Abstract

Class Action - Part Cover - Costs Order Against Insurer

Article

Class Action - Some Claims not Covered – Non-Party Insurer Ordered to Pay Costs

In Travelers Insce Co v XYZ [2018] EWCA (Civ) 1099, a class action defended by the defendant’s insurer in which many plaintiffs’ claims were not covered by the insurer’s policy, those plaintiffs were nevertheless awarded their costs against the insurer.

In the United Kingdom the court has a statutory discretion to order a third party to pay costs under section 51 of the Senior Courts Act 1981. Such an order was first made in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 HL involving related applications for remission of awards made in separate but related arbitrations. It was said that if separate sets of proceedings with common features are heard together, it may be pure chance whether the cost of presenting an argument or evidence as to the common feature falls within one or other of the sets, and it may be difficult to attribute costs to one rather than the other. In such a case, the court's jurisdiction to make a global order for costs relating to both should not be fettered by an implied limitation. Courts are well capable of exercising this discretion with reason and justice.

The focus is not upon legal rights and obligations but upon a broad discretion with justice as the criterion. It is the only immutable principle and antecedent cases where a discretion has been exercised  in different ways do not lay down prescriptive rules: Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23, [2016] 4 WLR 17 at [50] and [62]. In this context, precedents are merely illustrations of particular exercises of the discretion, and none is a binding authority on how it should be exercised. At best a precedent may demonstrate that in similar circumstances it would not be wrong to exercise the discretion in the same way, but it may not be wrong to exercise it differently: Jaggard v Sawyer [1995] 1 WLR 269, 288.

If an insured has no other or insufficient assets and the claimant obtains an award exceeding the cover limit, a costs order may be made against the insurer if it determined that the claim would be fought, it funded the defence, of which it had the conduct, it fought the claim exclusively to defend its own interests because it knew that the defendant had no assets, and the defence failed in its entirety. These are not conditions: they are no more than factors. If the insurer is contractually liable to indemnify an impecunious defendant in respect of his liability in costs, this can constitute good reason for an order under section 51.

Even if it is not so, it does not follow that no costs order should be made against it. This does not rewrite the policy but imposes on the insurer a liability independent of the policy. The order does not turn on the terms of the policy, but on the action that the insurer has taken pursuant to its terms. It is not a valid proposition that an insurer who has legitimate reasons for defending a claim should not have to fear additional orders for costs if the defence fails: TGA Chapman Ltd v Christopher [1998] 1 WLR 12, which also noted that there is no obligation in litigation to disclose the cover limit to a policy of insurance, though it may go to insurer’s liability to the claimant for costs if its silence were to enlarge costs by encouraging the claim for want of knowledge of the absence of cover. Travelers Insce Co v XYZ. The insurer’s contractual liability to indemnify its insured against its costs of preliminary issues can constitute good reason for an order under section, and the possibility of increased premiums is not relevant. This is to be distinguished from the case where the combined award of damages and costs exceeds the policy limit : Ibid.

In Citibank NA v Excess Insurance Co Ltd [1999] 1 Lloyd's Rep IR 122, which was criticised in  Travelers Insce Co v XYZ as too prescriptive, the policy was subject to a limit which was insufficient to meet the costs awarded against the insured. It was held on the factors mentioned above that that the insurer should not pay costs up to judgment on liability, but should pay them thereafter. If a policy has no limit on cover, the insurer would pay the claimant's costs of an unsuccessful defence. It was said that the application of s. 51 in the context of Liability insurance is likely to be rare, being confined to the class of policy which contains a limit and involves circumstances where, either because the assured has no assets or the claim is thought to be well within the policy limit, the litigation is conducted and controlled by the insurer. In other circumstances, the insured will be closely involved in the litigation for the protection of his real interests. The principles in Chapman are not necessarily determinative. Insofar as this authority purported to 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, was rejected in Travelers Insce Co v XYZ.

In Cormack v Excess Insurance Co Ltd [2002] Lloyd's Rep IR 398 a Professional Liability policy’s limit of cover, of which the claimants were unaware until very late in the proceedings, was exceeded by the total award of damages and costs. The judge exercised his discretion against an award of costs against the insurers. It was held that a maintainer of unsuccessful litigation, particularly one who has an interest in its outcome, may, depending on the circumstances, be relevant and justify such an outcome, not that it nessarily does so. The discretion should be exercised only when the circumstances of the case are sufficiently exceptional to warrant it. The judge applied the correct test and, on the material before him, was entitled to exercise his discretion as he did, but if he had exercised it differently he would not necessarily have been wrong. The test of exceptionality calls for reason and justice in the exercise of a discretionary function. That as between itself and the insured, the insurer may have a contractual entitlement to do what it does, does not necessarily govern the court's attitude as to what it has chosen to do pursuant to that entitlement.

In Palmer v Palmer [2008] EWCA Civ 46, [2008] Lloyd's Rep IR 535, the policy had a cover limit, and the insured told the insurer at an early stage that it could not meet the claim. The insurer contested the claim on advice that there was a good defence. The insured was involved in the decision-making process throughout; and approved of the action taken on its behalf, but its  desire to defend commercially irresponsible, and if the insurer had considered the insured's commercial interests it would have realised that. Costs were awarded against the insurer. The most relevant question was whether it was motivated either exclusively, or at least predominantly, by a consideration of its own interest in the manner in which it conducted the defence of the litigation."

In Legg v Sterte Garage Ltd [2016] EWCA Civ 97, [2016] Lloyd's Rep IR 390, costs were awarded against the insurer because the only reason for its conduct of the defence by, and their only interest in it, was to avoid a claim’s falling within the cover provided by the policy. The principle of reciprocity is important. On an appeal from the exercise of the discretion, it was said: "In order to challenge successfully the exercise by the judge of his discretion to make an order for costs against the insurers as a non-party, the insurers must show that the judge had regard to irrelevant considerations or failed to take into account relevant considerations or reached a decision which was not justified on the material before him, having regard to the breadth of the discretion to be exercised by him."

"Exceptional" means only 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. It is not to be judged according to what may be usual in the insurance industry, but whether it is extraordinary in the context of the whole range of litigation that comes before the court: TGA Chapman Ltd v Christopher [1998] 1 WLR 12, 20; Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 at [25], where it was said: "Where, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes." Approved in Deutsche Bank AG at [62]; Travelers Insce Co v XYZ.

In Australia, the court has the discretionary power to order non-parties to a litigation, including an insurer, to pay the claimant’s costs in an action of this kind. The remedy is exceptional, and the discretion must be exercised judicially and according to principle: Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 185, 192, and sparingly. If the defence is unsuccessful, though the insurer’s exposure be limited and its contractual obligation to the insured may exclude its liability to provide indemnity for costs, it may still be ordered to pay or contribute to the claimant’s costs in a suitable case, for the court’s inherent power to order costs will not be truncated by any arrangements between parties, particularly if one is not involved in the arrangement: Mete v Guardian Insce Co of Can (1999) 165 DLR (4th) 457; Schmeider v Singh (1999) 165 DLR (4th) 503. A causal connection of the insurer with the proceedings is necessary, but misconduct is not essential: Burns Philp & Co v Bhagat [1993] 1 VR 203, 219; Bischof v Adams [1992] 2 VR 198. The factors which the court should take into account are:

• The insurer has agreed to indemnify the insured who has been found liable to pay damages to the claimant in circumstances in which that liability is covered, in whole or in part, by its liability to indemnify him.
• He has been ordered to pay to the claimant some or all costs incurred in pursuing the action that led to his liability to pay.
• He is unable to pay its costs liability wholly or in part and consequently the claimant cannot recover that undischarged liability.
• There must be exceptional circumstances that make it reasonable and fair for a non-party order to be made, including:

1. The insurer determined that the claim should be contested;

(ii)        It funded the defence of the claim;

(iii)       It had the conduct of the defence;

(iv)       It fought the claim exclusively (or, perhaps, predominantly)  to defend      its own interests; and

(v)         The defence failed in its entirety.

Whether the insurer’s interest must be exclusive or may simply be sufficiently predominant, the test is reasonableness and justice. In cases involving limited cover, exclusivity or predominance of interest of the insurer is likely to be a critical ingredient: Pendennis Shipyard v Magrathea (Pendennis) [1998] 1 LI R 315; Globe Equities v Globe Servs (1999) The Times LR 34. Although the categories are not closed, whether it can be seen as the real  party to the litigation in all but name is an important factor, for example, a liquidator whose funding was necessary to run the litigation: Lawcover Insce v Muriniti [2017] NSWSC 1557. the insurer’s reasonableness and good faith in its involvement with the insured and its responsiveness to his interests and concerns are significant. These go to the question whether, when he was approaching or at the risk of exceeding the policy’s limit, it behaved solely in its own interests as if it were the defendant. This is to be distinguished from reasonableness of or justification for a tactical decision in the litigation, such as whether to maintain a certain defence. That is irrelevant to the issue, as is the fact of the insurer’s contractual entitlement to do what it did: TGA Chapman v Christopher [supra]; Palmer v Palmer (supra).

Conversely, it is no answer by an unsuccessful claimant to a proposed order for costs that the insurer had taken over the defence of the action and that consequently the insured defendant had not incurred any costs personally: New Pinnacle Group Silver Mining Co v Luhrig Coal & Ore Dressing Appliances Co (1902) 2 SR (NSW) 50; Adams v London Improved Motor Coach Builders [1921] 1 KB 495; Giannarelli v Shulker (Unreptd, VSC, 15 July 1990), noted 6 Aust Insce Law Bulletin 20.. This is because the insured’s rights are not affected by any private arrangement for indemnity purchased for a consideration, just as the plaintiff’s damages would not be reduced by the existence of his own accident or income insurance. Further, the insurer’s indemnity of the insured for the costs entitles it to be subrogated to the insured’s position and should be properly protected; and as the insurer’s solicitor also acts as the solicitor for the insured in the action, he incurs costs in that behalf. Even if the insured defendant’s solicitor is employed by the insurer on a salary, for such costs to be awarded to the insured is not contrary to the principle that costs are awarded to indemnify the successful party, and full party and party costs would still be recoverable in those circumstances: McCullum v Ifield (1969) 90 WN (Pt 1) (NSW) 525.