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Posted in Case reports, UK

UK: Make him a costs order he can’t refuse: Indemnity insurer must pay costs of negligently advised purchasers in Mafia-linked property development

On 11 January 2019, the High Court handed down its judgment in Various Claimants v Giambrone & Law (A Firm) & Others, AIG (Europe) Limited [2019] EWHC 34 (QB)), finding that AIG is liable for claimants’ costs pursuant to a non-party costs order under section 51 of the Senior Courts Act 1981.

Background

Giambrone concerns a group action against the law firm Giambrone & Law.  Advised by Giambrone, hundreds of claimants paid deposits for luxury off-plan apartments in Italy.  The development site was subsequently seized by the Italian authorities as part of an investigation into money laundering by the IRA and Italian Mafia.

In July 2017, the Court of Appeal found that Giambrone was in breach of contract and trust by handing over deposits to developers and failing to warn claimants of the risk of organised crime.  The claimants were awarded the value of their lost deposits as compensation. When Giambrone failed to pay, the claimants filed a third party costs order against its insurer, AIG.

AIG had asserted that it was entitled to aggregate all claims by aggrieved buyers within a £3 million indemnity limit (that was all but exhausted by prior settlements), which Giambrone disputed.  To settle this dispute, AIG and the partners of Giambrone entered into an agreement settling on a limited form of aggregation and requiring AIG to continue advancing defence costs (the “Agreement“).  Crucially, AIG could withdraw funding in the event that it determined there was no reasonable prospect of defending the claim.

Case Law on Section 51, Senior Courts Act 1981

Prior to Travelers Insurance Company Ltd v XYZ [2018] EWCA Civ 1099, in order for a liability insurer who funds an unsuccessful defence to face a costs order under section 51, the insurer must have controlled the litigation in its own interest, without paying appropriate regard to the insured’s interests.  Essentially, the insurer needed to be considered a “real party” to the litigation.

In Travelers, the Court of Appeal rejected the idea that there are prescriptive conditions to be fulfilled in order for insurers to be liable for costs under section 51.  The court has a broad discretion, and the only restraint is that it must be exercised justly.

The court in Travelers endorsed the principle of reciprocity: a person who funds and stands to benefit from proceedings should, if unsuccessful, accept the burden of paying the successful party’s costs. As the insurer funded the costs of the preliminary issues and stood to benefit from a successful outcome, it was required to pay the costs of claimants pursuing uninsured claims.

Giambrone Decision

The High Court’s decision in Giambrone has re-affirmed the approach in Travelers.

Arguing that it should not face a section 51 costs order, AIG highlighted that it did not exercise sole or even predominant control over the claim. Mr Justice Foskett accepted “the net effect of the [Agreement] was to give to the partners the power to control the defences …with minimal influence from AIG (or influence that, for whatever reason, AIG was not prepared to exercise)“.  Nevertheless, this was insufficient to shield AIG from a section 51 costs order.

Mr Justice Foskett held that:

where an indemnity insurer substantially relinquishes control of the conduct of the litigation to the insured (or fails to take steps to control it when there are grounds for intervening), and does so in the expectation that it will be immune from a costs liability towards the opposing party if the opposing party is successful, that expectation is open to be falsified by the court in a section 51 application, particularly if the prospects of success for the insured are assessed as poor” (emphasis added).

The court also relied on the reciprocity principle used in Travelers. AIG benefitted from the Agreement, and would benefit from a successful defence, because AIG’s position on aggregation would not be tested, despite their interpretation being legally uncertain.  AIG obtaining “some material benefit from the arrangement…adds weight to the making of an order under section 51“.

Mr Justice Foskett found that the claimants had spent twice as much pursuing their claims than they would have done if AIG had not funded the defence of the claims. As such, AIG was required to pay 50% of the claimants’ costs.

Key Points for Insurers

Indemnity insurers can no longer point to a list of decisive factors which claimants must prove to obtain a non-party costs order against insurers.  Nor can they argue that, unlike “after-the-event” insurers, indemnity insurers do not fund litigation with a view to sharing in the profits, so should not be liable for the other party’s costs. Travelers and Giambrone have shown that costs orders under section 51 are an entirely discretionary matter for the court.

Whilst every case will turn on its facts, it appears liability insurers who (i) stand to obtain a material benefit from the successful defence of a claim, or (ii) exercise any degree of control over the insured’s conduct of a claim (including failing to control when there are grounds for intervening) may face a bill for the successful party’s costs in the event of an unsuccessful defence.  Given that it is a struggle to envisage a scenario in which an insurer would not benefit in some way from the successful defence of a claim, liability insurers should be concerned by these decisions.

It is worth noting that a hurdle still exists to obtaining a section 51 costs order: an order should be “exceptional”.  This appears to be a low bar: it refers to any case that is “outside the ordinary run of cases“.  However, Mr Justice Foskett did comment that “the litigation was conducted on the Defendants’ side from the point of view of the costs position as unbalanced and, at first blush, unfair“.  Insurers should be mindful that their conduct in funding defences will be scrutinised, including where a blind eye is turned to the fact that “the game was not worth the candle.

Travelers is pending appeal to the Supreme Court, and its decision may provide much needed clarity for insurers on their exposure under section 51.