In 1998 the case of Chapman v Christopher imposed on a defendant's insurers an independent liability to pay the claimant's costs of an action which they had defended unsuccessfully, even though the amount of the judgment plus costs exceeded the limit of indemnity under the policy. The case was obviously of great significance to liability insurers.

The recent decision of the Court of Appeal in Cormack v Washbourne provides insurers with some hope that the effects of the Chapman v Christopher decision may be mitigated and more limited than previously thought.

The problem for insurers rests with Section 51 of The Supreme Court Act 1981. Under this, the Court has 'full power to determine by whom and to what extent the costs are to be paid'. This power has been exercised against funders of litigation (including insurers) who are responsible for the decision to take or defend legal action and therefore directly control the costs that ensue.

The principles under which these powers will be exercised against a non-party (including an insurer) can be summarised as:

  • A non party costs order is exceptional, not the norm
  • In the vast majority of cases it is unjust to make such an order
  • The discretion should be exercised in accordance with reason and justice

    Applying these principles to insurance-funded litigation, however, could produce an order that insurers should be liable for the costs of the action (irrespective of the limit of indemnity).

    In Chapman v Christopher liability cover was exceeded when insurers chose to defend a claim against their insured defendant following a serious fire. The Court of Appeal held that justice demanded the making of a non party costs order because the insurer determined that the case would be fought the insurer funded the case the insurer had control and conduct of the case the insurer fought the action exclusively for its own interests the defence failed in its entirety.

    Following this case, one could see why insurers were concerned. The combination of factors that justified the making of a non-party costs order were potentially ones that could be found in any number of cases where insurers controlled and maintained the action, with little interest from the insured.

    The decision in Cormack v Washbourne, however, provides insurers with new arguments for defending an application for non party costs by a winning party. It involved allegations of professional negligence. The claim proceeded to trial, the defendant's consent having been sought to reject one settlement offer and he having been informed, and not demurred from, the rejection of another offer. Having lost the trial, the judgment sum and costs exceeded the defendant's limit of indemnity. The claimant sought an order that the defendant's insurer should be ordered to pay non-party costs on the grounds that the insurer had effectively controlled the action throughout.

    At first glance the factors in this case resembled those in Chapman v Christopher. The insurer had decided to defend and had funded and controlled a case that had failed in its entirety. Factors that could be applied to many cases.

    The application for non party costs failed. Crucial distinctions were drawn between this case and Chapman v Christopher. It was emphasised that an order for non-party costs would only be made in exceptional cases. The order might be justified if the insurers' conduct was 'sufficiently self motivated to the exclusion of the defendantís interest'.

    This case involved professional indemnity insurance. The insured defendant's professional reputation could be compromised by an adverse finding. The insured had a reputation to defend, even though he had retired from practice prior to the trial. Accordingly, it was held that the insurer did not act exclusively in its own interests when promoting the action but in part defended the reputation of the insured defendant. In support of this assertion was the fact that the insured defendant's view was sought on settlement and he was informed of the progress of the case.

    The decision shows that, provided insurers involve the insured and maintain an 'appropriate balance' between their interests and the interests of their insured, this would be a critical factor in defending an application for non party costs.

    This was, of course, a case of professional negligence. Not only is the insured professional interested in his reputation in such a case, but his help is needed throughout the preparation of the defence as the allegations of negligence are refined and developed. The case may not transfer as well to other liability insurance where there is no professional reputation to defend. While other insured defendants may have legitimate interests to defend (their claims experience for example), in order for insurers to defeat an allegation of 'exclusivity of interest' the insured defendant must have had some involvement in the conduct of the action. There is often less involvement in other forms of liability insurance.

    The case, however, does provide a useful retraction from the bold principles of Chapman v Christopher. It confirms that non party orders will be the exception rather than the rule and that insurers, by giving proper cognisance to the interests of their insured defendant, can protect themselves against the risk of their loss exceeding the limit of indemnity. All in all, a useful case for insurers to quote and rely on.

  • Tim Hunt is a partner at solicitors Merricks.