XYZ v Travelers Insurance Company Ltd

This is an application for an order under section 51 Senior Courts Act 1981 that Travelers Insurance Company Ltd (Travelers) pay to the applicants the costs they incurred in their successful claims against Transform Medical Group (CS) Limited (in Administration) (Transform) for damages for injuries sustained as a result of Transform’s supply to them of defective breast implants manufactured by the French company PIP.

A Group Litigation Order (GLO) was made by Wyn Williams J in April 2012. From October 2012 I was the managing judge. About 1000 claimants joined the GLO and brought claims, in contract, and/or under the Sale of Goods and Services Act (SOGSA). There were several defendants, all companies running private hospitals. Further, separate, claims were brought under the Consumer Credit Act and settlements were reached in many cases. This application concerns a single defendant, Transform, and 426 of the 623 women who brought claims against it.

Transform had in place a standard product liability policy with Travelers for the period 31^st March 2007 to 30^th March 2011. Otherwise Transform was uninsured. The policy covered 197 claims. Those claims were settled in June 2015 in the light of expert evidence received in April 2014 which was overwhelmingly likely to lead to a finding that the implants were not of satisfactory quality. Travelers paid the damages and costs. Some claims arose during the period of cover but were not covered by the policy terms; those were cases where the claimant was concerned about the implant but there had been no rupture. These claimants were referred to by the parties as the “worried well”. Other claims fell outside the period covered by the policy. The applicants are all those whose claims were uninsured. Judgment was entered in all of their claims by March 2016. By then Transform was in administration. No damages or costs have been paid.

I have recorded the course of this litigation on a number of previous occasions. Suffice it to say here that in August 2013 I gave directions down to the trial of four issues in four sample cases. It was my expectation that the resolution of those issues (often referred to as the preliminary issues) would lead to the resolution of the whole of the litigation. That proved to be the case but there were twists and turns on the road.

The issues in the four sample cases were:-
i) Were the implants supplied in breach of the implied term as to satisfactory quality pursuant to S4(2) of the Sale of Goods and Services Act (SOGSA)?
ii) Were the implants supplied by Clover Leaf to Transform in breach of the term as to satisfactory quality implied under S14(2) of Sale of Goods Act, (SOGA) (as amended)?
iii)What remedies shall be afforded by S11 (M) (P) of SOGSA insofar as such issues are raised in the sample cases?

Cloverleaf had supplied PIP implants to Transform (and others). They were Part 20 defendants. They had insurance with Amlin Insurance. Transform and Travelers assumed that the policy would be similar to that issued by Travelers and so would not cover the “worried well”. For some years Amlin took virtually no part in the proceedings, asserting that Cloverleaf was not liable. As late as June 2014 it refused to take part in mediation. By then the expert evidence showed that the PIP implants had a higher propensity to rupture than other brands. Travelers wished to settle but did not do so because it wanted to be sure of recovering against Cloverleaf. The statements of Mr Kidman (solicitor, BLM) and of Mr Keating (claims specialist at Travelers) both emphasise the imperative to Travelers and Transform of ensuring that Cloverleaf was involved so as to avoid difficulties in recovering from them later. In my judgment there was no such imperative with respect to the insured claims and the delay in settling those claims was unnecessary. It was open to Travelers to settle with the claimants at any stage and to pursue Cloverleaf thereafter. Given that it was assumed that the Amlin policy would be in similar terms to the Travelers policy Transform cannot have expected to recover anything in respect of the “worried well”. I do not know whether there was any cover for the periods when Transform was uninsured.

By the middle of 2013 Mr Harvey, solicitor, of Hugh James, the lead solicitors for the claimants, formed the view that Transform was in financial difficulties. He had asked repeatedly for confirmation that it had adequate insurance to cover the claims. He was given no substantive response. In September 2013 I heard an application “that Transform do provide information to the claimants as to the nature and extent of its liability insurance cover in respect of its potential liability in these proceedings to the relevant claimants on the group register and/or that it do serve a copy of the relevant insurance policy documents upon those said claimants, pursuant to CPR part 18 and/or part 3.1(2)(m)”. Although the accounts had been signed off on a going concern basis it was plain that the financial position of Transform was precarious. Leading counsel for Transform accepted that on the evidence I was entitled to conclude, as I did, that Transform may not be able to fund the litigation to trial, meet any award of damages or meet any award of costs.

I dismissed much of the application (see my judgment at [2013] EWHC 3643 (QB)). Part 18 was of no application but I concluded (paragraph 36), “I am satisfied that CPR 3.1(2)(m) gives me the power to order Transform to provide to the court a witness statement (or statements) setting out whether Transform has insurance adequate to fund its participation in this litigation to the completion of the trial and the conclusion of any appeal. That knowledge will permit me to case manage this litigation now on the basis of adequate information. I am sure that is also in accordance with the overriding objective. It gives no unfair advantage to the claimants. There is no prejudice to Transform. The result will be that the court retains control over the use of its resources in this litigation.”

At paragraph 34 of the statement of Mr Keating (Travelers) the following appears “When [my judgment of November 2013] was handed down, BLM [who were representing Transform, funded by Travelers] felt uncomfortable having anything to do with assisting Transform in complying with the order because BLM did not want to become involved in insurance issues”. This notwithstanding that BLM and counsel had represented Transform on the application for disclosure of the insurance position. Mr Keating relates that Travelers and Transform then agreed the terms of a letter to be sent by Travelers’ solicitors, DWF, to me in purported compliance with my order. I did not consider this appropriate. The order was against Transform.

In December 2013 Mr Ainley, Chief Executive of Transform, provided to the court a witness statement in the light of which I did not amend the case management directions. The claimants’ advisers inferred, correctly, that I was satisfied that Transform had confirmed that they had insurance adequate to fund its participation in the litigation. The claimants’ advisers also inferred that Transform were insured in respect of all the claims they faced. That was not correct.

In April 2014 (after the expert evidence revealed that the claimants were overwhelmingly likely to succeed) Transform and Travelers told the claimants’ advisers that Transform had no insurance for claims occurring outside the period March 2007-March 2011 and that they were agreed that the terms of the product liability policy covered only rupture or injury cases (and so not claims by the “worried well”).

I am quite satisfied that had the claimants’ advisers known that there was no insurance cover for the 426 claims none of them would have been pursued. That would have been entirely consistent with the approach taken to other uninsured and impecunious defendants and with the way the application before me was argued in 2013.

At paragraph 47 of their skeleton argument for this hearing Mr Philipps QC and Mr Lynch assert “It would be wholly inconsistent with [my] decision [of November 2013] now to hold that Travelers should be penalised in costs for having asserted a right that the Court had held in the course of the very same litigation that it was entitled to assert.” This is a revealing submission, making clear that it was Travelers which was asserting the right in the hearing before me. It overlooks that the application was made against and resisted by Transform which was represented by counsel who were (I was told in the course of the hearing of this application) jointly instructed by Travelers and Transform. Whilst Travelers had a direct interest in the question of the disclosure of the terms of the insurance policy it was not a party to the application nor to the litigation. I made no determination of Travelers’ rights which in any event did not extend to uninsured claims.

The Insurance policy is a standard product liability policy. Clause 1 reads as follows, under the heading “Legal Liability”
“the Company will indemnify the insured subject to the Limits of Indemnity in respect of all sums which the Insured shall become legally liable to pay as Compensation for and arising out of accidental Injury or Damage occurring during the Period of Insurance and arising in connection with the Business”
Clause 2, under the heading “Claimants’ Costs and Expenses”
“The Company will in addition indemnify the insured against legal liability for claimant’s cost and expenses in connection with the indemnity provided under clause 1 of the cover”.
Clause 3, under the heading “Defence Costs and Expenses” reads, so far as is relevant
“The Company will in addition indemnify the Insured in respect of all
(a) costs of legal representation reasonably incurred with the Company’s written consent at any
(i) …
(ii) proceedings in any court …in respect of any act or omission causing or relating to any occurrence
(b) other costs and expenses reasonably incurred with the Company’s written consent in relation to any matter…which may be the subject of Indemnity under Clause 1 of the Cover”.

Thus, for the insured claims the claimants’ costs of the preliminary issues fall squarely within clause 2. As to defence costs the applicants say these come within clause 3 (a)(ii) so that the company will indemnify the insured in respect of all costs of any proceedings which may be the subject of indemnity under clause 1. I agree. Travelers argue that the costs of defending the common issues in the uninsured claims were payable as a result of the operation of 3(b) because they were “other costs and expenses reasonably incurred with the Company’s written consent in relation to any matter….which may be the subject of Indemnity under clause 1 of the Cover.” I disagree. The indemnity under clause 1 arises only in respect of insured claims. The relevant provision is 3 (a)(ii).

Travelers’ costs of defending the preliminary issues were the same whether there was one claim or one thousand. The position is analogous to that in International Energy Group Ltd v Zurich Insurance plc (SC(E)) [2016] AC at 509. See in particular the observations of Lord Sumption JSC (dissenting but not on this point) at paragraphs 174 and 175-

“174 That leaves the question whether the right to prorate the insured’s loss across the period of exposure applies also to defence costs.

175 The insuring clause provides, immediately after the principal coverage provisions: “The company will in addition…be responsible for all costs and expenses incurred with the consent of the company in defending any such claim for damages.” The insurer is liable under this provision for costs and expenses incurred with its consent in defending any “such” claim for damages, ie a claim for damages for disease caused during any period of insurance.”

Then, at paragraph 177A he said –

“…Unless there was some severable part of the defence costs that can be specifically related to a period when the insurer was not on risk, the whole of the defence costs had to be incurred to meet that part of the claim which was insured. The fact that it was also required to meet the uninsured remainder of the claim is irrelevant. The most that the insurer can say in this situation is that in funding the defence of a claim so far as it related to an insured period, it incidentally conferred a benefit on those who were potentially liable for the same claim in respect of an uninsured period: ie other insurers and IEG in its capacity as “self-insurer”. In New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237, the insured incurred costs in defending litigation in California against a number of parties only one of whom, a director, was insured against the relevant liability. The Privy Council held that the defence costs did not fall to be apportioned between the insured and uninsured defendants. So far as the defence costs were reasonably required to meet the defence of a party whose liability was insured, the insurer was bound to pay them. It did not matter that the expenditure also benefited other parties whose liabilities were not insured. The principle is accepted by the insurers on this appeal, who concede that they are liable to pay the defence costs in full. That concession appears to me to be correct.”

This was an unusual situation. Mr Harvey, a highly experienced litigator with particular expertise in complex group litigation had not, he said, previously come across a situation where an insurer paid uninsured defence costs in group litigation. Before taking that course Travelers had taken advice on the issue from specialist coverage counsel in 2012.

Travelers did not seek from Transform a share of the costs of defending the common issues. They were not contractually entitled to do so. Travelers would have been entitled to seek a share of the costs of defending the preliminary issues from the other defendants. They did not do so. No other defendant sought to put forward a sample case. The approach of the other insured defendants seems to have been to comply with case management directions whilst identifying the meritorious cases and settling them. CCA defendants did the same.

It was said on behalf of Travelers during the hearing of this application that although there were many claims they were treated as one because they raised common issues. That is not correct. Each claimant had a separate cause of action and from the outset it was Transform’s case that each claimant would have to prove that the particular implants supplied to her were defective. This was pleaded in the defences, it is repeated in the notes of conferences relied on by Travelers in this application and it was repeated in court before me on a number of occasions during the course of the litigation. It was only when the expert evidence was received that there was presumably a shift in position, given that the insured cases were eventually settled.

Each claimant was responsible for an equal share of the common costs which were those costs arising out of the issues to be tried in the four sample cases. All claims were stayed other than the four sample cases. There were 623 claimants in the part of the group that was suing Transform, each was liable for 1/623 of the common costs incurred pursuing the common issues against Transform. All 623 claimants succeeded in their claims against Transform (either by settlement or judgment). All were entitled to damages and costs. The 197 whose claims were covered by insurance received their damages and their costs from Travelers. That settlement would have represented 197/623 of the total costs incurred on behalf of all the claimants in pursuing the common issues against Transform. The balance of the common costs 426/623 fell on the impecunious Transform and therefore on each of the applicants.

Neither the claimants nor the defendants incurred other than minimal costs arising out of further claims being added to the register. Had only those claimants whose claims were insured pursued their claims Travelers would have paid the entirety of the claimants’ costs of the preliminary issues, instead of, roughly, 30%. The applicants would have incurred no costs had they not joined the register, and only modest costs had they left at an early stage. Having brought proceedings and succeeded where there is no insurance and Transform is in liquidation each applicant must pay her costs. The sum saved by Travelers which falls on the claimants must be, on my rough calculation in the region of £4m. Mr Keating, at paragraph 31 confirms “I should state that the decision to oppose the claimants’ application for disclosure of the insurance policy was not some kind of deliberate attempt on the part of Travelers to keep uninsured claimants in the GLO, so as to reduce the costs ultimately payable by Travelers with respect to the insured claims (and correspondingly to increase the costs ultimately payable by Transform). Such a thought never crossed my mind. I would not have even considered the claimants’ costs until we were in a position to settle some of the claims.” Such a thought cannot have crossed the minds of Transform or those advising them either, since it meant the transfer to Transform of a very significant costs liability which could easily have been avoided by informing the applicants at a very early stage that their potential claims were uninsured. It is plain from the statements relied on by Travelers in their application that the conflict between the interests of Travelers and Transform in respect of the claimants’ costs was not identified, still less advised about. The higher the number of uninsured successful claimants, the lower the proportion of common costs to be paid by Travelers and the higher to be borne by Transform.

Section 51 of the Senior Courts Act reads
“Costs in civil division of Court of Appeal, High Court and county courts.
Ii) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in-
(a) …
(b) the High Court; …
shall be in the discretion of the court.
(2) …
(3) The court shall have full power to determine by whom and to what extent the costs are to be paid … “.

Mr Preston takes as his starting point the decision in Deutsche Bank AG v Sebastian Holdings Inc CA [2016] 4 WLR 17 which reviews the principles to be applied. At paragraph 13 there is a brief history of the development of the law in respect of section 51, with reference to the decision of the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 where the House of Lords held that section 51 “gives the court jurisdiction to make orders for costs against persons other than parties to the proceedings, subject to any restrictions that might be imposed by rules of court. The decision thus opened the way for orders for costs to be made against third parties when their connection with the proceedings makes it just and equitable to do so.” They reviewed a number of cases, including, at paragraph 19 “In Dymocks Franchise Systems (NSW) Pty Ltd v Todd (associated Industrial Finance Pty Ltd, third party) 2004 1 WLR 2807 the Privy Council awarded the successful petitioner its costs, but since the respondents were unable to pay them, the petitioner applied for an order that they be paid by a third party, a company associated with one of the respondents which had promoted and funded the appeal substantially for its own benefit. Giving the judgment of their Lordships, Lord Brown of Eaton-Under – Heywood said at paragraph 25:
“ A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows. (1) Although costs orders against non-parties are to be regarded as “exceptional” exceptional in his context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order”.

At paragraph 61 in a postscript the court said that guidelines developed at a time when applications for costs against third parties were relatively uncommon were not intended to lay down rules. Since then there have been many more applications for orders for costs against third parties as a result of which it has come to be recognised that each case turns on its own facts. “We think it important to emphasise that the only immutable principle is that the jurisdiction must be exercised justly. It should also be recognised that, since the decision involves an exercise of discretion, limited assistance is likely to be gained from the citation of other decisions at first instance in which judges have or have not granted an order of this kind.”

At an earlier hearing when Travelers applied (unsuccessfully) to bring in Amlin as a party to an application under section 51, Mr Philipps QC said “the S51 jurisdiction is simply a question of determining the overall justice of what costs order should be made…the jurisdiction in s51 is as wide as could be. It entitles the court to do anything that is just.” That submission was consistent with the observations of the Court of Appeal in Deutsche Bank at paragraph 61 to which I have already referred.

At the hearing of this application he advocated a narrower approach to the jurisdiction. He submitted that where the court is dealing with an application under S51 for costs against an insurer the discretion should be exercised in accordance with well established principles first set out by Thomas J, as he then was in Citibank NA v Excess Insurance company Ltd [1999] 1 Lloyds Rep IR 122, and followed in a number of later cases. In Citibank Thomas J formulated what he described as the critical question thus “who exercised the control and direction of the litigation through the receipt of advice and the taking of decisions?” He submits that an application against an insurer will succeed only where the evidence is that the insurer controlled the litigation without paying appropriate regard to any inconsistent or contrary interest of the insured. If the evidence establishes that then it is appropriate to regard the insurer as the “real” party to the litigation such that the insurer ought to pay the successful party’s costs. In this case, they submit, the evidence falls well short of that. Accordingly, the application should be dismissed. Travelers have submitted lengthy statements dealing with the question of control.

Mr Philipps submits uncontroversially that the fact that the insurer has funded the insured’s unsuccessful defence is not, without more, a sufficient ground on which to order the insurer to pay the claimant’s costs. But that is not this case. Here, an insurer has funded the unsuccessful defence of 426 claims, none of which it ever insured. It is for that reason that Mr Preston submits that the situation is conceptually different from the situation dealt with by Thomas J in Citibank and in the line of cases thereafter, all of which were concerned with insurers who had funded the unsuccessful defence of a claim where costs and/or damages exceeded the limit of indemnity. It follows, he submits, that these cases are of limited assistance. I agree.

In my judgment it is not necessary for the applicants to establish that Travelers controlled the litigation of their claims. My starting point is that the uninsured claims were nothing to do with Travelers. Their involvement, if any, in the defence of the claims and their approach to Transform’s conduct of them are nonetheless relevant considerations.

The relationship between Transform and Travelers was developed before me by Travelers in detail. It is not necessary to rehearse all of it. I confine myself to a summary together with the detail of some incidents which best exemplify particular conduct:-

The point comes into very sharp focus towards the end of the process; in January of 2015 Transform asked Travelers (see Mr Keating’s statement at paragraph 65) if it could make a “drop hands” offer to 228 “worried well” claimants. A similar offer had been agreed to by Travelers before the mediation in July 2014. Travelers’ agreement to a proposed settlement should not have been necessary where claims were uninsured. Nonetheless their agreement had been sought and given in July 2014. By January 2015 Mr Keating was concerned that if Cloverleaf subsequently did not agree that the offer should have been made Transform may have difficulty recovering from Cloverleaf defence costs which had already been paid by Travelers. He therefore asked for time “to think fully through the possible consequences of the “drop hands” offer”. His concern was for the financial interest of Travelers. He knew Transform would not be in a position to pay the costs Travelers had already paid. Mr Keating goes on to say that Bevan Brittan (then acting for Transform) were wrong when they wrote to Hugh James on 3 February 2015 to outline the proposed “drop hands” settlement of the “worried well” claims and said “Transform wished to make a drop hands offer, subject to Travelers’ consent…Travelers took the view that its consent was required before the offer could be made and such consent was not currently forthcoming”. Mr Keating says that Transform knew that Travelers’ consent was required only in respect of any proposed admission of liability. Two things arise out of this: first, it was not for Travelers to consent to an admission of liability in the uninsured claims. The fact that it insured 197 different claims did not give it the right to influence the conduct of the uninsured claims. The withholding of consent was to protect its own position. It refused consent even to Transform making a confidential admission of liability so that the applicants could bring their cases to a conclusion and stop the costs clock running. Second, the reality was that Transform believed (and Travelers did not disabuse them of this) that Travelers’ agreement to a “drop hands” offer was required. That is why it was sought (and given) at the time of the mediation in July 2014 and why it was asked for again in early 2015. If Travelers did not consider it could prevent the offer being made, time to consider the matter would not have been necessary.

Finally I record that Travelers was on notice of this application well before the applicants applied for summary judgment against Transform. This was done so that Travelers had the opportunity to fund the defence of the uninsured claims to trial (the insured claims having been settled). It did not do so. Instead it instructed counsel to attend a case management hearing at which it had no locus to seek to persuade me that the entry of summary judgments was not in the interests of the applicants. A witness statement was served in support of that view. I rejected the argument.

Conclusion

I have no doubt that the history of the litigation as set out above reveals that these cases were exceptional, as defined in Dymocks. They were well outside the normal run of cases in which the parties pursue or defend claims for their own benefit and at their own expense.

The fact that Travelers insured other claims did not entitle it to be involved in, still less influence, the conduct of the uninsured claims, both of which it did. That factor weighs heavily in favour of granting the application. But for Travelers’ interests I am quite satisfied that Transform would have disclosed to the claimants at an early stage (and well before the sample cases were identified) that it was uninsured save for the period 2007-2011 and that there was no insurance for the “worried well”. As I have already said, had that happened the applicants would not have brought/continued their claims and incurred the costs which they now seek from Travelers. This too I consider to be a powerful factor in favour of granting the application.

The ultimate issue is whether or not it is just to grant the application and make the order. In addition to my findings about the history of the litigation, the relationship between Transform and Travelers during the course of the litigation and the disclosure of the insurance position I take account of the following two matters:-
i) Had the applicants failed in their claims against the defendant they would have been liable for all of Travelers’ costs of defending their claims against Transform. Thus, in paying the defence costs, Travelers took no risk yet reaped the very significant benefit to which I have referred.
ii) Travelers will be paying what they bargained for under the contract of insurance.

I am quite satisfied that it is just to make an order against Travelers for the applicants’ costs up to 31 March 2016.