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UK: Insurers beware: if you refuse cover mid-proceedings you could suffer cost consequences
Court of Appeal.
Judgement handed down on 23/02/2016
A recent Court of Appeal judgment serves as a reminder that if, part way through proceedings, insurers refuse coverage (where they had previously agreed cover and had run the defence of a claim) they open themselves up to a non-party costs order for the claimant's costs of proceedings.
Proceedings for damages for negligence and nuisance, and under the rule in Rylands v Fletcher, were brought against a garage company in November 2008 and were defended by its public liability insurers until September 2010. At that point, the insurer's solicitors notified the claimant's solicitors that the insurers had “now confirmed that the policy of insurance does not respond to the claims”. Proceedings were well under way by this point; statements of case had been exchanged and the insurers had made an unsuccessful application for strike out and summary judgment. The insured garage company did not have the funds to continue to defend the claim and judgment in default of defence was entered against them in October 2010. Due to the garage company's insolvency they were unable to meet either any liability under the judgment or the costs order made against it. The claimants applied for an order that the garage company's insurers pay their costs. The County Court ordered the insurers to pay the claimants’ costs of the proceedings under section 51(3) of the Senior Courts Act 1981. The Court of Appeal upheld the decision. The relevant test for justifying the exceptional course of making a costs order against insurers is laid out in In TGA Chapman Ltd v Christopher “ as:
- the insurers determined that the claim would be fought;
- the insurers funded the defence of the claim;
- the insurers had the conduct of the litigation;
- the insurers fought the claim exclusively to defend their own interests;
- the defence failed in its entirety.
The Court of Appeal identified the key point for consideration was (4) whether the insurers were acting exclusively or predominantly in their own interests in defending the claims. The Court of Appeal found that there was ample material on which the judge could conclude that they were because they knew from the start of the proceedings that the garage company would be unable to meet any award of damages if it was not covered by the policy. The Court of Appeal stated that "the only reasonable inference from the precarious financial position of Sterte and from its failure to defend the claims once the insurers withdrew their support is that, but for the insurers’ support, Sterte would not have defended the claims and the claimants would have avoided the bulk of the costs they were forced to incur. There can be no serious doubt that the conduct of the defence by the insurers was causative of those costs."
Given its decision on section 51(3) of the Senior Courts Act 1981, the Court of Appeal did not need to consider the Third Parties (Rights Against Insurers) Act 1930 point (whether the insured garage company was entitled to an indemnity against the claimants’ costs under the terms of the policy and the statutory assignment of such right to the claimants under the 1930 Act). However, the Court did comment on this point and specifically referred to MacGillivray on Insurance Law (13th ed. 2015) as being relevant. The court commented that the insured garage company was entitled to be indemnified by the insurers against the costs order in favour of the claimants and, by reason of the 1930 Act, that right vested in the claimant.
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