Yesterday, the Supreme Court handed down judgment in Travelers Insurance Co Ltd v XYZ. UKSC 48.] This was an application for non-party costs against liability insurers made under s 51(3) of the Senior Courts Act 1981 by claimants in the PIP breast implant group litigation.
I have previously written about non-party costs order against insurers, including commentary on the Court of Appeal decision in Travelers v XYZ, and I will be updating that post in the light of the Supreme Court decision.
In the meantime, here are my initial thoughts on the decision.
Travelers v XYZ involved a Group Litigation Order (‘GLO’), and the facts were unusual. They are summarised briefly in my earlier blog: for present purposes, the key point is that some of the claims against the insured which were within the GLO were covered by insurance, but others were not.
Although the facts were unusual, the Supreme Court took the opportunity to review the principles applicable to non-party costs orders against liability insurers.
Much of what is in the Supreme Court decision amounts to confirmation of well-established principles from earlier authorities in relation to applications for non-party costs orders against liability insurers:
- The proper participation of the insurer in the funding, conduct and control of the insured’s case is regulated by long-settled principles, which are in addition to the contractual terms of the policy itself. As Sir Wilfrid Greene MR said in Groom v Crocker 1 KB 194 at 203., insurers must act in what they consider in good faith to be the common interest of themselves and their insured.
- There are two bases on which a non-party costs order against liability insurers might be made: intermeddling; and becoming the ‘real defendant’ to proceedings.TGA Chapman Ltd v Christopher  1 WLR 12, CA; Travelers v XYZ, para 36 (Lord Briggs, with whom Lady Black and Lord Kitchin agreed.
- ‘Exceptionality’ is not a useful test for determining whether a non-party costs orders should be made against liability insurers.TGA Chapman Ltd v Christopher  1 WLR 12, 20, CA; Citibank NA v Excess Insurance Co Ltd  Lloyd’s Rep IR 122, 131 (Thomas J); Travelers v XYZ, paras 33 and 34 (Lord Briggs).
- In order to identify whether a liability insurer has become the ‘real defendant’ to proceedings, the principles laid down by the Court of Appeal in TGA Chapman Ltd v Christopher 1 WLR 12 should be applied.Travelers v XYZ, paras 52 and 77 (Lord Briggs).
- As there is no obligation on insurers to disclose policy information including limits of cover, a failure to do so is unlikely to justify a non-party costs order.Cormack v Excess Insurance Co Ltd  Lloyd’s Rep IR 398, CA, 406, col 2 (Auld LJ); Travelers v XYZ, paras 67 and 81 (Lord Briggs).
- If the other ingredients for a non-party costs order are present, causation remains an important element, and it is the costs attributable to the intermeddling that the meddler is likely to be ordered to pay: if the costs would have been incurred in any event, an order is unlikely.Travelers v XYZ, paras 66 and 80 (Lord Briggs).
Liability insurers will be reassured in particular by the clear statement that non-disclosure by insurers of policy limits is unlikely to justify a non-party costs order.
Key points of interest in the decision are:
- The analysis and application of the principles relevant to intermeddlers, rather than the ‘real defendant’ principles, because the insurer had become involved in uninsured claims.At paras 52 to 56 (Lord Briggs). On this basis, the ‘real defendant’ principles established in TGA Chapman Ltd v Christopher are confined to claims in which the limit of indemnity is insufficient to cover the costs of the successful party.At para 78 (Lord Briggs).
- The significance accorded by the Supreme Court to the fact that in liability insurance, the insurer’s involvement arises from a framework of contractual obligation as between the insurer and the insured: Lord Briggs said that if the insurer has not gone beyond the confines of those contractual obligations and attendant rights as explained in Groom v Crocker, ‘liability as an intermeddler may be very hard to establish’.At para 55.
One element of this framework of rights is the established principle that, in relation to issues common to insured and uninsured claims, insurers may notUnless the policy expressly permits this. apportion their contractual liability to pay defence costs.Travelers v XYZ, para 13 (Lord Briggs), referring to New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd  1 WLR 1237, PC, approved: International Energy Group Ltd v Zurich Assurance plc  AC 509, paras 36 to 38.
This meant that insurers were funding the common costs of the defence of both insured and uninsured claims. Lord Briggs notedAt para 63 that solicitors who were jointly instructed by the insured and the insurer played an advisory role in the insured’s decision not to disclose the limits of its insurance cover earlier, when uninsured claimants might have abandoned their claims, and successfully to resist an order for disclosure. That advice was, Lord Briggs said, ‘given in good faith without a perception by the solicitors that there might be (as the judge held that there was in fact) a conflict between the interests of the insured and the insurer’ in whether to make the disclosure.
This is an interesting remark: the good faith of the solicitors, and their failure to identify the conflict, while explaining why an insurer has strayed beyond the proper ambit of its role as outlined in Groom v Crocker, does not mean that that has not happened. Lord Briggs expressly left openAt para 64 the question of whether it would be right, in those circumstances, for the insurer to take responsibility for the advice.
The basis of Lord Briggs’s conclusion on this point was, in fact, simply that the advice fairly reflected the insurer’s rights, and was not therefore conduct which amounted to unjustified intermeddling in the uninsured claims for the purposes of the proceedings.At para 64
How far this might be pushed in practice is unclear: Lord Briggs said that it might even have extended to the insurer’s involvement in settlement and admissions in relation to uninsured claims, although he did not reach a firm conclusion on this, and that the court should be slow to second-guess jointly instructed solicitors where they allow the insurer a role in decision-making about claims raising common issues, notwithstanding that some of the claims are uninsured.At paras 73 and 83 He also recognised that, where there was a connection between uninsured and insured claim, what he described as ‘the legitimate interests of the insurer’ might justify some involvement by a liability insurer in decision-making and even funding of the defence of the uninsured claims without exposing the insurer to liability to pay the successful claimant’s costs.At para 79.
Ultimately, though, Lord Briggs preferred to rest his decision on the absence of any relevant causative link in relation to the incurring of costs.At para 74.
Lord Sumption, who said that he agreed broadly with Lord Briggs’s analysis of the relevant principles and their application in this case, made a series of potentially significant observations in a concurring judgment.
Lord Sumption too emphasised the importance of the insurer’s contractual right to direct the conduct of the litigation, but he developed the analysis differently. He said that this was a form of compulsory agency and was a right to direct the litigation ‘in his assured’s interest, and not his own, even though their interests will usually coincide’.At para 114.
This is in contrast to the assumption implicit in Lord Briggs’s judgment that, where the interests of the insured and the insurer conflict, the insurer’s contractual right to control the litigation entitles the insurer to act in accordance with its interests rather than those of the insured. Lord Sumption said that the solicitor who the insurer appoints is the insured’s solicitor, who owes all the usual professional duties to the insured and is entitled to look to the insured for his fees, notwithstanding that his instructions come from the insurer.
Lord Sumption said that this feature in particular meant that the insurer could not be regarded as the real defendant, that this left unjustified intermeddling as the only basis on which a liability insurer might be at risk of having a costs order made against him, and that cases in which a costs order might be made against a liability insurer on this basis were ‘likely to be rare’.At para 116. He added that:
- A liability insurer has an obvious legal interest in the performance of his contractual duties under the policy and the exercise of his contractual rights.
- That interest is limited to the defence of insured claims and different considerations may arise if he steps outside that role.
- As Travelers v XYZ illustrated, the proper defence of claims may involve steps which directly or indirectly affect uninsured claims.
- This is an area in which a person conducting or directing the conduct of litigation is entitled to a large margin of judgment and hindsight is not usually an adequate tool for assessing how he exercises it.
- ‘If he acts in good faith in the interest of the assured qua the defendant to insured claims, he should not incur liability in costs.’
- He would expect this to be equally true of the case where the potential liability of the assured is subject to a limit of cover which is exceeded, but that was not an issue which needed to be examined because it did not arise on the facts of the appeal.
Although Lords Briggs and Sumption both considered that insurers should be afforded a significant degree of latitude in decision-making in litigation against insureds which they were contractually entitled to control, Lord Sumption placed at the heart of his analysis the insurers’ obligation to act in the interests of the insured. If liability insurers do this, they should not be exposed to liability for non-party costs orders. If they prefer their own interests, they should be prepared for a less benign outcome. Which side of the line their conduct will fall if they act on flawed advice from a jointly instructed solicitor is unclear. Lord Briggs’s judgment could be interpreted as hinting that an order should not be made; and the opposite could be said for Lord Sumption’s.
Alison Padfield QC
|↑1|| UKSC 48.]|
|↑2|| 1 KB 194 at 203.|
|↑3||TGA Chapman Ltd v Christopher  1 WLR 12, CA; Travelers v XYZ, para 36 (Lord Briggs, with whom Lady Black and Lord Kitchin agreed.|
|↑4||TGA Chapman Ltd v Christopher  1 WLR 12, 20, CA; Citibank NA v Excess Insurance Co Ltd  Lloyd’s Rep IR 122, 131 (Thomas J); Travelers v XYZ, paras 33 and 34 (Lord Briggs).|
|↑5|| 1 WLR 12|
|↑6||Travelers v XYZ, paras 52 and 77 (Lord Briggs).|
|↑7||Cormack v Excess Insurance Co Ltd  Lloyd’s Rep IR 398, CA, 406, col 2 (Auld LJ); Travelers v XYZ, paras 67 and 81 (Lord Briggs).|
|↑8||Travelers v XYZ, paras 66 and 80 (Lord Briggs).|
|↑9||At paras 52 to 56 (Lord Briggs).|
|↑10||At para 78 (Lord Briggs).|
|↑11||At para 55.|
|↑12||Unless the policy expressly permits this.|
|↑13||Travelers v XYZ, para 13 (Lord Briggs), referring to New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd  1 WLR 1237, PC, approved: International Energy Group Ltd v Zurich Assurance plc  AC 509, paras 36 to 38.|
|↑14||At para 63|
|↑15||At para 64|
|↑16||At para 64|
|↑17||At paras 73 and 83|
|↑18||At para 79.|
|↑19||At para 74.|
|↑20||At para 114.|
|↑21||At para 116.|