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Insurers at increasing risk of non-party costs orders

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Various Claimants v Giambrone & AIG [2019] EWHC 34 (QB)

The Supreme Court heard the appeal in the leading case on non-party costs orders against liability insurers, Travelers Insurance Company Ltd v XYZ[2018] EWCA Civ 1099.  The central issue before the court for consideration is when it will be appropriate to order a liability insurer to pay a costs order otherwise payable by its insured, where the insurer provided coverage for the defence costs in the litigation.  Whilst the Supreme Court judgment is awaited, we will recap the law set out in Various Claimants v Giambrone & AIG, a High Court decision handed down earlier in the year which applied the Court of Appeal decision in XYZ.

In Giambrone, the court made a non-party costs order against AIG, based on its involvement in the defence of the claim against its assured, a law firm found to have provided negligent advice.  The judgment provides a clear statement of a number of principles in respect of non-party costs orders, but also extends those principles, so that inaction (rather than action) by insurers which is adverse to the insured's interests, was also taken into account.  

Where insureds are covered by ATE insurance or alternative forms of litigation funding, there may be a valid expectation that their insurers shall be responsible for costs orders otherwise payable by the insured.  However, the concept that liability insurers should be ordered to pay the successful third party claimant’s costs does not immediately follow.  The making of such orders has been strongly resisted, but so far unsuccessfully in Giambrone and XYZ.

Background

Giambrone, a law firm, had advised in relation to investments in a luxury homes development in Calabria, Italy.  After Giambrone released a deposit payment to the property developers the Italian authorities seized the development site as it was part of an investigation into Mafia money laundering.  The claimants successfully argued that Giambrone was negligent in failing to advise on the known risks of the development site being linked to organised crime.  Giambrone had strongly contested the issues in the litigation but lost on all points.

Giambrone had professional indemnity insurance in place with AIG.  The insurance policy contained an aggregation clause.   AIG considered that this clause applied so that the aggregated limit of £3 million would apply to the claims.  This was disputed by Giambrone.  However, a side agreement was negotiated under which AIG agreed to fund Giambrone’s defence costs whilst maintaining its arguments about the aggregation limit.  Under this agreement, AIG was entitled to cease funding the defence where it considered there to be no reasonable prospect of successfully defending the claim.

Outcome

Foskett J sitting in the High Court exercised his discretion under s.51 of the Senior Courts Act 1981 to order AIG to pay half of the claimants’ legal costs, even though AIG was not a party to the original Giambrone negligence litigation.  Section 51 (3) provides that "The court shall have full power to determine by whom and to what extent the costs are to be paid."  The courts have interpreted this as permitting non-party costs orders to be made, but only in exceptional circumstances.  In his decision, and in exercising his discretion in respect of the costs to be paid, the judge relied upon the earlier Court of Appeal judgment in XYZ last year.

The XYZ judgment made clear that there were no rigid factors for the courts to consider when awarding a non-party costs order, provided that the discretion was exercised justly.  The Court of Appeal stated the court’s discretion was very broad and was to be exercised based on the circumstances of each case.  However, the court did set out some principles on how the discretion should be exercised, as follows:

Control - a liability insurer who funds an unsuccessful defence by its insured will be liable under s.51 if "the evidence establishes that the insurer controlled the litigation in its own interest, and without paying appropriate regard to any inconsistent or contrary interest of its insured".

Benefit - A non-party costs order will only be appropriate where the insurer stands to obtain benefit from the litigation by pursuing or defending the claim.

Reciprocity - He who takes the benefit must also accept the burden.  If a defence succeeds, then an insurer (cost paying party) would be able to recover its costs from the claimants.  Fairness demands reciprocity and therefore the insurer should pay for the claimants’ costs if the defence fails.

In Giambrone the claimants successfully argued the reciprocity principle, namely that as AIG stood to benefit from a successful defence, they must be liable if the same defence fails. In light of side agreement between AIG and Giambrone, AIG were found to materially benefit from the successful litigation, given that their position on aggregation was not to be tested.   

Foskett J applied these principles to Giambrone and found that by entering into the separate litigation financing agreement (to defer any decision about aggregation) AIG effectively let Giambrone control of the litigation.  AIG had had an option to stop funding Giambrone’s defence as soon as it considered it meritless (as the Court subsequently decided) but chose not to intervene and, in doing so, allowed costs to rack up although its case was weak.  The judge found that the ability to intervene was sufficient to find that AIG had control over the litigation which it had chosen not to exercise and, adverse to Giambrone’s interest, AIG allowed Giambrone to continue pursuing a defence.

This decision extends the principle of insurers’ adverse actions in XYZ to include inaction by insurers which is adverse to the insured’s interest in the litigation.

Comment

The English court has shown that it is willing to follow and incrementally extend the decision in XYZ to award “exceptional” discretionary non-party costs orders against liability insurers.

What is clear from the Giambrone judgment is that the contractual rights and limitations between an insurer and the insured need not be the sole determinant of the discretion of the court in making a non-party costs order.  The award will be based on the circumstances of the case and is at the broad discretion of the courts.

The defendants in Giambrone were not granted permission to appeal and therefore this litigation has reached its conclusion.  It remains to be seen how the Supreme Court will decide the appeal in XYZ, and whether the justification developed by the lower courts for imposing non-party costs orders on liability insurers will be endorsed, overturned or moderated.

This article was co-authored by Elizabeth Tozzi, Associate at Ince.

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