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02 April 2019
In Various Claimants v Giambrone & Law and Ors  EWHC 34 (QB), the High Court awarded a non-party costs order against a law firm's professional indemnity insurer under section 51 of the Senior Courts Act 1981 in circumstances where the insurer had effectively relinquished control of the defence of the litigation. The decision follows closely on the back of the Court of Appeal's decision in Travelers Insurance Company Ltd v XYZ  EWCA Civ 1099.
A law firm, Giambrone & Law, (the Insured) was insured under a professional indemnity insurance policy (the Policy) with AIG (Europe) Limited (AIG). The Policy had a £3 million limit of liability in respect of "any one claim" excluding defence costs.
Group litigation proceedings were commenced against the Insured regarding its handling of off-plan property purchases. Whilst many of the individual claims were settled before trial, all major issues were, according to the judge, "fiercely fought" by the Insured. This was despite the existence of circumstantial evidence suggesting that the Insured had little confidence in successfully defending the remaining claims. The Claimants in the underlying action ultimately succeeded on all points.
This case was an application under section 51 of the Senior Courts Act 1981 for a non-party costs order against AIG. Section 51 provides that "[the] court shall have full power to determine by whom and to what extent the costs are to be paid".
In defence of the application, AIG placed considerable reliance on a separate agreement it had entered into with the partners of the Insured (referred to in the judgment as the HOTS agreement). AIG's position on coverage under the Policy was that it was entitled to aggregate the claims against the Insured so that they amounted to one claim, thus capping AIG's limit at £3 million in respect of damages and/or costs to the Claimants. The Insured challenged AIG's coverage position. In order to resolve this coverage dispute, the parties entered into the HOTS agreement. Under this agreement, the parties agreed the basis upon which the claims against the Insured would be aggregated and AIG agreed to advance defence costs on that basis with the proviso that it was entitled to withdraw such funding "in the event that it reasonably considers that there is no realistic prospect of defending the claim".
AIG relied on the HOTS agreement to justify its conduct in the litigation. AIG claimed that once the HOTS agreement was in place, it was no longer in control of the way the defences to the claims were conducted. It also argued that whilst it funded the defence costs, it was not at any time advised that there was no realistic prospect of success which would entitle AIG to withdraw funding for the defence costs.
AIG also claimed that, even without its funding of the defence costs, the Insured would have caused the Claimants to incur materially the same costs.
Mr Justice Foskett determined that the relevant question was: did the fact that AIG had no effective control over the defence to the litigation protect it from a successful section 51 application? He answered that question in the negative, stating:
"…where an indemnity insurer substantially relinquishes control of the conduct of the litigation to the insured (or fails to take steps to control it when there are grounds for intervening), and does so in the expectation that it will be immune from a costs liability towards the opposing party if the opposing party is successful, that expectation is open to be falsified by the court in a section 51 application, particularly if the prospects of success for the insured are assessed as poor".
Since legal professional privilege had not been waived, it was not possible to determine what advice had been given regarding the merits of the claim. However, it was known that many of the claims had settled before trial, and all offers of settlement from the conclusion of the HOTS agreement onwards were at the high end of normal value. Foskett J concluded from these facts that it was reasonable to assume that the Insured had cause to be concerned about its ability to defend successfully the claims at trial. He was therefore not convinced that AIG had no grounds for withdrawing funding.
The judge also noted that the HOTS agreement was an arrangement which benefited AIG because the aggregation issue was settled at a time when there was doubt about whether AIG's interpretation of the Policy was correct.
As regards AIG's contention that the Insured would still have caused the Claimants to incur materially the same costs even if AIG had not funded the defence costs, Foskett J determined that he could not properly infer from the available facts that the Insured had sufficient resources to fund the defence of the claims without AIG's assistance. The judge expressed the view that, absent AIG's funds, the Insured would have been much more circumspect about the potential exposure to an adverse costs order. Therefore, it was reasonable to conclude that AIG's funding of the defence materially increased the costs expended by the Claimants in pursuing their claims.
Whilst acknowledging that quantifying the proportion of costs which would not have been incurred by the Claimants but for AIG's support could only be done on a "broad impressionistic basis", the judge found that the Claimants had spent twice as much pursuing their claims as they would have done had AIG not funded the defence in the way it did. AIG was therefore required to pay half the Claimants' costs.
The High Court's decision makes plain that the Court's discretion under section 51 is a broad one and that each case ultimately turns on its own facts. The decision is consistent with the Court of Appeal's decision last year in Travelers Insurance Co Ltd v XYZ. In that case, a factor in favour of the adverse costs order made against the insurer was the fact that the insurer had some control over the proceedings, the exercise of which prolonged the proceedings. This case clarifies that an insurer need not exert any active control over the Insured's conduct of the proceedings in order to be the subject of an adverse costs order under section 51.
The key requirement appears to be that the insurer will benefit from its arrangement with the insured and has a stake in the successful outcome of the proceedings. This was reflected in Foskett J's reference to the principle of reciprocity in Travelers Insurance Co Ltd v XYZ :
"…if a person funds and stands to benefit from proceedings, justice requires that if they fail he should pay the successful party's costs…This is no more than a reflection (or perhaps a modest extension) of the long-standing principle that he who takes a benefit must also accept the burden."
Liability insurers should take heed.
For further information on this topic please contact David A Jones, Leah Monk or Sarah Irons at Herbert Smith Freehills LLP by telephone (+44 20 7374 8000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.
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