10 Jan 2020

In October 2019 the Supreme Court unanimously overturned the Court of Appeal's decision in Travelers Insurance Company Limited v XYZ [2019] UKSC 48 on non-party costs orders against insurers. We examine the background to the decision and consider how insurers can avoid non-party costs orders being made against them.

Travelers v XYZ

Factual background

Transform Medical Group (CS) Limited was a medical clinic which had supplied breast implants manufactured by Poly Implant Prothese ( PIP). Many of these implants had ruptured causing bodily injury. Around 1000 claims had been brought in total in respect of the PIP implants, 623 of which had been brought as a group litigation action against Transform.

The litigation

Transform had product liability cover with Travelers and Travelers funded the whole of Transform's defence. Four test cases were considered in the High Court and the claimants were ultimately successful. During the course of the litigation Transform entered insolvent administration. However, it was not disclosed until a relatively late stage that only 197 of the claimants had implants which had failed within the insured period, and the remaining 426 claimants were therefore uninsured.

Pursuant to a non-party costs order under s51 Senior Courts Act 1981, the High Court (Lady Justice Thirwell) ordered Travelers to pay the costs of the 426 uninsured claimants. The Court of Appeal (Lord Justice Lewison and Lord Justice Patten) agreed with the decision of the High Court, albeit giving different reasons.

The Supreme Court decision

The Supreme Court overturned the decisions of the lower courts and allowed the appeal by Travelers.

Conduct of the non-party

The lower courts had considered that a determining factor in whether an award of costs could be made against a non-party was exceptionality. However, the Supreme Court disagreed, stating that the determining factor should be the conduct of the non-party, not the mere rarity of the case.

Asymmetry of risk

The Supreme Court also considered that asymmetry of risk is unlikely on its own to be a reason for the making of a non-party costs order against the insurer where that asymmetry arises because a claimant has pursued an uninsured and insolvent defendant. The asymmetry in this case was not caused by Travelers, but rather it resulted from the fact that Transform was insolvent and largely uninsured, and the claimant's liability for costs was several only (ie each claimant was independently only liable for a small proportion of overall costs). Asymmetry of risk can occur in other instances such as where a party is legally aided, or if Qualified One-Way Costs Shifting applies.

Chapman guidelines – when is a liability insurer at risk of a non-party costs order?

The Supreme Court referred to the principles set out in TGA Chapman Ltd v Christopher [1998] 1 WLR 12 and considered that these principles are useful guidelines for establishing whether a costs order should be made against a non-party. The court considered the starting assumption in the Chapman case, that non-parties usually, although not invariably, have no legitimate interest in becoming involved in the litigation of others. This does not make any involvement illegitimate, but a non-party will need to have some justification or excuse.

It was noted that there are broadly two separate bases upon which a liability insurer may be at risk of a non-party costs order:

  • The court must consider whether the insurer has "intermeddled" in a dispute in which it was not a party.
  • The court must also consider whether the insurer was the "real defendant", arising from its interest in the outcome of the proceedings, its contractual obligation to indemnify the defendant for its costs liability and its exercise of control over the conduct of the defence.

Travelers' conduct

The Supreme Court looked at Travelers' conduct and considered whether Travelers had intermeddled, and/or whether it was the real defendant. The conduct considered included the non-disclosure of the limits of the insurance cover, and the decision-making about offers and admissions.

Travelers was contractually obliged to fund the defence of the issues which were common to both the insured and uninsured claims. Mr Hugh Preston QC for the respondents submitted that this legitimate role of Travelers in the uninsured claims did not extend to funding the whole of the defence, and still less to decision-making about admissions or offers of settlement. The court considered that in reality such distinctions are likely to break down. The court found that the main issues in this claim were common to both the insured and uninsured claims and that Travelers had a legitimate interest in the defence of the insured claims and consequently in the issues common to both the insured and uninsured claims. Travelers' involvement was justified as an insurer and there was no intermeddling.

In respect of the non-disclosure of the limits of the insurance cover, as the law stands, parties are not legally obliged to disclose the details of their insurance. Non-disclosure of limits of cover is unlikely to constitute relevant conduct as long as this remains the case.

In respect of Travelers' involvement in Transform's decision not to make offers to settle or admissions to the uninsured claimants the court stated that, if necessary, it would conclude that this involvement was justified but in any event it did not cause the claimants to incur costs. By 2015 the uninsured claimants were pursuing their claims to a judgment with costs. The court considered that the offer of an admission of liability, or a drop-hands offer (with each party paying its own costs), was unlikely to have persuaded the uninsured claimants from continuing to incur the cost of obtaining default judgment, and summary judgment in relation to the uninsured test claims, once the insured claims had been settled, Travelers had withdrawn further funding.

How can insurers avoid a non-party costs order against them?

Where an insurer is contractually obliged to fund part of a claim, the extent of its involvement in other parts of the claim should be considered carefully. Where such involvement cannot be avoided due to there being common issues, or in circumstances where it could cause detriment to the insured elements of the claim for the insurer not to be involved (for instance in respect of offers to settle the uninsured parts of the claim which may prejudice the insured parts) then it is likely that the insurer's involvement would be regarded as legitimate.

The Chapman principles were considered by the Supreme Court as being useful for establishing whether the insurer has become the real defendant in all but name. However, these principles are only likely to be useful where some part of the claim is outside the limits of cover. They are not likely to be of assistance where the question is whether the insurer's involvement crossed the line and it became involved in the defence of wholly uninsured claims, as it did in the above case. In those cases the insurer may cross the line even where it does not assume total control if it intermeddles in the uninsured claim in a manner which it cannot justify.

Any party applying for a non-party costs order would also still need to prove a causative link between the particular conduct of the non-party relied upon and the incurring by the claimant of the costs it is seeking to recover. If those costs would have been incurred in any event, it is unlikely that a non-party costs order would be made.