The court found that the insurer, AIG, was liable for the costs under section 51 of the 1981 Senior Courts Act. The decision follows a similar judgment against insurers Travelers last year, when the Court of Appeal said the High Court was entitled to use its discretion to order a third-party costs under section 51.
The judge in the AIG case said the Travelers ruling established a principle of reciprocity, providing support for making the costs order.
A group of claimants had been successful in litigation against law firm Giambrone & Law over a property investment scheme. A costs order was made against the firm but the claimants had not received the money, resulting in a third-party costs order being filed against AIG.
AIG said that it was entitled to aggregate the claims against Giambrone so they amounted to a single claim, with cover limited to £3 million payable in respect of damages and costs.
Under the agreement signed between AIG and the four partners in the firm, the insurer was still committed to paying for the defence of the claims, but the partners were able to control the defence with “minimal influence from AIG”, according to the court.
The judge said he was not convinced that this lack of control meant that AIG was protected from an application for costs under section 51.
“As I have said, the power was conceded on a basis that left AIG either with virtually no effective control or with control that AIG decided, for whatever reason, not to exercise,” the judge said.
“In my view, 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,” the judge said.
He ruled that AIG’s funding of the defence doubled the costs incurred by the claimants, and ordered the insurer to pay 50% of the costs.
Insurance litigation expert Elaine Quinn of Pinsent Masons, the law firm behind Out-Law.com, said indemnity insurers, particularly involved in group litigation, should take heed of the decision.
“The specific facts of the case were key in persuading the court to grant the section 51 application. The critical issue here was the insurer’s decision, while funding the insured’s defence costs, to substantially relinquish control of the conduct of the defence to the insured and to fail to take steps to control it when there were grounds for intervening,” Quinn said.
“Evidence was put forward that defence cost expenditure was incurred when it was known to the defendants and their advisors that the claims would be ‘extremely difficult to defend’ and that the defence was ‘much more likely to fail than to succeed’,” Quinn said.
“The court was unpersuaded by an argument that there should be a distinction between the position of litigation funders and ‘after-the-event’ insurers versus indemnity insurers given their differing motives in proceedings, preferring instead the principle of reciprocity laid down in Travelers - that he who takes a benefit must also accept the burden,” Quinn said.
“This will be felt as a stringent decision for indemnity insurers. The court was told during the hearing that the Travelers decision is under appeal to the Supreme Court and therefore the law around section 51 and its application in these types of cases may receive welcome further analysis soon.,” Quinn said.