Who Pays the Piper?

Non-Party Costs Orders against Insurers:
Travelers Insurance Co Ltd v XYZ [2019] UKSC 48

On 30 October 2019 the Supreme Court of the United Kingdom delivered judgment in Travelers Insurance Co Ltd v XYZ,¹ addressing the question of whether a liability insurer should pay non-party costs.

Jurisdiction to make a costs order against a non-party was first recognised in the 1986 decision of Aiden Shipping v Interbulk.² The House of Lords held that non-parties could be ordered to pay costs where justice so required. The leading New Zealand case on non-party costs orders is the Privy Council’s 2004 decision in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No.2).³ In that case, the Privy Council ordered the litigation funder who had supported the Todd family and their companies in the unsuccessful defence of proceedings to pay Dymock’s costs. The Privy Council recognised that, in some cases, justice will require a non-party to pay the successful party’s costs where the non-party has not only funded the proceeding but has substantially controlled it for their own benefit. In those cases, the non-party is the real party to the litigation.

Although there is a body of case law on non-party costs orders in New Zealand, there is no case, as far as we are aware, that has considered an insurer’s liability to pay non-party costs. Prior to Travelers, the leading English authority on an insurer’s liability to pay such costs is the Court of Appeal decision in Chapman Ltd v Christopher.⁴ This case is discussed in more detail below.

Travelers is an important decision because insurers are potentially exposed to a non-party costs order where they fund and control litigation, and the other side’s costs exceed the insurer’s liability under the terms of the policy.

The basic ingredients for a non-party costs order against an insurer are:

• An insurer has funded, controlled or stands to benefit from the litigation.
• The litigation has been lost and an adverse costs order has been or will be made against the insured.
• The insured is unable to pay some or all of the costs.

In 2012, a group action comprising 623 claims arising from the supply of defective silicone breast implants was brought against Transform Medical Group (CS) Ltd (Transform), a medical clinic which had supplied the defective implants. Travelers Insurance Co Ltd (Travelers) provided product liability insurance to Transform. The insurance provided indemnity for third party claims brought against Transform for bodily injury (and defence costs) occurring during the period of insurance which ran from 31 March 2007 to 20 March 2011. The policies contained standard claims control clauses, allowing Travelers to assume the conduct of the litigation on Transform’s behalf.

Of the 623 claimants bringing claims against Transform, 197 suffered injury during the period covered by the policy. Transform did not have any insurance cover for the claims brought by the remaining 426 claimants.

The claims were pursued together pursuant to a Group Litigation Order (GLO).⁵ The Court identified two common issues for early determination and selected four test claims to be fast-tracked for early determination. Two of the four test claimants were insured and two were not. The selection of the test cases was made without any reference to any understanding on the part of the Court, or the claimants, about the extent and terms of the insurance.

Travelers funded the whole of Transform’s defence until settlement of the insured claims.

At a relatively late stage (April 2014), Transform’s insurance position was revealed to the claimants’ solicitors. By that time, expert evidence showed that it was likely that the claimants would be successful against Transform. The decision not to disclose that a large number of claims were uninsured at an earlier stage was taken on the basis of legal advice given by the solicitors who were jointly instructed to act for Travelers and Transform. Rather than abandon their claims at this point, the uninsured claimants decided to continue. It appears that a key consideration for doing so, notwithstanding they were uninsured, was a desire to recover costs from Travelers.

In June 2015 Transform entered insolvent administration.

In August 2015, the covered claims were settled, with Travelers paying damages and an agreed portion of common costs referable to the covered claims.

The 423 uninsured claimants obtained default judgment against Transform in May 2016. They then sought to recover their costs from Travelers.

In the first instance, the High Court made a non-party costs order against Travelers. The Judge was primarily motivated by the following three factors:

• Her view that the uninsured claims were entirely separate and distinct from the insured claims, so that Travelers had no business involving itself in the uninsured claims at all, either directly or through jointly retained solicitors. The point was that Travelers had controlled the entire litigation on Transform’s behalf, notwithstanding that the majority of claims were uninsured.
• Had early disclosure of the limitations on the insurance been made, the Judge found the uninsured claimants would not have proceeded against Transform thereby avoiding incurring the costs they were now claiming from Travelers.
• There was an asymmetry in cost risks as between the uninsured claimants and Travelers. If Travelers was successful in defending the uninsured claims, it would have a full costs recovery against the uninsured claimants.  Conversely, if the uninsured claimants were successful against Transform, they would have no recourse at all against Travelers for their costs and, because of Transform’s financial plight, no effective recourse against Transform either.

Travelers appealed. They argued that, in order to make a non-party costs order against it, the Court needed to be satisfied that it had controlled the litigation in its own interests to such an extent (and to the exclusion of the insured’s interests) that it could be said to be the ‘real party’ to the litigation. Travelers argued this was not the case because it had not acted contrary to the insured’s interests. The fact that there was a joint retainer with their solicitors meant that Travelers had not overstepped the mark such that a costs order should be made against it.

The Court of Appeal reached the same conclusion as the first instance judge, albeit for slightly different reasons. It thought the trial judge went too far in her conclusion that the uninsured claims had nothing whatsoever to do with the insured claims. The same common issues arose in both, and Travelers was obliged under the policies (and the general law) to fund Transform’s defence in relation to the common issues in all four test cases. In relation to issues common to the insured and uninsured claims, it is settled law that insurers may not apportion their contractual liability to pay defence costs.⁶

The Court of Appeal focussed on the issue of asymmetry: the fact that if Travelers was successful in defending the action, it would have the benefit of recovering costs from all of the claimants (including the uninsured claimants). On the other hand, if it was unsuccessful, it would have no exposure to the uninsured claimants’ costs, absent a non-party costs order. In the Court of Appeal’s view, this was an “exceptional circumstance” which justified Travelers paying costs.

The Supreme Court unanimously allowed Travellers’ appeal and overturned the decisions of the lower courts.

Lord Briggs, giving the main judgment, started his analysis of the law by noting that:

Appellate courts have struggled to identify principles applicable across the board to the exercise of the jurisdiction to make a costs order against a non-party, save at the very highest level of generality.

The Court observed that liability insurance serves an obvious public interest and it is important for the courts to apply clear and reasonably detailed principles so that liability insurers know their position. It is not enough for a court to ask whether the case is “exceptional” because this does not provide adequate certainty.

Broadly speaking, the authorities reveal two approaches to deciding whether a third party should pay costs:

• Where the third party took control of the litigation and became “the real defendant”.
• Whether the third party engaged in “unjustified intermeddling”.

The Court discussed the Chapman case,⁷ which, as mentioned, was the leading decision on a liability insurer’s liability to pay non-party costs. In that case, the Court of Appeal ordered the insurers to pay costs. The plaintiffs relied on the following features to justify seeking a costs order against the insurers where the defence failed in its entirety, and the insurers:

• determined that the claim would be fought;
• funded the defence of the claim;
• had the conduct of the litigation; and
• fought the claim exclusively to defend their own interests.

The most important features of the Chapman case were that the insurers had the conduct of the litigation; they had funded and defended the litigation purely in their own interests, regardless of the insured defendant’s interests. The insured had been entirely without means from start to finish, and it would have been content to settle the case at the outset rather than contest it. The insurers were regarded as the real defendants in all but name.

The Supreme Court in Travelers held that the Chapman ‘real defendant test’ was a useful one for identifying whether an insurer should be liable to pay costs, but only in respect of claims which were within the scope of the cover (i.e. insured).  It was inappropriate in this case where the claims were wholly uninsured. In the Court’s view, in an uninsured claim, the ‘intermeddling’ test should be applied.

The intermeddling test has been described to apply where:⁸

There is wanton and officious intermeddling with the disputes of others in which the meddler has no interest whatsoever, and where the assistance he renders to one or the other party is without justification or excuse.

The Supreme Court held that the ‘intermeddling’ test is not satisfied merely by showing that an insurer has taken control of the litigation or done anything which approached it becoming the real defendant. What must be measured is the nature and extent of the insurer’s involvement as against the alleged justification or excuse for it.

A framework of contractual obligation as between the insurer and insured is likely to be of primary relevance. It may even be decisive against liability, especially where the relevant contract is of a type which is recognised and supported by public policy, such as liability insurance.  Provided the insurer has not gone beyond the confines of its contractual obligations and rights in framing its involvement, liability as an intermeddler may be very hard to establish.

The Supreme Court found that the “key feature” in the present case was the fact that the claims before the Court were wholly uninsured. Therefore, the uninsured claimants could have no real expectation (even if successful) of recovering their costs from Travelers “unless those costs were incurred as a result of some unjustified intervention in their claims”.

The Court then went on to discuss the features of the case that led the High Court and Court of Appeal to make a costs order against Travelers.

Both of the lower courts had been concerned with the asymmetry of costs risk between the insurer and the uninsured claimants: if the insurer/insured had succeeded, then the claimants would have been equally liable to contribute towards Transform’s costs which ultimately would have been to Traveler’s advantage. But failure on the same issues, would have meant the uninsured claimants would not recover their costs, absent a non-party costs order.

The Supreme Court noted, however, that the asymmetry was not the product of Travelers’ intervention. Instead it was simply because Transform was insolvent and uninsured, and each claimant’s several liability for a small proportion of the overall common costs. The uninsured claimants had taken on that cost risk regardless of whether the claims were uninsured. The Court observed Travelers’ legitimate interests in the defence of both the insured and uninsured claims where the “legitimate interests of the insurer will justify some involvement in decision making and even funding of the defence of the uninsured claims”. It held that Travelers’ involvement was not “unjustified meddling” but, rather, “the involuntary engagement which arose from their status as insurers under the policies”.

As mentioned earlier, the jointly instructed solicitors for Travelers and Transform advised Transform not to disclose the limits of the insurance cover. Disclosure that most of the claims were uninsured was not given until two years into the litigation. The Supreme Court said that parties are not legally obliged to disclose details of their insurance. As such, the advice fairly reflected Travelers’ rights relating to the claims that were insured and was not “intermeddling”.

The Supreme Court confirmed it is necessary to demonstrate a causative link between the conduct of the non-party and the incurring of the costs which the claimant seeks to recover. As to the non-disclosure of cover, which the trial judge had found had had a causative impact on the costs incurred, the decision not to make this disclosure was within Travelers’ rights as an insurer and was not causative of the uninsured claimants’ decision to incur costs.

In 2015, Travelers withheld consent to the making of a drop-hands offer to the uninsured claimants and participated in the decision not to admit liability.  Although the Court considered such conduct was justified, it said this was irrelevant in any event as it was not causative of any loss; the uninsured claimants would have pursued their claims to a judgment with costs in any event, regardless of any offer to settle on a ‘drop-hands’ basis because they were seeking to recover the substantial costs they had already incurred.

The Court of Appeal had been right to depart from the trial judge’s finding that Travelers had nothing to do with the uninsured claims. All the claims were part of the same group action and raised common issues, which had been ordered to be tried together in sample test claims. Furthermore, under the terms of its policy, Transform were entitled to have the defence of the common issues funded by Travelers, irrespective of whether they arose from insured or uninsured claims.  As such, Travellers’ involvement in the litigation of the uninsured claims did not amount to unjustified intermeddling.

The Supreme Court therefore allowed the appeal and concluded the lower courts were wrong to order Travelers to pay non-party costs.

In many cases, non-party costs issues are unlikely to arise because insurance cover will be adequate to pay costs awards to a successful claimant. However, insurers are potentially exposed to non-party costs where they insure one of the parties and conduct, control and fund litigation and the cover is inadequate to fully indemnify the claims including costs, or where covered and uncovered claims are included in the litigation, such as the Travelers case.

Liability insurers should welcome the Supreme Court’s decision. The decision suggests the circumstances in which a non-party costs order will be made against a liability insurer are likely to be rare.

1. Travelers Insurance Co Ltd v XYZ [2019] UKSC 48.
2. Aiden Shipping v Interbulk [1986] AC 965 (HL).  In England and Wales, the jurisdiction arises under s51 of the Senior Courts Act 1981.
3. Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No.2) [2004] UKPC 39, [2005] 1 NZLR 145.
4. TGA Chapman Ltd v Christopher [1998] 1 WLR 12.
5.  A Group Litigation Order is an order of a court in England and Wales, which permits a number of claims which give rise to common or related issues (of fact or law) to be managed collectively.
6. New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237 (PC).
7. TGA Chapman Ltd v Christopher [1998] 1 WLR 12.
8. Giles v Thompson [1994] 1 AC 142 at p164D per Lord Mustill.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.