts Act 1980 (“Section 51”) requiring Travelers to pay costs incurred by claimants pursuing claims against its insured. Travelers was found liable even though the claims were uninsured and it had not acted so as to become a ‘real party’ to the litigation.
The action concerned claims pursued by around 1,000 claimants under a Group Litigation Order. They all sought damages for the supply of defective breast implants manufactured by PIP. 623 of the claims were brought against Transform Medical Group (CS) Ltd (“Transform”). Travelers provided Transform with cover in respect of 197 of the claims it faced, but the remaining 426 claims were uninsured (“the uninsured claims”). Transform was the defendant to all four sample cases chosen to determine preliminary issues relating to the quality of the implants.
Ahead of trial, expert evidence was served that suggested the Court would conclude the implants were not of satisfactory quality and this led to settlement of the insured claims; Travelers paid an agreed proportion of damages plus costs basis in respect of the insured claims. Shortly before settlement of the insured claims, Transform entered insolvent administration. Consequently, although the claimants in respect of the uninsured claims (“the uninsured claimants”) entered default judgment, they recovered nothing from Transform in respect of either damages or costs. In those circumstances the uninsured claimants applied for an order pursuant to Section 51 that Travelers pay their costs of the action. This order was granted at first instance by Thirwell LJ (as she had become by the time she made the order). Travelers appealed against that order.
Travelers contended that case law had established principles regulating the circumstances in which costs might be ordered against an insurer and that Thirwell LJ had failed to follow these. In particular, it maintained that a liability insurer could only be made liable under Section 51 if the evidence established that the insurer had controlled the litigation in its own interest, without paying appropriate regard to any inconsistent or contrary interest of its insured, so that it could be said the insurer had become a ‘real party’. It argued that if that criterion was not met then no order could be made.
The Court’s Decision
The Court of Appeal dismissed Travelers’ appeal and its contention that an insurer could only be made liable for costs if it had become a ‘real party’.
Citing Deutsche Bank AG v Sebastian Holdings Inc  EWCA Civ 23, Lewison LJ (with whom Patten LJ agreed) re-emphasised that although the Courts had given guidance on the exercise of the discretion to award costs pursuant to Section 51: “none of it is immutable…the Court is not concerned with legal rights and obligations but with a board discretion which it will seek to exercise in a manner that will do justice. The only immutable principle is that the discretion must be exercised justly…previous cases in which judges have or have not exercised their discretion in different ways cannot be regarded as laying down prescriptive rules…”
Reviewing a line of decisions upon which Travelers relied, Lewison LJ concluded that only one, the decision of Thomas J in Citibank NA v Excess Insurance Co Ltd  1 Lloyd’s Rep IR 122, could be said to lay down conditions that had to be fulfilled before a costs order could be made against an insurer. He further held that if that was the effect of Citibank then it was wrong and the Court of Appeal was not bound by it. He acknowledged that the cases had all made clear that it was an “exceptional” case where an order was made under Section 51, but in doing so commented that “all that that means is that the case is outside the ordinary run of cases…Whether a case is exceptional is not to be judged according to whether a case is extraordinary in the context of the whole range of litigation that comes before the Courts.”
Applying these principles, the Court of Appeal held that it was just for Travelers to be required to pay the uninsured claimants’ costs. It accepted that Travelers had not overstepped the mark so as to become a real party; solicitors had been appointed to act for both Travelers and Transform and Transform was closely involved in all decision making. Nevertheless, Travelers had funded the costs of the preliminary issues and, given the sample claims raised common issues, stood to benefit from a successful outcome on all the claims. Further, there was an asymmetry to Travelers’ contention that it should not be required to pay costs in respect of the uninsured claim and other factors that also made the case ‘exceptional’. Had Travelers succeeded then all the claimants would have been liable to pay costs equally, which would have been to Travelers’ advantage. By contrast, having lost, Travelers was maintaining that it should only be liable for approximately 32% of the costs. No more costs had been incurred by Travelers because there had been 623 claims rather than just 197 claims. The issues were the same and if all the claims had been insured then it would have been obliged to indemnify Transform in respect of costs. Therefore, an outcome that meant Travelers escaped liability for approximately 68% of the costs because 426 of the claims happened to be uninsured would accord with “neither reason nor justice given the probably unique circumstances of this case”.
Notably, the Court of Appeal also criticised the legal representatives that had acted jointly for Travelers and Transform for advising Transform not to disclose the fact that some of the claims were not insured. It agreed with Thirwell LJ both that this was a decision made to protect Travelers’ interests rather than Transform’s and that had the lack of insurance been disclosed then the uninsured claims would not have been brought or at least continued. Lewsion LJ held, “after some hesitation” that the decision not to disclose the lack of cover was also relevant to the issue of costs and that it was just for Travelers to bear some responsibility for advice given under a joint retainer that had caused costs to be incurred by the uninsured claimants. However, he stressed that given the other circumstances of the case this point was not decisive.
Given the unusual facts, this decision is unsurprising and clearly just. In more common circumstances, one would still expect the Court to attach a great deal of significance to whether an insurer can be said to have become ‘a real party’ when determining whether to make an order pursuant to Section 51. Nevertheless, the case is an important reminder that the discretion under Section 51 is a broad and relatively unfettered one that requires the Court simply to act justly. It also serves as a warning about the risk of liability pursuant to Section 51 if a decision not to disclose the absence of cover causes costs to be incurred.
Miles Harris, 4 New Square
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
© 2018 Miles Harris
Keywords: Non-party costs order against Insurers