Supreme Court clarifies the position on non-party costs orders in favour of uninsured claimants

United Kingdom

In a decision arising out of claims relating to defective silicone breast implants, the Supreme Court has provided guidance on insurers’ potential liability for third-party costs orders.

Background

Transform Medical Group faced 623 claims for its role in the supply of defective breast implants in relation to the Poly Implant Prothèse Group Litigation Order. Travelers Insurance Co Ltd, provided product liability insurance to Transform, which covered liability for bodily injury. Travelers determined that 426 of the claims (the so called, “worried well” patients) had not suffered bodily injury from a rupture of their implants and did not therefore fall for cover under the policy.

At the outset of the litigation, the claimants’ legal team sought clarification on the nature of Transform’s insurance cover, prompted by concerns that it might be in financial difficulties. However, it was not until June 2014, in the later stages of litigation (faced with an application made against Transform to disclose its insurance position), that Travelers and Transform, in reliance upon advice provided under a joint retainer, chose to voluntarily reveal that a large number of the claims were uninsured. As the claimants had feared, Transform subsequently entered into liquidation.

The insured claims were eventually settled in June 2015 and the question arose as to whether Travelers would be liable to pay the uninsured (as well as the insured) claimants’ costs. The uninsured claimants applied for a costs order directly against Travelers (with Transform now in liquidation) pursuant to section 51 of the Senior Courts Act 1981.

First Instance Decision

At first instance, Thirlwall LJ decided to grant a non-party costs order against Travelers (siding with the uninsured claimants) as this was an, “exceptional case”, applying the following reasoning:

  1. Travelers had no business involving itself in the uninsured claims at all, either directly or through jointly retained solicitors.
  2. If early disclosure of the coverage position had been made, the uninsured claimants would not have pursued their claims, so the costs they incurred (for which they had no effective recourse) would not have been incurred at all.
  3. There had been an asymmetry in costs risk as between the uninsured claimants and Travelers. If Travelers successfully defended the uninsured claims they would be able to recover the costs against the claimants but by contrast, on Travelers’ analysis, if the uninsured claimants were successful against Transform, they would not have any recourse against Travelers.
  4. Participation in settlement discussions supported the view that Travelers participated in the uninsured claims to an extent sufficient to insure a non-party costs liability.

Court of Appeal Decision

The Court of Appeal reached the same conclusion in that this was an “exceptional case” but for different reasons:

  1. The Court is concerned with a “broad discretion which it will seek to exercise in a manner that will do justice” when faced with these applications.
  2. Contrary to Thirlwill LJ’s view, the uninsured and insured claims did have common issues (i.e. in relation to sharing the costs risk of the litigation) and Travelers were therefore obliged to fund Transform’s defence of these common issues.
  3. There had been a conflict of interest between Travelers and Transform (in relation to the advice provided under the joint retainer) in that Transform wanted to reduce the number of claims but Travelers (believing they were only partly responsible for the claimants’ costs) had an interest in as many of the uninsured claimants as possible pursing the litigation.

The decision not to disclose the position on insurance coverage was noted as being due to flawed legal advice given to Transform under the joint retainer. It was correct for Travelers to bear some responsibility for the advice under the joint retainer, having funded the costs of the preliminary issues and standing to benefit from a successful outcome.

The Supreme Court Decision

On 30 October 2019, the Supreme Court, the main judgment being delivered by Lord Briggs, unanimously overturned the previous decision which found against Travelers and allowed their appeal. Ultimately, the Court sought to establish that there are clear principles to be applied when insurers are held responsible for the non-party costs liability of insurers. or: the Court sought to provide liability insurers with guidance on when they may be subject to non-party costs orders.

Lord Briggs determined that there are two ways in which insurers might be liable when faced with a non-party costs order:

1. Could the Insurer be considered the ‘real defendant’ in the sense that it took control of the litigation?

The Supreme Court found that the ‘real defendant’ test (as set out in TGA Chapman Ltd v Christopher, 1998) is useful when assessing whether an insurer should be liable for costs where a claim is partly covered by insurance but some part is outside the limits of cover. The test was not, however, helpful (in cases such as this one) when considering wholly uninsured claims.

2. Was the insurer involved in ‘unjustified intermeddling’?

In cases where a claim is wholly uninsured, the correct test is whether the insurer has engaged in 'unjustified intermeddling'. There is no set benchmark for what amounts to ‘intermeddling’, the Supreme Court noting that, in every case, “the nature and extent of the non-party’s involvement will have to be measured against the alleged justification or excuse for it”. Where a non-party has become involved in litigation under a framework of contractual obligations, such as liability insurance, and its involvement has not gone beyond its obligations and rights under the policy, it may be difficult to establish that it has 'intermeddled'. This point was underlined by Lord Sumption in his concurring judgment who noted that costs orders against liability insurers on the basis that they have ‘intermeddled’ unjustifiably, are “likely to be rare”. The Supreme Court found that, although there were various aspects of the insurer’s conduct that were open to criticism (focusing on the non-disclosure of insurance cover), it had fallen short of “unjustified intermeddling”. In this respect, it was noted that the parties to litigation are not necessarily required to disclose their insurance arrangements.

Further, the Court of Appeal had been right to depart from Thirlwall LJ’s finding that Travelers had nothing to do with the uninsured claims. All the claims raised common issues, which had been ordered to be tried together. Transform were therefore entitled under the Policy to have the defence of the common issues funded by Travelers, regardless of whether they arose from insured or uninsured claims. As such, Travelers’ involvement in the litigation of the uninsured claims did not amount to unjustified intermeddling.

Asymmetry – lack of Reciprocity

Although the Court of Appeal highlighted that the uninsured claimants might not be able to recover their costs, the Supreme Court did not consider the costs risk to be decisive. There will often be asymmetry (for example, where one party is in receipt of legal aid). Any asymmetry in the present case did not directly result from Travelers’ actions.

Settlement and Admissions

The Supreme Court found that there was no causative link between Travelers’ involvement in making an offer towards the costs of the uninsured claimants and the costs sought, because the claimants would have pursued the claims regardless of any offer made to pay their costs.

Comment

The Supreme Court has established a more principled approach to determining whether a non-party costs order is likely to be granted against an insurer. Although the decision provides insurers with a degree of reassurance in that they may be able to avoid liability for costs under a section 51 Order, there still remains uncertainty at this stage over what would constitute ‘unjustified intermeddling’.

When considering litigation strategy, this case serves as a reminder that insurers should always be aware that adverse cost consequences could arise, particularly in relation to the uninsured elements of a claim. In this respect, Insurers may wish to consider disclosing their insurance position at the earliest juncture possible (having carefully considered when it is most appropriate to do so) in order to mitigate against the risk of facing any costs penalties at a later stage.

In respect of the underlying issues concerning conflicts and joint-retainers, insurers will also be well advised to assess throughout the litigation whether conflicts arise between insurer and insured as they may ultimately suffer costs consequences for advice given by lawyers appointed on a joint retainer.

Further reading: Travelers Insurance Company Ltd v XYZ [2019] UKSC 48.