Travelers Insurance Company Ltd (Appellant) v XYZ (Respondents) [2019] UKSC 48

The Supreme Court has reviewed the principles concerning third-party costs orders and ruled that an insurer was not liable for uninsured claimants' costs.

The Supreme Court unanimously overturned the Court of Appeal's judgment to hold that Travelers was not liable to pay the costs of a group of uninsured claimants by way of a third-party costs order.

Transform Medical Group (CS) Ltd was a medical clinic that supplied breast implants manufactured by Poly Implant Prothèse. Many of these ruptured causing bodily injury. A group litigation action was brought by about 1,000 claimants. Of these, 623 were brought against Transform. Transform entered into insolvent administration half way through the litigation.

Transform had product liability insurance with Travelers covering liability for bodily injury occurring during the policy period. 426 of the claims against Transform were uninsured claims as either no bodily injury had occurred or it occurred outside of the policy period. 

The insured claims were settled and Travelers paid an agreed proportion of the damages and costs attributable to those claimants. In contrast, the 426 claimants with uninsured claims obtained a judgment but recovered no costs or damages from Transform owing to its insolvency and lack of insurance cover. They sought their costs from Travelers and amongst other things relied upon allegations that the policy limits were not disclosed until late in the proceedings, the insurer had been involved in the settlement decisions, and an asymmetry of risk of costs recovery. 

The Supreme Court identified two key principles in determining liability for costs of a third party liability insurer under section 51 of the Senior Courts Act 1981.

1. The "real defendant" test

This test derives from the decision of the Court of Appeal in Chapman¹. In essence, the court asks whether the insurer took control of the litigation and became the real defendant. This will include consideration of whether the insurer "decided that the claim should be fought, conducted the defence, and did so motivated entirely by their own interests" (see paragraph 40). 

Lord Briggs said that the Chapman principles were engaged in costs claims where the underlying claim was insured. That was not this case. He rejected the Court of Appeal's application of an "elusive concept of exceptionality" and said that in cases where the claim was uninsured the "intermeddling" test was the appropriate one.

2. The "unjustified intermeddling" test

Here the test is whether the insurer unjustifiably intermeddled in the conduct of the defence of the claim and that conduct caused the claimant's costs to be incurred. This was particularly complicated in this case because the insured and uninsured claims were run together by jointly instructed solicitors under a Group Litigation Order in respect of issues that were common to all of the claims.

The court held that Travelers had not unjustifiably meddled in the litigation and rejected the grounds relied on by the claimants. 

The decision not to disclose the limits of cover earlier may have contributed to some of the uninsured claimants' costs but was not motivated by a desire to dilute Travelers' costs risk and was not an inappropriate intervention in circumstances where Travelers acted on advice given in good faith in relation to the claims as a whole. Lord Briggs said that this was "not in any recognisable sense an inappropriate intervention by Travelers in the defence of the uninsured claims, as distinct from the insured claims. The advice was given in relation to the claims against Transform as a whole and was plainly part of the conduct of the defence to the insured claims which Travelers was entitled to control… just as much as it was part of the conduct of the defence of the uninsured claims." (paragraph 63). He also noted that there was no obligation to disclose details of insurance.

The involvement in decisions on settlement and admissions did not cause any of the costs to be incurred. The Court of Appeal had failed to conduct any analysis of that and the Supreme Court was clearly surprised that it fell to it to do so. Lord Briggs further held that the involvement in settlement and admission decisions in relation to uninsured claims while the closely related insured claims were still alive would not, in any event, have comprised a "sufficient crossing of the line" to attract a third party costs order (paragraph 73). It is therefore legitimate for liability insurers to be involved in the decision-making, conduct and funding of a defence against uninsured claims where those claims are closely connected with insured claims and there are common issues to be tried.

The asymmetry of costs risk arose out of the fact that the uninsured claimants faced the risk of paying the defendant's costs but Travelers did not face the risk of paying the claimants' costs. In addition, the several liability of the insured and uninsured claimants for common costs meant that Travelers would have a commensurately reduced exposure for the common costs. The defendant did not have that same impediment in its own costs recovery. 

Conclusion

This will be a welcome decision for insurers who are engaged in the common situation of having to insure the defence of claims where there is insufficient cover. It is often a difficult path for insurers and the facts in this case were particularly complex. The conduct of claims in this situation presents a constantly moving situation that requires continual assessment. The court has observed that intermeddling liability is likely to be rare where an insurer has acted in good faith. But this is unlikely to deter claimants with unrecovered costs where large amounts are at stake and insurers will continue to implement careful risk management measures in relation to litigation where there is potential for third party costs liability.

¹ TGA Chapman Ltd v Christopher [1998] 1 WLR 12. In Chapman, the claimant relied upon five features of the case which justified a non-party costs order: (1) the insurers determined that the claim would be fought; (2) the insurers funded the defence of the claim; (3) the insurers had the conduct of the litigation; (4) the insurers fought the claim exclusively to defend their own interests; (5) the defence failed in its entirety.