The Defendant caused a fire on the Plaintiff's
premises, resulting in damage in excess of £1 million.
The Defendant was covered under a household
contents policy taken out by his mother with whom he lived. The
relevant limit of indemnity was £1 million. The Defendant himself
had no assets. The household policy was issued by Sun Alliance.
The Plaintiff's own insurers brought a subrogated
claim against the Defendant. Sun Alliance had the conduct of the
Liability was conceded on the first day of trial.
The trial went ahead on the issue of contributory negligence. The
Judge rejected the allegation of contributory negligence, however,
and awarded the Plaintiff damages and costs.
After judgment had been entered against the
Defendant, Sun Alliance paid over the limit of indemnity of £1
million to the Plaintiff in settlement of the Defendant's
liability. That sum was accepted by the Plaintiff without prejudice
to its right to argue that Sun Alliance should be liable for the
costs of the action over and above the limit of indemnity.
Sun Alliance was ordered to pay the Plaintiff's
costs even though the limit of indemnity under the policy had been
Under Section 51 of the Supreme Court Act 1981, the
High Court has a discretion to determine by whom, and to what
extent, the costs of proceedings are to be paid. In the case of
Aiden Shipping Co Limited -v- Interbulk Limited (1986), the House
of Lords held that costs can be awarded against a person who is not
a party to the proceedings where this is required by the interests
In the present case, the Court of Appeal held that
costs will only be ordered against a third party in exceptional
circumstances. On the facts, Phillips LJ held that the following
factors made this an exceptional case:
- insurers had determined that the claim would be fought;
- insurers had funded the defence of the claim;
- insurers had the conduct of the litigation;
- insurers fought the claim exclusively to defend their own
- the defence failed in its entirety.
Phillips LJ went on to say that, although the above
factors may be commonplace in insurance litigation, they are
exceptional in litigation as a whole. It is most unusual for an
action to be funded, controlled and directed by a third party
purely for its own benefit.
The main objection raised by Sun Alliance was that
it was unjust that it should be exposed to a greater liability than
the limit of indemnity in the policy; furthermore, the premium
reflected the limit of indemnity.
The Court of Appeal disagreed. There was no
evidence as to the extent to which premiums would increase, if at
all, as a result of costs orders in excess of a limit of indemnity.
In any event, there was no reason why insureds should not be
expected to pay a premium which reflects insurers' exposure to such
In making the costs order, the court was not
re-writing the terms of the policy, because Sun Alliance's
liability for costs was independent of the policy. Instead, Sun
Alliance's liability for costs depended upon the actions it chose
to take pursuant to the policy terms, namely, defending a case
which the Defendant would have had no interest in and where the
defence failed in its entirety.
Finally, the Court of Appeal placed some importance
on the fact that the Plaintiff was unable to obtain interest on the
damages awarded, as interest cannot be awarded against a non-party.
Accordingly, the award of costs prevented Sun Alliance from reaping
a financial benefit from continuing to defend a claim, on grounds
which proved to be without merit.
This decision confirms that, where an insurer has
conduct of the defence of a claim on behalf of an insured, a costs
order may be made directly against the insurer. The fact that the
insurer is not itself a party to the proceedings is irrelevant; the
limit of indemnity is also irrelevant to the making of such an
The Court of Appeal refused leave to appeal to the
House of Lords; a petition for leave to appeal will be considered
by the House of Lords shortly.
Insurers should review their reserves in the light
of the Court of Appeal's decision. Claims reserves will, of course,
usually incorporate an estimate of the claimant's costs. However,
it will now be appropriate in certain circumstances to maintain a
claims reserve which exceeds the limit of indemnity. For example,
where the potential quantum of a claim exceeds the limit of
indemnity of a primary layer policy, but where there are no excess
A similar conclusion was reached in the subsequent
case of Pendennis Shipyard Limited & Others -v- Magrathea
(Pendennis) Limited (Judgment 18th July 1997). In that case, the
Defendant's insurers withdrew instructions from their solicitors
three weeks before trial. The Plaintiffs were awarded damages and
applied for a costs order against the insurers. The Judge granted
the costs order and stated,
"In my view the decisive factor here is that (the
insurers) took over the defence of the action and conducted it for
themselves for their own benefit. If an insurer does that, the
insurer may ordinarily expect to pay the costs of the Plaintiff if
the defence is unsuccessful".
The insurers contended that they should not have to
meet the costs from the date of withdrawal of their instructions.
The Judge rejected this argument on the basis that the Plaintiff
had to deal at trial with the defence which had been served
previously on insurers' instructions. The insurers remained on risk
for the Plaintiff's costs up to and including the costs of the
trial. In the light of the Pendennis decision, it now appears that
Chapman -v- Christopher represents a general rule and that insurers
will ordinarily be required to meet the costs of a successful
There is no easy way for insurers to avoid the risk
of a costs order. If the position on liability is obviously weak
and the quantum of the claim far exceeds the limit of indemnity,
insurers may be able to avoid a costs order by tendering the limit
of indemnity to the insured and withdrawing from the defence of the
proceedings. If that tactic is adopted, however, there must be
sufficient time for the insured and the insured's own solicitors to
form an independent judgment as to the future conduct of the
(T G A Chapman Limited & Another -v- Christopher &
Sun Alliance and London Insurance PLC, CA: Judgment 8th July