Liability insurers’ exposure to s51 non-party costs orders: Various Claimants v. AIG (Europe) Limited  EWHC 34 (QB)
In what circumstances is a liability insurer, standing behind a defendant to litigation, vulnerable to a non-party costs order in the claimant’s favour under section 51 of the Senior Courts Act 1981? In May of 2018, the Court of Appeal considered that question in respect of a standard product liability policy: Travelers Insurance v. XYZ  EWCA Civ 1099;  Lloyd’s Rep 636. In Various Claimants v. AIG (Europe) Limited  EWHC 34, Foskett J ordered a professional indemnity insurer, issuing a primary layer ‘Minimum Terms’ policy to the law firm, Giambrone & Law, to pay 50% of the Claimants’ costs pursuant to section 51. The Judge’s decision is considered by Jamie Smith QC of 4 New Square.
Giambrone and the ‘Jewel of the Sea’
In 2007/early 2008 many individuals, resident in England and Ireland, were persuaded to invest in ‘off plan’ holiday homes in Calabrese, Italy. One such development was the ‘Jewel of the Sea’, promoted by VFI Overseas Properties (“VFI”). The prospective purchasers received advice from Avvocato Giambrone, an Italian advocate practising from ‘Giambrone & Law’, which was originally an unincorporated partnership but then incorporated (“the Firm”, “the LLP”, together “Giambrone”). Giambrone also received and disbursed the purchasers’ deposits.
The ‘Jewel of the Sea’ did not live up to its name. It was never completed. Allegations were made that the project was a money laundering operation organised by the Mafia/the IRA. The purchasers lost their deposits. Giambrone were involved in other Italian development projects, promoted by other entities, which came to a similarly sticky end.
The litigation before Foskett J
From late 2008 onwards many claims were pursued against Giambrone arising out of Italian developments. One group of Claimants sued in respect of the ‘Jewel of the Sea’ (“the Litigation”). After extensive pre-trial skirmishing in the Litigation, Foskett J made findings on preliminary issues ( EWHC 1946 (QB)) and subsequently granted summary judgment to the Claimants ( EWHC 3315 (QB)) on the footing that deposits had been released by Giambrone in breach of trust. An appeal to the Court of Appeal was unsuccessful ( EWCA Civ 1193;  PNLR 2).
Giambrone’s professional indemnity insurance and the aggregation argument
Giambrone’s primary layer professional indemnity insurance cover, attaching to the basket of claims arising from Italian development projects (including the Litigation), was underwritten by AIG (Europe) Limited (“AIG”).
From the earliest stages of the Litigation, AIG contended that all the development claims aggregated so as to attract a single limit of £3m indemnity. This was disputed by both the Claimants and Giambrone. If AIG’s position on aggregation was correct, the Litigation would not be economic to pursue. In view of the aggregation position, and in recognition of the risk of Giambrone’s defence in the Litigation not succeeding, AIG made repeated efforts to bring the Litigation to an end by settlement. One such step was to offer to refer the aggregation issue to binding arbitration, which the Claimants did not take up.
The relevant terms of AIG’s policy
As mandated by the Law Society’s ‘Minimum Terms’ AIG was obliged to meet Giambrone’s defence costs for so long as the Litigation was contested. AIG had the usual right of control:
“The Insurer shall be entitled at its own expense, to take over and conduct, in the name of any Insured, the defence, investigation or settlement of any claim it deems expedient …”
Against the backdrop of the aggregation dispute, on 6 February 2013 AIG and Giambrone entered into a ‘Binding Heads of Terms Agreement’ (“HOTS”) by which it was agreed that four limits of indemnity were available in respect of the development claims, one per promoter. As such, the Litigation was to be aggregated with all claims arising from VFI-promoted sales. This left £1.1m of remaining cover for the Litigation (for damages and Claimant costs).
The HOTS also regulated the circumstances in which AIG was obliged to advance Defence Costs:
“AIG shall advance defence costs in respect of the Aggregated Claims provided always that AIG shall be entitled to withdraw funding for Defence Costs … in the event that it reasonably considers that there is no realistic prospect of defending the claim”.
The HOTS did not govern the claims against the LLP (as distinct from the Firm).
The conduct of the Litigation
As regards the Litigation against the Firm, the HOTS thus arguably represented an important event at which AIG’s usual position as professional indemnity insurer (giving instructions to a panel firm, having a joint retainer with AIG and Giambrone) was surrendered, with the Firm thereafter having sole control of its defence, save to the extent of AIG’s entitlement to withdraw funding for defence costs where it reasonably considered there to be “no realistic prospect of defending the claim”.
AIG’s position was that, after the HOTS, it did not (a) reach the view that the Firm had no realistic prospect of defending the Litigation or (b) exercise sole or even predominant control of the defence to the Litigation. The Judge found that:
“the net effect of the HOTS was to give to the partners [of the Firm] the power to control the defences to the Jewel of the Sea claims with minimal influence from AIG (or influence that, for whatever reason, AIG was not prepared to exercise) despite AIG being committed to bankroll the pursuit of those defences when there must have been entirely reasonable concerns from time to time, if not throughout, that the game was not worth the candle” (paragraph 76).
As regards the Litigation against the LLP, AIG accepted that “it was AIG’s decision to defend the Claimants’ claims against the LLP up to the point when it withdrew funding … on 2 December 2014” (paragraph 73).
THE KEY ARGUMENTS
The legal framework
AIG emphasised the particular position of a professional indemnity insurer whereby the insurance contract does not seek to exploit a profitable opportunity to provide litigation funding; but indeed where the best outcome for insurers is that no third party claim is made at all. This was presented as a key distinction between liability insurance and, say, ATE insurance and litigation funding. AIG thus allied itself with the argument unsuccessfully presented to the Court of Appeal in Travelers v. XYZ (as above) that no section 51 order should properly be made against a liability insurer unless it is shown to have controlled the litigation in its own interest, without paying due regard to any contrary interest of the insured.
The Claimants referred to Lewison LJ’s remarks in Travelers as to ‘reciprocity’, namely that it would represent an unfair asymmetry if liability insurers benefited from a successful defence of third party litigation, but could not be held to account on costs if the defence failed.
AIG placed reliance on the HOTS as demonstrating why, from February 2013 onwards, AIG was not in control of the Litigation; and that it ceased to defend the claims against the LLP as soon as it could, in December 2014.
The Claimants, on the other hand, argued that the significance of the HOTS was that AIG had thereby volunteered to relinquish control; and that it conferred a benefit on AIG in resolving the aggregation dispute on the basis that only four limits of indemnity were available.
The Claimants’ behaviour
AIG contended that regard should be had to the extensive steps AIG had taken towards settlement of the Litigation and of the Claimants’ decision (in AIG’s words) to “set their faces against engaging properly in settlement discussions with AIG”.
AIG invited the Judge to infer that, even had the defence costs tap been turned off, Giambrone would have had the funds and the appetite to contest the Litigation in precisely the same way as it had done with the benefit of AIG’s backing. If correct, the section 51 application would fail on causation.
The legal framework
The Judge appears to have proceeded on the footing that the guiding test under section 51 is “whether in the circumstances it is just to make a discretionary order requiring the non-party to pay costs because of the nature of its involvement in the litigation” (in the words of Tomlinson J in Excalibur Ventures v. Texas Keystone  EWCA Civ 1144;  1 WLR 2221) (see paragraphs 14 and 79). Following a broad description of the key cases at paragraphs 8 to 23, the Judge deals only briefly with the legal framework later in his judgment:
“To the extent that any broad support is required from previous authorities, then the reciprocity/asymmetry issue referred to in the Travelers Insurance case … offers some support, albeit that the facts were rather different in that case, as does TGA Chapman Ltd v. Christopher  1 WLR 12” (paragraph 79).
The Judge expressed his ‘essential basis’ for making a non-party costs order against AIG as follows:
“… where an indemnity insurer substantially relinquishes control of the conduct of the litigation to the insured (or fails to take steps to control it when there are grounds for intervening), and does so in the expectation that it will be immune from a costs liability towards the opposing party if the opposing party is successful, that expectation is open to be falsified by the court in a section 51 application, particularly if the prospects of success for the insured are assessed as poor” (paragraph 78).
The Judge also held that the HOTS gave “some material benefit” to AIG and this was “a cumulative factor that adds weight to the making of an order under section 51” (paragraph 80).
The Claimants’ behaviour
Foskett J stated that he considered it “quite impossible to attribute responsibility for the failure of the negotiations in a way that has any impact on the outcome of this application” (paragraph 83).
The Judge was not prepared to infer that Giambrone could and would have fought the Litigation in the same attritional fashion if its costs had not been funded by AIG. To the contrary, the inference drawn was that Avvocato Giambrone would have been “much more circumspect about his potential exposure to a costs order against him” absent AIG’s backing (paragraph 108).
In the result, Foskett J held that AIG was liable to pay 50% of the Claimants’ Litigation costs (pursuing the Firm and the LLP) (paragraph 112).
Liability insurers may feel that the Travelers decision and now the AIG judgment of Foskett J do not give appropriate weight to the commercial purpose of liability insurance as compared to ATE insurance or litigation funding. Liability insurers seek to make their money from underwriting good risks (with a commensurately lower prospect of third party claims falling for indemnity); they are not looking to profit from the pursuit or defence of litigation. Furthermore, AIG was providing cover to Giambrone as a Qualifying Insurer under the Law Society’s mandatory insurance regime for solicitors in England and Wales, with an obligation to advance defence costs (subject to a control clause). In such circumstances, there is arguably force in the submission made to the Court of Appeal in Travelers that reciprocity is not enough to establish the section 51 jurisdiction against liability insurers.
There is also a question to be asked whether AIG’s decision to cede control was correctly to be held against it absent any finding that the HOTS was a deliberate attempt by AIG to gain immunity from section 51.
The Supreme Court has granted Travelers permission to appeal, and the appeal is due to be heard in June 2019. Time will tell whether AIG will seek to have the Giambrone matter reviewed by that court on a conjoined appeal.
See link to read Miles Harris’s previous blog post on Travelers Insurance Company v XYZ  EWCA Civ 1099