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 an important judgment (Travelers Insurance Co Ltd v XYZ)¹ which addressed the question whether a liability insurer should be subject to a non-party costs order as a result of the role it played in litigation.

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 claims relating to bodily injury (and defence costs) occurring 31 March 2007 to 20 March 2011. The policies contained standard claims control clauses, allowing Travelers to conduct 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 cover for the claims brought by the remaining 426 claimants.

Travelers funded the whole of Transform’s defence up until settlement of the insured claims.
At a relatively late stage in the litigation (April 2014), Transform’s insurance position was revealed to the claimants’ solicitors.

In August 2015, the covered claims were settled, with Travelers paying both damages and an agreed portion of common costs referable to the covered claims.
The remaining 426 claimants continued their action in respect of the uninsured claims. A default judgment was entered May 2016. However, the uninsured claimants were unable to recover any damages or costs as Transform had become insolvent. The claimants then sought to recover their costs from Travelers.

In the first instance the High Court made a non-party costs order against Travelers. The order was based on the following:

• That the uninsured claims were entirely separate and distinct from the insured claims;
• Had early disclosure of the limits on the cover available under the policies been made, the uninsured claimants would not have proceeded and avoided costs;
• There was an asymmetry in costs risk 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 against Travelers or the insolvent Transform.

The Court of Appeal reached the same conclusion as the first instance judge, albeit for slightly different reasons.

The Supreme Court allowed the appeal against the order that Travelers pay costs.

The Court noted that 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”; and
• Whether the third party engaged in “unjustified intermeddling”.

The Supreme Court held that the ‘real defendant test’² was a useful test for identifying whether an insurer should be liable to pay costs in claims where the claims were insured (even where there is a limit on the cover). However, it was inappropriate in a case like this where the claims were wholly uninsured. The Court stated that in an uninsured claim, the ‘intermeddling’ test should be applied.

It held that the ‘intermeddling’ test is not satisfied merely by showing that an insurer has taken control of the litigation. What must be considered is the nature and extent of the insurer’s involvement as against the alleged justification or excuse for it. The 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, its liability as an intermeddler may be very hard to establish. The appeal was allowed and the costs order against Travellers was overturned.

In many cases, non-party costs issues are unlikely to arise because the cover will be adequate. However, insurers could be exposed to the risk of a non-party costs order when they conduct, control and fund litigation and where the cover is inadequate to fully indemnify the claim including costs, or where covered and uncovered claims are included in the litigation, such as in the Travelers case.

The Supreme Court’s decision provides some welcome clarification regarding when a non-party costs order is likely to be granted against a liability insurer. It confirms a non-party costs order is unlikely where the insurer acts in good faith, in the interests of the insured in relation the insured claims and in accordance with their contractual obligations and entitlements.

Liability insurers can take some comfort from the fact that this decision suggests that 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. The test comes from TGA Chapman Ltd v Christopher [1998] 1 WLR 12.

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.