The only limit on the court’s discretion to make third-party costs orders against insurers is that it must be exercised justly, the Court of Appeal has ruled.
As a result, Travelers Insurance has to pay out on more claims than it insured.
Travelers Insurance Company Ltd v XYZ  EWCA Civ 1099 dealt with the liability for costs arising out of litigation concerning the supply of defective PIP breast implants.
The claims were made in group litigation involving around 1,000 claimants. Some 623 of those claims were brought against Transform Medical Group (CS) Ltd, which was insured by Travelers in relation to 197 claims, but, for various reasons, not the remaining 426.
The case settled in 2015, but not before Transform had entered insolvent administration. Travelers paid an agreed proportion of the damages and costs attributable to the insured claims.
The uninsured claimants incurred little by way of individual costs, but were potentially liable under the costs-sharing terms of the group litigation order for their proportion of the common costs.
In March 2016 the uninsured claimants entered judgment in default against Transform. The uninsured claimants have not recovered anything, either by way of damages or costs. The court noted that, because Transform was insolvent, they were unlikely to do so.
As a result, the uninsured claimants applied to the court for an order that Travelers pay their costs of the action – not any damages. Lady Justice Thirlwall (as she had by then become) made such an order in January 2017.
On appeal, Travelers argued that there were principles established by the case law which regulated the circumstances in which costs may be awarded against an insurer, and that the judge’s failure to apply them was a fundamental error of principle which vitiated the exercise of her discretion.
Giving the ruling of the Court of Appeal, Lord Justice Lewison cited the 2016 Court of Appeal case of Deutsche Bank AG v Sebastian Holdings Inc, in which it was held that, although the courts have given guidance from time to time, “none of it is immutable”.
He continued: “On an application of this kind, the court is not concerned with legal rights and obligations but with a broad discretion which it will seek to exercise in a manner that will do justice. The only immutable principle is that the discretion must be exercised justly.”
Lewison LJ said there was “an obvious asymmetry” in Travelers’ position. He explained: “If Transform had succeeded on the preliminary issues, then all claimants (whether insured or uninsured) would have been liable equally to contribute towards Transform’s costs which, ultimately, would have been to Travelers’ advantage.
“But failure on those very same issues has the result, if Travelers are correct, that it is ultimately liable for only approximately 32% of the claimants’ costs.
“In addition, as the judge also recognised, there is a large element of happenstance in Travelers’ position. The costs of defending the preliminary issues, for both claimants and defendants, were the same whether there had been 197 claims or 623.”
The judge said his “instinctive reaction” was that this result accorded “neither with reason nor justice given the probably unique circumstances of this case”.
. “The judge directed herself that the ultimate issue was whether it was just to make the order under section 51. That self-direction was entirely correct. Whether it was just to make the order was a value judgment for the judge to make.
“In making her value judgment, she had to consider whether the case merited the adjective exceptional. She decided that it did. In my judgment, the value judgment that she reached was one that was open to her.”