Judgment applies reciprocity test, holding liability insurer liable to pay claimants’ costs under s.51 Senior Courts Act

Various Claimants v Giambrone and AIG [11.01.19]

In the first significant decision concerning s.51 Senior Courts Act 1981 since the Court of Appeal handed down judgment in Travelers Insurance Company Limited v XYZ [17.05.18], Mr Justice Foskett has applied the 'principle of reciprocity', established in XYZ, in directing that a liability insurer should pay claimants’ costs as a third party funder.

Giambrone and XYZ (which is pending appeal to the Supreme Court) collectively set a line of authority which should be troubling to all liability Insurers.

Position prior to XYZ

Prior to XYZ, the authorities had tended to distinguish between the position of liability insurers, who insure against risks that may never eventuate, and after the event (ATE) funders who actively consider the risk when electing to advance costs of defending that risk.

Broadly, those authorities held that costs should generally only be directed to be paid by a liability insurer in exceptional circumstances where the claim was defended predominantly in the interests of the insurer, rather than its insured, such that the insurer was the “true party” to the litigation. In contrast, the authorities treated litigation funders/ATE insurers as being in a different position of voluntary funder of litigation, advancing funds in their own interests, namely to make a profit from the litigation.

The new test

In XYZ the Court of Appeal introduced a new test, which made no distinction between liability and ATE insurers and which has been termed the “principle of reciprocity”, in deciding that all that was required was that the third party funder receive some benefit from the successful defence of the claim in order to justify the exercise of the discretion to award costs against it.


As with XYZ, Giambrone concerned group litigation, with claims brought against Giambrone for many millions of pounds relating to the negligent conduct of the claimants’ purchases of off-plan holiday homes in Calabria, Sicily.

There were also common, albeit different, issues relating to the availability of indemnity for the claims. In Giambrone, AIG contended that it was entitled to aggregate claims on the basis that they arose from the same or similar acts or omissions in a series of related transactions. Prior to the commencement of any of the relevant claimants’ claims AIG had entered into an agreement with its insured whereby the parties compromised the aggregation dispute between them on terms which defined the available indemnity for the claims. The agreement provided, critically it appears for the purposes of the judgment, that AIG would, nonetheless, continue to advance defence costs unless it reasonably concluded that there was no realistic prospect of the claims being successfully defended.


In making his decision Foskett J drew on his own assessment of the merits of the underlying claims, in which he had given the liability judgment, and concluded that the merits were at all times poor. Although he held that Mr Giambrone had “effective control” of the litigation, he concluded that AIG was at fault for failing to control his conduct, either by:

  • entering into the agreement compromising the aggregation dispute with him on the terms agreed which required AIG to continue to advance defence costs following erosion of the limit of indemnity or
  • AIG’s failure to invoke the limitation in the agreement by contending that the claims had no realistic prospect of success.

He concluded that AIG had secured some benefit from the ongoing defence of the claims by reason of the settlement of the aggregation issue at a time when the law was uncertain and that he was entitled to apply the principle of reciprocity set down in XYZ.

In distinction from XYZ, the Giambrone claimants were informed of the insurance coverage position before any of the claims were pursued but they elected to pursue the claims in any event. However, the judge did not place any significance on this fact for the purposes of exercise of his discretion.

The judge adopted a broad-brush approach concluding that approximately 50% of the claimants’ costs throughout the whole proceedings at first instance would not have been incurred if AIG had not advanced the defence costs and directed that AIG pay 50% of the assessed costs.


Cumulatively XYZ and Giambrone are troubling for liability insurers generally. As the law now stands, any degree of control by a liability insurer over the defence of an insured’s claim exposes it to a third party costs order and, moreover, the making of such an order may be a presumption rather than being the exception. Indeed Giambrone appears to go further than XYZ by imposing a liability under s.51 based on the insurer’s failure to control the manner of their insured’s conduct of litigation.

In reality, it is difficult to identify any case where a liability insurer does not obtain some benefit from the defence of a claim. It does not know what claims may be made when it underwrites cover, reflecting the disparity between the premia paid to liability insurers for the before the event (BTE) cover and the premia paid to ATE insurers which can be many tens if not hundreds of thousand pounds higher, as was the position in Giambrone. Furthermore, a liability insurer, particularly one writing cover for professional risks, will often be bound to offer specified or minimum terms of cover as well as, of course, owing a duty to treat its customers fairly in its approach to conduct of claims.

On the basis of these judgments it is difficult to know how a liability insurer who provides cover which is inadequate to indemnify the full claim and claimants’ costs can reasonably mitigate against an exposure to pay claimants’ costs in addition to the limits of indemnity whilst, at the same time, complying with its contractual obligations and the FCA requirement to treat customers fairly.

This issue is clearly of paramount importance to the liability insurance industry and we hope that the Supreme Court will clarify the law on this issue in due course.

Read other items in London Market Brief - January 2019

Related item: Insurer liable for costs of defending uninsured claims