Legg & Ors v Sterte Garage Ltd & Anor

Proceedings for damages for negligence and nuisance, and under the rule in Rylands v Fletcher, brought against a garage company in November 2008 were defended by its public liability insurers until September 2010. The insurers then ceased to conduct the defence, and judgment in default of defence was entered against the garage company. The garage company was insolvent and unable to meet either any liability under the judgment or the costs order made against it. The claimants applied for an order that the insurers pay their costs, which the insurers resisted. Deputy District Judge Coppen, sitting in the County Court at Bournemouth and Poole, ordered the insurers to pay the claimants’ costs of the proceedings.

The insurers appeal against the order for costs against them, with permission granted by Sir Stanley Burnton. Surprising as it may seem, the appeal lies to the Court of Appeal, as the order for costs was a final decision in an action allocated to the multi-track: article 4 of the Access to Justice Act 1999 (Destination of Appeals) Order 2000 and Fox v Foundation Piling Group Ltd; Thorne v Courtier [2011] EWCA Civ 104; [2011] PIQR Q3.

The judge made the order on two separate grounds. First, he made it in exercise of the court’s discretion to order costs to be paid by a non-party, pursuant to section 51(3) of the Senior Courts Act 1981. Secondly, he made it on the basis that the insurers were liable under the policy to indemnify the garage company against its liability for costs to the claimants and, as a result of the liquidation of the garage company, the claimant succeeded to the garage company’s rights under the Third Party (Rights Against Insurers) Act 1930.

On this appeal, the insurers contend that the order should not have been made on either basis.

The following summary of the facts leading up to the issue of proceedings is taken largely from the skeleton argument of counsel for the claimants, the respondents to this appeal.

The claimants are the owner-occupiers of semi-detached houses at nos. 82, 84, 86, 88 and 90 Sterte Road, Poole, Dorset At no. 78 Sterte Road, is Sterte Garage which was operated by Sterte Garage Limited (Sterte) as a car repair business and sometime supplier of petrol and diesel fuel.

In 2003 residents of Sterte Road began to notice unpleasant diesel smells in their gardens and also inside their homes. The local authority, Poole Borough Council, was contacted and as a result it made enquiries of Sterte’s employees. These enquiries revealed that there had been a spillage of some 300 litres of diesel from an above ground tank at the garage. It was later ascertained that this had occurred in August 1997.

The council commissioned an expert report from Marcus Hodges Environment Limited, environmental consultants. The report dated 1 July 2003 noted that an above ground fuel tank failed “approximately two years ago”, resulting in the loss of about 200 litres of fuel. The report stated that, although much of the fuel was cleaned up, “there is potential for this spill to have resulted in hydrocarbon contamination leaking into the ground and groundwater adjacent and beneath 80 Sterte Road resulting in the odours present”. The report also identified diesel underground storage tank(s) as a site-specific potential area of concern. The report recommended monitoring.

The council also commissioned reports from engineering consultants, WS Atkins Consultants Limited (Atkins). Atkins carried out intrusive investigations of some of the affected properties (nos.78, 80 and 82), before producing their first report in May 2004. The report’s executive summary stated that “Characterisation of the free phase plume has led to the conclusion that the original source is most likely to be the above ground diesel storage tank located on the garage site (78 Sterte Road) directly to the rear of the property at 80 Sterte Road. This tank is reported to have failed around 1998 releasing approximately 300 litres of fuel”. The report stated that the diesel was moving northwards, from Sterte’s premises through the claimants’ land, and migrating upwards through the surface of the soil and into the air inside the claimants’ homes. It stated that the presence of the diesel represented a significant health hazard to the residents of Sterte Road. The presence of two underground storage tanks, with capacities of 2,270 litres and 13,638 litres, was noted.

In August 2004 the council served on the affected residents notice that it had determined that their land was contaminated. The notice summarised the evidence on which the assessment was based. It specified that council officers had spoken to employees of Sterte who had confirmed that there had been a spillage of some 300 litres of diesel fuel from the above ground tank in 1998. A substantial scheme of remediation was put in place by the council to deal with the threat to human health posed by the presence of the diesel and the emergence of particulates through the soil and into the air. The residents were moved away from their homes for nine weeks whilst building work was carried out. The work consisted of the removal of the ground floor of each property and its replacement after airtight bunds were installed. Substantial chemical monitoring and extraction equipment was installed in the houses and their gardens.

In April 2005, March 2006 and August 2006, further reports were obtained by the council from Atkins. In each of these reports it was stated that the most likely source of the pollution was the above ground diesel storage tank. The 2005 report gave the estimated spillage from the diesel tank as 700 litres.

The only information that the claimants had about the cause of the diesel pollution was what was passed on to them by the council, including copies of the experts’ reports.

In 2004 the first and second claimants, Mr and Mrs Legg, the owner-occupiers of 82 Sterte Road, instructed solicitors who wrote to Sterte. Sterte failed to provide any information about what had happened, although its solicitors were slightly more helpful.

In February 2005 the claimants’ solicitors wrote a letter of claim to the appellant insurers (Aviva), who appointed a broker, Questgates, to investigate the claim.

On 6 May 2005 Questgates wrote to the claimants’ solicitors on Aviva’s behalf asking for evidence to be provided that Sterte was legally responsible for the spillage and that the spillage was the cause of the diesel smells. The letter promised that a decision would be made as regards Sterte’s liability and whether any liability of Sterte was covered by the public liability insurance following receipt of the information. The claimants duly sent a full summary of the claim and provided copies of the expert reports that had been released by the council. There followed a series of chasing letters from the claimants’ solicitors, with no substantive response until 11 September 2006, when Aviva wrote a short letter stating:

By June 2008 the claimants’ solicitors were ready to issue proceedings. They wrote to Sterte’s solicitors asking where the proceedings should be served. They received a reply from the insurers, stating that “our position on policy indemnity remains unchanged” and that they had appointed solicitors who would accept service of proceedings on behalf of the insurers.

Cover for public liability was provided as part of a Motor Trader’s Combined Insurance Policy issued by General Accident. The appellant insurers, Aviva, accept that they are liable for any valid claim made under this policy. Section E contains the public liability insurance under which cover was provided in the event of, among other things, accidental loss of or damage to property or nuisance, arising in connection with Sterte’s business. Among the exclusions are:

That exclusion is in turn subject to a limited exception for which cover is provided:

As appeared from the insurers’ letter dated 11 September 2006, their position was that the leakage of diesel oil from the above ground tank in August 1997 did not cause the damage to the claimants’ properties and accordingly any liability of Sterte for such damage was not covered by the policy.

A claim form was issued on behalf of Mr and Mrs Legg on 5 November 2008, claiming damages against Sterte. The particulars of claim served with the claim form pleaded “a major spillage of diesel oil from a storage tank” at Sterte’s premises on 21 August 1997, estimated at 300 litres. It was further pleaded that “thereafter the spilled diesel oil entered the ground and leached towards the adjoining properties, including the claimants’.” The claim for damages was pleaded in negligence and nuisance and under the rule in Rylands v Fletcher.

In a witness statement of Robert Allen, a claims manager employed by the insurers, filed in opposition to the application by the claimants for costs against the insurers, Mr Allen states that Sterte’s solicitors passed the papers to the insurers, because the particulars of claim referred to the escape of fuel from the above ground storage tank in 1997 as the only source of the pollution, and requested confirmation that the insurers would be willing to indemnify Sterte under the policy. Mr Allen continues that the solicitors:

Mr Allen continues:

Berrymans Lace Mawer LLP (BLM) were the solicitors nominated by the insurers and they were jointly retained by the insurers and Sterte, with the insurers funding the defence costs.

On 21 January 2009, BLM filed a defence on behalf of Sterte. It alleged that the claim was time-barred and, additionally, denied that any damage was caused by the spillage in 1997, alleged that the spillage was caused by an act of vandalism and did not admit that any damage to the claimants’ property was caused by diesel coming from Sterte’s property. A reply was served in March 2009 and requests for further information were served by each party.

On 6 July 2009, BLM served an application to strike out the claim on the basis that the claim was time-barred. The application proceeded on the assumption that any damage to the claimants’ property was caused by the pleaded leakage from the above ground storage tank in 1997 and on the basis of an expert report to the effect that any such damage must have been caused more than six years before the issue of the claim form.

In response to this application, the claimants obtained expert evidence from Mr Simon Firth. He was instructed to address two questions. First, was it more probable than not that some part of the diesel plume which migrated into the claimants’ land entered it after 5 November 2002 and, secondly, was it more probable than not that some part of the diesel plume which had migrated into their land moved within it so as to contaminate some part of it, or increase the degree of contamination, after 5 November 2002. His answers to these questions were, respectively, no and yes. Both are important for the subsequent conduct of these proceedings.

So far as the first question is concerned, Mr Firth answered as follows:

This raised, for the first time, as a possible cause of the damage to the claimants’ land, long-term leaks from underground storage tanks or associated pipe work on Sterte’s property. Damage resulting from such leakage would fall outside the public liability cover for pollution damage in section E of the policy.

In answer to the second question, Mr Firth wrote:

It will be seen that this part of Mr Firth’s evidence does not distinguish between diesel resulting from the leak from the above ground storage tank in 1997 and long-term leaks from the underground storage tanks or associated pipe work.

On 29 July 2010, the application to strike out the claim was heard and dismissed. Deputy District Judge Baehr was invited by counsel for Sterte to deal with the application, and he did deal with it, solely as an application to strike out on the limitation grounds and on the basis of the pleaded case. This was made clear by DDJ Baehr who, according to the note of his judgment provided by BLM, said:

He set out his reasons for dismissing the application to strike out the claim as follows:

In the light of the evidence provided by Mr Firth, the claimants applied to amend their particulars of claim so as to rely on the additional allegation of pollution caused by the escape of diesel from the underground storage tanks and associated pipe work. Permission was granted by DDJ Baehr at the hearing on 30 July 2010 and amended particulars of claim were served on 6 August 2010.

The amended particulars of claim left intact the original claim based on the leakage of diesel oil from the above ground storage tank in August 1997. What was added was an averment that “further at all material times up to 20,000 litres of diesel oil leaked from tanks and pipes in the defendant’s premises” and a statement that the claimants relied on the contents of Mr Firth’s report in which it was stated that the likely source of the contamination was leakage from the underground tanks and pipes. This was in addition to reliance on the reports obtained by the local authority from Atkins.

In the meantime, on 20 November 2009, the other five claimants had issued a claim form seeking damages in respect of the damage alleged to have been caused to their properties. The particulars of claim were served in February 2010 and were based on both the leakage from the above ground storage tank in August 1997 and on leakage from the underground storage tanks and pipes.

A consent order was made on 16 August 2010 that Sterte should serve its defence to the claim brought by the five claimants by 17 September 2010. BLM were also on the record in those proceedings as acting for Sterte.

By a letter dated 7 September 2010, BLM informed the claimants’ solicitors that the insurers had “now confirmed that the policy of insurance does not respond to the claims” and that “accordingly, we are no longer instructed to act on behalf of Sterte Garage Ltd.”

On 5 October 2010, judgment was entered for the five claimants in their action on the issue of liability in default of defence.

On 6 December 2010, BLM came off the record as acting for Sterte in the claim brought by Mr and Mrs Legg and their claim was consolidated with the claim brought by the other five claimants. Directions were given for the assessment of damages.

On 22 December 2010, Sterte went into creditors’ voluntary winding-up.

On 6 April 2011, the damages were assessed and judgment was entered for a total sum of £191,654 and Sterte was ordered to pay all of the claimants’ costs. Those costs were subsequently assessed by default at £85,450.

On 12 July 2013, the claimants issued an application for the insurers to be joined as a defendant and for an order that they pay the claimants’ costs from 6 May 2005. The insurers made a cross-application that the claimants pay their costs on the basis that the claimants wrongly alleged that the damage to their properties was caused by a sudden incident in 1997 “which they knew or ought reasonably to have known, was not causative of their loss”. The applications were heard by DDJ Coppen who acceded to the claimants’ application and dismissed the insurers’ application. The insurers have not sought to appeal the dismissal of their application.

In his judgment DDJ Coppen set out the factual background and the procedural history of the case. In the section of his judgment dealing with the reasons for his decision, the judge referred to the financially precarious position of Sterte from the start of the case and the involvement of the insurers and solicitors appointed by it on behalf of Sterte in the proceedings. His judgment then contains a passage which is perhaps more directly in point in relation to the claim for costs under the Third Party (Rights Against Insurers) Act 1930 but which is relevant also to the application for costs under section 51(3) of the Senior Courts Act 1981. The judge said:

Directly addressing the application under section 51, the judge said:

The insurers criticise the decision to make an order for costs against them under section 51(3) of the Senior Courts Act 1981 on a number of grounds.

First, the insurers repeatedly made clear that the policy did not provide cover for pollution damage save in respect of a single unintended incident and that, in their view, the claims being made would not be covered by the policy. Secondly, the insurers only participated in the defence of the claim because it was pleaded solely on the basis of the incident occurring in 1997 which, if established as causing damage to the claimants, would fall within the cover provided by the policy. Thirdly, the defence of that claim was substantially successful. The amendment made to the particulars of claim in Mr and Mrs Legg’s action and the particulars of claim in the other action effectively abandoned the claim based on the 1997 incident in favour of the claim based on the gradual leakage of far larger quantities of diesel from the underground storage tanks and pipe work.

Fourthly, in so far as it may be thought that there remained a claim based on the 1997 incident, the judge should have decided the issue of fact that the damage to the claimants’ properties was not caused by that incident. Fifthly, the insurers acted in the interests of Sterte as well as their own interests in defending the claim as originally pleaded and, if the insurers had not funded the defence, Sterte itself would have done so. Accordingly, the actions of the insurers were not causative of any additional costs. Sixthly, the insurers had no choice but to defend a claim which, on its face, fell within the policy cover and Sterte would have had legitimate grounds for complaint if it had not taken steps to defend the claim.

Before considering these criticisms, I will note the present state of the authorities concerning the making of orders for costs against insurers who fund the defence of a claim.

In TGA Chapman Ltd v Christopher [1998] 1 WLR 12, at 20-21, Phillips LJ, giving the leading judgment, accepted that the following features, established in that case, justified the exceptional course of making a costs order against the insurers:

In Cormack v Excess Insurance Co Ltd [2002] Lloyd’s LR 398, this court held that it was not an appropriate case in which to make an order for costs against the insurers, principally because the insurers had acted in the interests of the defendant as well as in their own interests.

The relevant authorities were reviewed by this court in Palmer v Palmer [2008] EWCA Civ 46; [2008] Lloyds Rep IR 535. Rimer LJ, with whom Pill and Sedley LJJ agreed, said that a critical issue was whether the insurers were “motivated either exclusively or at least predominantly, by a consideration of its own interest in the manner in which it conducted the defence of the litigation.”

Taking first the critical question whether the insurers were acting exclusively or predominantly in their own interests in defending the claims, it appears to me that there was ample material on which the judge could conclude that they were. As the insurers knew from the start of the proceedings, Sterte would be unable to meet any award of damages if it was not covered by the policy. The purpose of the insurers in defending the claim as originally pleaded was not to protect Sterte against an award of damages that it would otherwise be unable to meet, but was to seek to defeat a claim which, as pleaded, fell within the narrow class of pollution incidents covered by the policy. The insurers had no interest in defending the claim if and to the extent that it was based on any other polluting causes, as they made clear when they withdrew their support of the defence in September 2010. There was no doubt that the claimants’ property had been damaged by the presence of diesel oil and no real grounds for doubting that it was caused by leakages from Sterte’s property. Sterte asserted no grounds for defending the claims against it. The only reason for the conduct of the defence by the insurers, and their only interest in it, was to avoid a claim falling within the cover provided by the policy.

The insurers would have had a good answer to the claim for a non-party costs order against them if, following the Firth report, the claimants had in fact abandoned their claim based on the 1997 incident. In substance, then, the insurers would have funded the successful defence of such claim. But the claimants did not abandon that claim. I have earlier referred to the way in which the particulars of claim in the action brought by Mr and Mrs Legg were amended and the way in which the particulars of claim in the other action were framed. Both specifically plead the 1997 incident. DDJ Baehr had refused to strike out the claim based solely on that incident precisely because the claimants might be in a position to establish that it had caused loss within the limitation period. Neither in form nor in substance was this claim abandoned.

There is no foundation in the evidence for the insurers’ assertion that if they had not funded the defence, Sterte would have done so. 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.

I regard it as wholly unrealistic to expect the judge to have decided the issue of fact as to whether damage to the properties was caused by the 1997 incident. Beyond the reports referred to in the particulars of claim, there was no evidence before the court on which this issue could be decided. All the reports, other than Mr Firth’s, attributed the damage to the 1997 incident. Mr Firth’s report indicated, in answer to the second question which he was instructed to answer, that at least some of the damage to the claimants’ properties could have resulted from the 1997 incident.

In order to challenge successfully the exercise by the judge of his discretion to make an order for costs against the insurers as a non-party, the insurers must show that the judge had regard to irrelevant considerations or failed to take into account relevant considerations or reached a decision which was not justified on the material before him, having regard to the breadth of the discretion to be exercised by him. In my judgment, the insurers are unable to demonstrate that the judge’s exercise of his discretion was flawed in any way. On the contrary, there was in my judgment ample material to justify the order which he made.

In the light of this conclusion, it is not strictly necessary to consider the challenge to the judge’s decision to the extent that it is based on the right of Sterte to be indemnified against the claimants’ costs under the terms of the policy and the statutory assignment of such right to the claimants under the 1930 Act, but the issue was fully argued.

The policy covered a wide variety of risks, including, in section E, public liability risks. Applicable to all sections of the policy are General Conditions set out at the start of the policy.

The judge held in favour of the claimants under both General Condition 11 and also under the specific terms of section E.

General Condition 11 (headed “Subrogation”) provides:

The judge accepted the submission for the claimants that clause 11 entitled Sterte to be indemnified against an adverse costs order made in favour of the claimants. With respect, this is to misunderstand the purpose and effect of the clause. As the heading indicates, it permits the insurer to be subrogated to, and to enforce, claims which Sterte may have against third parties in respect of insured risks. Sterte, and hence the claimants, are not therefore entitled to an indemnity in respect of the costs order against Sterte under this general condition.

The public liability insurance provided under section E is:

“Compensation” is defined as “the amount awarded by a Court of Law in respect of damages including interest thereon but excluding punitive and/or exemplary damages”.

The definition of “Costs and Expenses” is:

The insurers submit that their liability to indemnify Sterte against either compensation or costs and expenses arises only if an insured event has occurred. They point to the drafting of the section headed “Contingency” quoted above and on the exclusion of all pollution claims other than those arising from a non-gradual event. They submit that the judgment entered against Sterte, based on a pleaded case of non-gradual as well as gradual pollution, even if establishing as between the claimants and Sterte that damage or nuisance resulting from non-gradual pollution was suffered by the claimants, is not binding as between Sterte and the insurers. The insurers had withdrawn from defending the proceedings on behalf of Sterte before judgment was entered and, they submit, they cannot be bound by a conclusion in proceedings to which they were not party. They rely on authorities such as Hollington v Hewthorn [1943] KB 587.

Whether or not insurers are liable to indemnify the insured against any adverse costs orders made in proceedings against the insured is a question of construction of the policy. Where a successful claim is clearly within the cover provided by the policy, this is very unlikely to be a problem. A problem may, however, arise where either an adverse order for costs is made in proceedings which are unsuccessful or where, as here, the insurers deny that an insured risk occurred.

This issue is discussed in MacGillivray on Insurance Law (13^th ed. 2015) at para 30-051:

Given that an insured will usually wish to be covered against the costs of unsuccessful claims as well as successful claims, a well-advised insured would require wording which clearly extends cover to adverse costs orders even in unsuccessful proceedings. The commercial need for such cover is all the greater when proceedings may be defended by, or on the instructions of, the insurers, whose conduct of the proceedings may lead to an adverse costs order. Under the policy in the present case, as in most policies, the policy holder risks losing cover if it negotiates, settles or repudiates any claim without the written consent of the insurer, which the insurer may well not be required to give. Likewise, an insured is unlikely to wish to find himself in the position of Sterte in this case, where judgment is entered on a basis which at least partly falls within the cover but which is denied by the insurers.

The focus in the present case must be on the definition of “Costs and Expenses”. What is the extent of the cover provided by Section E when read with that definition? The critical issue is the effect of the words at the end of the definition, “in connection with any event which is or may be the subject of indemnity under the Section.” The insurers submit that those words govern only paragraph 3 of the definition, that is, solicitors’ fees for legal representation at an inquest, inquiry or summary proceedings. This submission, accepting at least a limited effect of those words, disposes of a submission made on behalf of the insurers that the definitions could not extend the cover if an event specified under the heading “Contingency” (quoted above) had not occurred. On any footing, those words do cover costs incurred even if there has been no insured loss or damage, at least to the extent provided in paragraph 3 of the definition.

The question is whether the words at the end of the definition also qualify paragraphs 1 and 2. The lay-out of the definition supports the limited construction for which the insurers contend. As a matter of lay-out, the closing words appear to qualify only paragraph 3. In an agreement where care appears to have been taken with the lay-out of the terms, it will be taken into account by the court in construing the contract: see Lewison: The Interpretation of Contracts (6^th ed. 2015) at page 282. But it is only a factor to be taken into account and its effect may well be displaced by the context or sense of the clause in question.

If the insurers in this case were right, it would mean that they were not liable to pay the costs covered by paragraph 2 (“all costs and expenses incurred with the Corporation’s written consent”), if the claim against the insured failed. This would produce an extraordinary result in a typical case. Proceedings are issued against the insured for a claim which, if successful, constitutes an insured risk. As would normally be the case, the insurers conduct the defence on behalf of the insured and do so successfully. No doubt part of the insured’s costs would be recoverable from the unsuccessful claimant, but an order for costs is unlikely to cover the entirety of the defence costs and in any event the claimant may be unable to pay the costs. In those circumstances, according to the insurers’ submission, the insured would have no cover for its costs, even though incurred with the written consent of the insurer. In my judgment, it is highly unlikely, looking at the matter objectively, that the parties could have intended this result. It is not the result, if the words at the end of the definition are read as qualifying the entire definition, rather than just paragraph 3. This consideration is, in my judgment, more than sufficient to displace any weight that may be placed on the lay-out of the definition. Accordingly, the closing words also qualify paragraph 1, which encompass the costs order made in favour of the claimants and against Sterte in this case.

It follows that Sterte 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.

For this reason also, therefore, I would dismiss this appeal.

Accordingly, for the reasons given in this judgment, I would dismiss the appeal.

I agree.

I also agree.