Insurers: heightened risk of non-party costs orders - what you need to know

11 March 2019

In Various Claimants v Giambrone & Law (a firm) and others [2019], a non-party costs order has been made against insurers, even though those insurers had largely ceded control over the defence to certain insureds.

We review the Court's approach to the exercise of its discretion under s51 of the Senior Courts Act 1981 (s51) which leaves indemnity insurers with greater exposure to a non-party costs order.



Background

The background to this decision is complex - we provide a high level summary below.

  1. The original dispute heard in 2015 related to the "sale" to various purchasers in 2007-2008 of new build apartments in Calabria in Southern Italy, off plan. Each purchaser had engaged one or other manifestation of the legal practice of Avvocato Gabriele Giambrone (Giambrone) to act in the proposed purchases. Ultimately, the purchases were never completed, resulting in loss suffered. The intended purchasers who together now comprise the Claimants in this action alleged breach of duty by Giambrone for the failed purchases and essentially succeeded on all liability issues.
  2. The latest decision relates solely to a subsequent application by the Claimants made pursuant to s51 for a non-party costs order against AIG (Europe) Ltd (AIG), the professional indemnity insurers of Giambrone.

Legal basis of claim

S51 provides that "[the] court shall have full power to determine by whom and to what extent the costs are to be paid". It is well established by previous case law that individuals/entities who are not parties to the legal proceedings can still be ordered to pay costs and the relevant procedure for such an application is set out in Rule 46 of the Civil Procedure Rules.

Until last year, none of the significant judgments on s51 had related to a claim against a non-party liability insurer. In Travelers Insurance Co Ltd v XYZ [2018], the Court of Appeal had the opportunity to address this scenario and affirmed the making of a s51 non-party costs order in a group action against the liability insurers of an unsuccessful defendant in favour of the claimants who had uninsured claims as well as those whose claims were insured. Notably, the Court of Appeal held that the only fixed principle in this context was that the s51 jurisdiction must be exercised "justly".

In his judgment in Travelers, Lord Justice Lewison emphasised the importance of the principle of reciprocity when considering a s51 application: "...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".

The Supreme Court has granted permission to appeal in the Travelers case but unless and until there is a Supreme Court judgment overturning it, the Court of Appeal judgment represents the current law.

The insurance position

The insurance position in the Giambrone proceedings was also complex and included the following issues:

  • there was disagreement on provisions relating to the aggregation (or not) of claims; and
  • the differing insurance position of the various Giambrone entities.

Some (not all) of the Giambrone insureds (the Giambrone Partners - the 4 named partners in the Giambrone partnership) entered into a binding Heads of Terms Agreement (the HOTS) with AIG in 2013 resolving the dispute on aggregation. Under the terms of the HOTS, a separate aggregated limit of £3 million was agreed to be applicable to claims arising in respect of sales promoted by each particular promoter - in other words, on a "per promoter" basis. There were 4 separate promoters of the development.

AIG contended that the HOTS was highly significant in the context of this s51 application as:

  1. as from the date of the HOTS (6 February 2013), AIG had little control over the conduct of the litigation against the Giambrone Partners; and
  2. paragraph 2.4 of the HOTS stated "….AIG shall be entitled to withdraw funding for Defence Costs…in the event that it reasonably considers that there is no realistic prospect of defending the claim…".

AIG did however accept that its position in relation to the potential withdrawal of defence costs funding was markedly less advantageous to it after the HOTS had been entered into than it had been prior to this, as the funding agreed in the HOTS for the defence costs was largely open-ended, subject to paragraph 2.4 referenced above.

The decision

S51 in principle

There was extended debate between the parties during the trial on paragraph 2.4 of the HOTS and the extent to which AIG had or had not received advice on the prospects of success of the defences. The position on this point was complicated by the fact that legal professional privilege had not been waived, so many of the potentially relevant papers were not before the Court.

In the Judgment, Mr Justice Foskett noted that a key witness for AIG "more or less [accepted]" that "the net effect of the HOTS was to give to the [Giambrone Partners] the power to control the defences to the… [relevant] claims with minimal influence from AIG (or influence that, for whatever reason, AIG was not prepared to exercise) despite AIG being committed to bankroll the pursuit of those defences when there must have been entirely reasonable concerns from time to time, if not throughout, that the game was not worth the candle".

The key issue can be summarised as follows: was the Court persuaded that as a matter of fact, the Giambrone Partners effectively controlled the defence to the litigation, to the extent that this effectively shielded AIG from a successful s51 application? - Mr Justice Foskett did not think so. He considered it significant that the power to control the defences was ceded by AIG in a deal (the HOTS) that settled the aggregation disputes and was therefore commercially highly advantageous to AIG, with AIG "[taking] its chances" that the HOTS might have an adverse effect on AIG seeking to resist a s51 application.

He concluded that the entitlement to a s51 Order was established in principle, subject to causation, and then (if relevant) quantification.

Section 51 - causation

It was AIG's submission that the Claimants would have incurred much the same costs even without the funding of the Giambrone Partners' defence costs - seeking to rely on the principle that a non-party could not be made liable for costs if those costs would have been incurred even without the non-party's involvement.

The Judge however considered that Avvocato Giambrone would have been much more circumspect in the conduct of the litigation if he had himself been funding the legal costs to some degree. He concluded that AIG's funding of the defence did materially increase the costs expended by the Claimants.

Section 51 - quantification

The Judge said that he could only approach this issue on a "broad impressionistic basis from the vantage point of being the [trial] judge… 'doing the best I can'." He stated that, erring on the side of caution, his view would be that AIG should pay one half of the costs of the Claimants and left Counsel to agree a form of order on this basis.

Commentary

The latest Giambrone decision and the Travelers case (which is pending appeal to the Supreme Court in June 2019) collectively set up a line of authority which will cause significant concern for liability insurers (and potentially also for financiers of litigation).

Prior to this decision, it would have been fair to conclude that the fact AIG had little control over the defences of the insured from the date of the HOTS would be a significant factor for AIG in resisting a s51 application. Post Giambrone however, this can no longer be presumed. Although each case will be assessed on its merits, it now appears that in a case where a liability insurer derives some benefit from the ongoing defence of the claim, including (as was the case for AIG here in respect of the aggregation issue) a compromise on policy coverage, it will face the risk of being exposed to a s51 costs order.

Pending clarification by the Supreme Court, based on the law as it currently stands, liability insurers face significant challenges in terms of mitigating this exposure and will have to exercise caution before funding, or assuming conduct of, the defence of claims which may not be covered in full by the relevant policy. Insurers will need to weigh up any commercial benefits to be gained by ensuring the continued defence of a claim against the possible risks of exposure to third party costs orders.


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