The Supreme Court has overturned a ruling by the Court of Appeal that the only limit on the court’s discretion to make third-party costs orders against insurers was that it must be exercised justly.
Lord Briggs said the underlying questions of whether the non-party had become the real defendant in relation to an insured claim or “intermeddled” in an uninsured one were “fundamental”.
The case involved liability for costs arising from the PIP breast implant group litigation.
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. Travelers did not disclose this until a relatively late stage in proceedings.
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.
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, a decision upheld by the Court of Appeal in May 2018.
Giving the lead judgment, Lord Briggs took issue with arguments based on asymmetry which “so deeply affected the courts below” – the fact that the uninsured claimants would have to pay the other side’s costs if they lost, but the defendants would not.
Lord Briggs described as “misplaced” the reliance on this by the courts below to justify the imposition of a third-party costs order under section 51 of the Senior Courts Act 1981.
He said: “In the present case, every one of the claimants against Transform began their claims without knowing whether they were covered by insurance and continued them in face of increasingly depressing evidence about Transform’s impending insolvency.
“They all took the risk of asymmetric costs exposure and, for a majority of them, namely the respondents, that risk came to pass…
“By contrast the lucky minority made a satisfactory costs recovery, funded by Travelers, when their cases were settled after mediation in August 2015.”
The authorities revealed two broad approaches to deciding whether a third party should pay costs: whether the third party took control of the litigation and became “the real defendant”, and whether the third party engaged in “unjustified intermeddling”.
Lord Briggs said application of the real defendant test, as set out by the Court of Appeal in TGA Chapman v Christopher, was useful in cases where insurance existed but some part of the claim lay outside the scope of cover, but was “inappropriate” in a case of this kind where claims were wholly uninsured.
In these cases, the question was whether there had been “unjustified intermeddling” by the insurer in litigation to which it was not a party.
Lord Briggs said that where there was a connection between the uninsured and the claims for which the insurer had already provided cover, it “may well be” that the insurer’s legitimate interests justified “some involvement” in “decision-making and even funding of the defence of the uninsured claims without exposing the liability of the insurer” to pay the successful claimants’ costs.
“This is just such a case because of the very close connection between insured and uninsured claims, raising common issues to be tried together in test cases in group litigation, and the limited nature of Travelers’ involvement in the uninsured claims.”
Lord Briggs said that, of the three elements of Travelers’ conduct which the High Court regarded as “crossing the line”, the first (non-disclosure) was not “unjustified intermeddling, although it did cause those costs to be incurred”, while the second and third (decision-making about offers and admissions) “even if amounting to unjustified intermeddling, which I doubt, plainly had no relevant causative consequences”.
Lord Briggs allowed the appeal by Travelers. Lord Kitchin and Lady Black agreed. Lord Reed and Lord Sumption gave separate concurring judgments, with the latter suggesting that cases in which an insurer has engaged in intermeddling were likely to be rare, and an insurer who acted in good faith in relation to insured claims should not incur a costs liability.