Traditionally, the courts would only exercise their section 51 discretion in ‘exceptional circumstances’. Yet the recent Court of Appeal decision in Kylie Palmer v Estate of Kevin Palmer and others [2008] suggests that, in the insurance context, the circumstances may not have to be very ‘exceptional’ at all and the frequency of such orders seems likely to rise.
Following the Court of Appeal decision in Chapman v Christopher [1998], the key features for a non-party costs order are:
- the non-party determined that the claim would be fought;
- it funded the defence of the claim;
- it had conduct of the litigation;
- it defended the claim exclusively to defend its own interests; and
- the defence failed in its entirety.
When the Technology and Construction Court decided to make a costs award against defence insurers in Plymouth & South West Co-operative Society v Architecture Structure & Management [2006], insurers were alerted to the risks of defending cases exclusively to fit their own commercial objectives.
Palmer v Palmer
Now, in Palmer, the trial judge’s finding that the circumstances were sufficiently exceptional for a section 51 order to be made against insurers has been upheld by the Court of Appeal, despite clear evidence that the case was fought following legal advice to both insurers and the insured that the defence ought to succeed, and the insured, albeit impecunious, being equally keen to contest the allegations.
The underlying facts of Palmer are tragic. The claimant, aged six, was seriously injured in the car accident which killed her father. The claimant sought damages from her father’s estate, but the motor insurers successfully avoided the relevant policy. The claim therefore proceeded against the Motor Insurers’ Bureau (MIB), which required the claimant also to bring proceedings against PZP, the manufacturer of a seat-belt device. The MIB argued that the device (a Klunk Klip) was defective and caused the claimant’s injuries. The estate admitted liability, so the only issue at trial was PZP’s liability. PZP were found to be liable and the claimant’s damages are expected to exceed £2m.
However, the limit of indemnity under PZP’s product liability policy is just £500,000 (including claimant costs). With a view to reducing its own exposure, the MIB argued that PZP’s insurers should carry the responsibility for the costs incurred by the claimant and the MIB in the claim against PZP.
The MIB’s application was granted: the trial judge found that, by August 2003, the Klunk Klip business had collapsed and PZP was almost insolvent, so the claim was being defended to protect insurers’ interests. The judge relied on the fact that shortly before trial, the insurers rejected the MIB’s proposal (that the insurer contribute £300,000 towards the claim and bear its own costs) without taking the insured’s specific instructions, despite being on notice of their financial position.
On appeal, the insurer argued that it had simply exercised its rights under the policy and that the claim had been defended for the mutual benefit of insurers and the insured, both parties relying on legal advice that the prospects of successfully defending the claim were good. In reliance on that advice, PZP had invested in its business, fully participated in preparing the case for trial and endorsed the decision to reject the MIB’s offer.
The Court of Appeal accepted that PZP had wanted to defend the claim, and that the case had been fought in the mutual interests of insurers and the insured; but despite this, it endorsed the trial judge’s assessment that, in reality, PZP had no commercial interest in defending the claim so the insurer was the real defendant. Lord Justice Rimer opined that PZP’s wish to defend the claim was “commercially irresponsible” - it was obvious that PZP’s interests were best served by settling the claim. Further, the insurer knew that a judgment of £2m would spell the end for PZP, and that admission could not be reconciled with the assertion that there was a mutual interest in defending the claim. The insurer’s appeal against the section 51 order therefore failed.
Implications of the case
The consequences of Palmer are potentially quite extensive and will have significant tactical bearing on any case where the quantum exposure for a defendant may exceed available cover. If an insured is subsequently faced with a claim which may exceed the limit of indemnity, it is difficult to see how it will ever make commercial sense for the impecunious insured to fight. If such a claim is fought and lost, then following Palmer, insurers are at serious risk of a section 51 application and order, even if the defence strategy has lawyers’ endorsement and support from the insured; and notwithstanding that such situations are not uncommon, still less exceptional.
The Palmer decision also suggests the insurers (and the lawyers advising them) have duties to be attentive to what are objectively the ‘best interests’ of the insured, even if these are not consistent with the instructions being received. Looked at from a different angle, it is tempting to infer that the people the Court of Appeal is really trying to protect - or even to benefit through such duties - are the insured’s opponents in the litigation; thus creating an inherent tension of loyalties for the insurers and lawyers.
This is a particularly difficult concept to grapple with, because it appears to set one standard for claimants, who may or may not have insurance or other costs protection, and whose entitlement to access to the courts and ‘justice’ is well enshrined; and quite another standard for insured defendants, whose insurers may now, it seems, have duties and responsibilities to forego legal process and pay claims, even if they appear to lack merit. How this reconciles with basic rights to fair trial, which apply equally to defendants as well as claimants, is unclear.
The immediate practical message for defendants’ lawyers and insurers is clear: if there is a risk that the indemnity limit will be exceeded and the insured may not be able to pay, insurers should review their reserves to accommodate the potential section 51 risk and weigh up their options at every strategically critical time. Serious consideration should also be given, during the litigation, to documenting the commercial and other justifications for fighting the case, and perhaps to communicating them to the other parties in open correspondence.
Claimants and their lawyers, meanwhile, should remain alert to their risks that their opponent defendants may be under-insured, and be ready to take whatever money is available rather than perpetuate high-cost litigation.
Mike Willis is a partner and Naomi Park a solicitor in the professional and financial risks group at Beachcroft.
