Court entitled to make costs order against insurer in group litigation

The Court of Appeal found that the facts of the case made it an "exceptional" one, which justified the use by the High Court judge of her discretion to order a third party to pay costs under section 51 of the 1981 Senior Courts Act. The only principle limiting the use by the judge of her discretion is that it must be exercised justly, it ruled.

Travelers, the insurer, had argued that previous cases had established a set of principles which regulate the circumstances in which costs may be awarded against an insurer. Giving the judgment of the court, Lord Justice Lewison said that it was "too prescriptive" to refer to the effect of the previous cases as establishing 'principles'.

"I do not consider that these cases ... lay down a series of conditions which must be fulfilled before a costs order can be made against insurers, such that if they are not fulfilled an exercise of discretion against insurers must be wrong," he said.

"It has, of course, often been said that an order under section 51 is to be regarded as 'exceptional'. However, all that that means is that the case is outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. Whether a case is exceptional is not to be judged according to what is or may be usual in the insurance industry, but whether a case is extraordinary in the context of the whole range of litigation that comes before the court," he said.

"[T]he judge directed herself that the ultimate issue was whether it was just to make the order under section 51. That self-direction was entirely correct. Whether it was just to make the order was a value judgment for the judge to make. In making her value judgment she had to consider whether the case merited the adjective exceptional. She decided that it did. In my judgment the value judgment that she reached was one that was open to her," he said.

Lord Justice Lewison acknowledged that the judge in a 1999 case involving Citibank appeared to have limited the use of his discretion with reference to the facts of another case. He said that that case had been wrongly decided to the extent that it attempted to "lay down a series of conditions which must be fulfilled before a costs order can be made against insurers".

The issue of liability for costs arose out of litigation concerning the supply of defective implants for use in breast surgery. The claims were made by way of a GLO, covering around 1,000 individual cases. Of those cases, 623 were brought against Transform Medical Group, which was insured by Travelers. However, its policy with Travelers only covered 197 of those cases.

In June 2015, Transform entered insolvent administration. The claim was ultimately settled a few months later. Travelers paid an agreed proportion of the damages and costs attributable to the insured claims. The individuals whose claims were uninsured have not been able to recover either damages or costs due to Transform's insolvency. They therefore applied to the court for an order that Travelers pay the costs of their action, although they are not seeking damages or other compensation. The High Court granted to order sought in January 2017.

The High Court judge found that there were a number of factors which made this an 'exceptional' case, justifying the use of her discretion under section 51. She found that there would have been no limit on Travelers' liability to pay the costs of an unsuccessful defence had all the Transform claimants been insured, in contrast to some of the cases relied on by the insurer in which the combined award of damages and costs exceeded the policy limit. There was also an "obvious asymmetry" in the insurer's position, as if Transform had succeeded on the preliminary issues all the claimants, whether insured or uninsured, would have been required to contribute to its costs.

The judge also heard that Transform had wanted to disclose its lack of insurance to the uninsured claimants, but had been discouraged from doing so by its legal representation. The Court of Appeal decided "with some hesitation" that the flawed advice given to Transform on this point also pointed to Travelers' liability, as the legal counsel was retained by both Transform and Travelers jointly. However, this point was not "decisive", as "the overall circumstances ... make this case exceptional".

Insurance litigation expert Ravi Nayer of Pinsent Masons, the law firm behind Out-Law.com said that the case showed that the interests of insured companies and their insurers in relation to disclosure were "not always aligned".

"Insurers should, as a starting point, consider the likely chances that a lack of disclosure of the existence of a relevant policy of insurance may lead to a class of claimants relying on that lack of disclosure and bringing proceedings," he said. "This will have a knock on effect of financially exposing the insurer in the event it loses on the substantial case."

"The judgment also shows that non-party costs order awards are likely to be granted following a close examination of the facts of the particular case, not the body of case law that may speak in relation to it. The case law should only be seen as a guide. The requirement for a case to be 'exceptional' has this exact purpose - whether it is exceptional or not can only be determined upon an analysis of the facts," he said.