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Insurers can be liable to pay costs for defending uninsured claims alongside insured claims

  • United Kingdom
  • Insurance and reinsurance

25-05-2018

The Court of Appeal has upheld a decision at first instance that an insurer was liable for the costs of defending uninsured claims under section 51 of the Senior Courts Act 1981 – Travelers Insurance Company v XYZ [2018] EWCA Civ 1099.

In its judgment dated 17 May 2018, the Court of Appeal emphasised the importance of the principle of reciprocity – if the insured defendant had won, all claimants (on both insured and uninsured claims) would have been liable to contribute to the defendant’s costs. As a result, the insurer stood to benefit from a successful outcome.  On that basis, the fact that some of the claims were uninsured was irrelevant in considering the extent of the insurer’s liability for those claimants’ costs once the case was lost.

The Court of Appeal considered a number of authorities on the jurisdiction of the courts to make a third party costs order against an insurer, concluding that there is no set of prescribed conditions to be met before such an order can be made, save that the discretion must be exercised in a manner that will do justice.

In the present case, the Court was of the view that the insurer’s expectation must have been that if it was called upon to indemnify the insured for defective products, all claims would be covered by the policy, so the insurer would potentially be liable to pay for all the costs of an unsuccessful defence.  Requiring the insurer to pay the costs in respect of uninsured claims was therefore no more than the insurer bargained for. Indeed, in the context of a Group Litigation Order where the number of claimants was irrelevant to the total amount of claimants’ costs, it would be unfair if the liability of the insurer was determined by reference to the proportion of insured claims.

While the Court of Appeal acknowledged that third party costs orders are “exceptional”, it stated that all that means is that the case is outside the ordinary run of cases where parties pursue or depend claims for their own benefit and at their own expense.  The test of whether a case is exceptional is not according to what is usual in the insurance industry, but in the context of the whole range of litigation that comes before the court, so where a third party “not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs.  The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.” ‘[Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807]

While the case was determined on its facts, it shows that insurers must exercise caution when funding claims for insureds where part of the claim is not covered by the insurance, as they run the risk of incurring the entire liability for costs of the other party - or parties - to the claim.

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