February 24, 2017

Product Liability - XYZ v Travelers Insurance Company Ltd (High Court)

Insurer which chose to pay defence costs for purely uninsured claims ordered to pay the winning claimants' costs

The claimants in a group litigation action alleged that the defendant had supplied defective breast implants to them. The defendant's product liability insurers advised that the policy did not cover the "worried well" ie those claimants who were concerned about their implants but whose implants had not ruptured. Eventually, the insured claims (197 in total) were settled with the consent of the insurer. The remaining 229 claimants (whose claims were uninsured) subsequently succeeded in their claim against the defendant.  The defendant was by then in administration.

The claimants therefore applied, pursuant to section 51 of the Senior Courts Act 1981, for a costs order against the insurer (which was had not been a party to the proceedings).

The policy provided the insurer would pay the insured's defence costs of "proceedings in any court…in respect of any act or omission causing or relating to any occurrence" (clause 3(a)(ii)) and "other costs and expenses reasonably incurred…in relation to any matter…which may be the subject of indemnity" (clause 3(b)). The judge held that the insurer would therefore cover the defence costs for insured claims. However, she rejected an argument that Clause 3(b) required the insurer to pay the costs of defending the common issues in the uninsured claims: "the indemnity…arises only in respect of insured claims. The relevant provision is 3(a)(ii)".

The insurer in this case had taken the unusual step of agreeing to pay uninsured defence costs in group litigation. However, the judge held that the insurer had been wrong to treat all the claims as one because they raised common issues: "Each claimant had a separate cause of action and from the outset it was [the defendant]'s case that each claimant would have to prove that the particular implants supplied to her were defective".

The judge also held that this case differed from one where an insurer is ordered to pay because it has controlled the litigation without paying appropriate regard to any contrary interest of the insured (see eg Citibank v Excess Insurance [1999]). She said that "In my judgment it is not necessary for the applicants to establish that [the insurer] controlled the litigation of their claims. My starting point is that the uninsured claims were nothing to do with [the insurer]. Their involvement, if any, in the defence of the claims and their approach to [the defendant]'s conduct of them are nonetheless relevant considerations".

She concluded that "The fact that [the insurer] insured other claims did not entitle it to be involved in, still less influence, the conduct of the uninsured claims, both of which it did". But for the insurer's involvement, it was held that the defendant would have disclosed at an early stage that there was no insurance for the "worried well" claims and the applicants would most likely have discontinued their claims. These were said to be powerful factors for making the non-party costs order. Furthermore, had the applicants' lost, they would have been liable to pay all the insurer's costs of defending the claims against the defendant. It was held that the insurer could not take this benefit without bearing some risk too.

Accordingly, the costs order was made against the insurer.

COMMENT: Prior caselaw has established that (unless otherwise agreed between the parties) an insurer is only required to pay the defence costs of claims which fall within the scope of policy cover. Where both insured and uninsured claims are being defended by the insured, the insurer will be liable for the costs of defending all the claims (but may seek an allocation of those costs after judgment). However, in this case, only uninsured claims were being brought against the insured (although both insured and uninsured claims were originally notified). The insurer's continued involvement was therefore held to be exceptional enough to take the case out of the norm and to justify a non-party costs order against the insurer. Insurers should therefore bear this risk in mind when considering (perhaps for tactical or commercial reasons) whether to become involved in defending claims brought against the insured, none of which fall within the scope of the policy.