Insurer liable for costs of defending uninsured claims

The Court of Appeal recently handed down judgment in Travelers Insurance Company Limited v XYZ. It was a product liability case, but the principles have general application, and it will be important for insurers to be mindful of circumstances where their exposure to claimants’ costs may exceed their liability under the terms of the policy.

Facts

A Group Litigation Order (GLO) was made in 2012 in respect of allegedly-defective breast implants, which around 1,000 people joined. 623 of those claims were brought against Transform Medical Group (CS) Limited (Transform), which was insured by Travelers. 197 of the claims were insured, but the balance of 426 were uninsured, either because they were brought by the “worried well”, whose implants had not in fact failed, or because the causes of action fell outside the period covered by the insurance. The case proceeded by way of four sample cases.

The solicitors defending Transform were acting upon a joint retainer for both Transform and Travelers. They advised, backed by advice from Counsel, not to disclose the lack of insurance in respect of the 426 cases. Whilst Transform wanted to disclose this to the claimants, they acted upon advice given by their solicitors.

Transform entered into insolvent administration in June 2015. In August 2015, Travelers settled the insured cases and paid an agreed proportion of the costs attributable to the insured claims. Following judgment in default having been entered against Transform by the claimants with uninsured claims, the issue arose as to whether Travelers would be responsible for their costs (no application was made for Travelers to pay any sum in respect of damages).

The claimants with uninsured claims applied under s51 Senior Courts Act 1981 to require Travelers to pay their costs. The case authorities do not provide prescriptive conditions which an applicant must establish to obtain a non-party costs order; rather the court must exercise its discretion justly.

First instance decision

At first instance, the Judge found that, but for Travelers’ interest, Transform would have disclosed the lack of insurance and those claims would not have been pursued, and those claimants would therefore not have incurred any liability for costs of the GLO. Accordingly, Travelers were ordered to pay those costs. Travelers appealed.

Court of Appeal

The court found that the costs of defending the GLO for both claimants and defendants would have been the same whether there had been 197 or 623 claimants. If there were only the 197 insured claims, Travelers would have been exposed to all the claimants’ costs. Therefore, simply because 426 claimants with uninsured claims joined the GLO, Travelers would fortuitously escape liability for approximately 68% of those costs if the application for a non-party costs order was not granted.

The Court of Appeal upheld the decision of the lower court. Travelers had funded defence costs, and stood to benefit from a successful outcome. The advice not to disclose the lack of insurance had been given under a joint retainer, and it was not unjust to require Travelers to pay the full amount of costs to the claimants with uninsured claims.

Comment

Whilst there is no obligation on a party to disclose the terms of an available insurance policy, or whether claims are in fact covered (or whether this is the subject of dispute), it is important to give careful consideration to whether in fact a voluntary disclosure should be made. Solicitors acting on a joint retainer must be alive to potential conflicts, so insurers should consider obtaining separate advice. Obvious circumstances where this can come into play include:

• When a claim (and costs) is likely to exceed a limit of indemnity
• When defence costs erode the limit
• When some claims, or aspects of claims, are not covered
• When there is a dispute as to policy response.

Advising on matters such as this will always be a tactical tightrope – how much of our hand do we want to disclose voluntarily to a claimant? However, we must always be wary of potential orders against insurers in excess of the policy terms or limits. The earlier a disclosure is made to a claimant, the stronger insurers’ defence to an application for a non-party costs order, because the claimant would have continued with a claim in the knowledge that there may be a risk of non-recovery.