Claire Ferguson considers insurers' liability for wasted costs

Claire Ferguson

There was a question in a recent professional negligence case of whether the defen-

dant's professional indemnity insurers might be liable for costs incurred by the plaintiffs, which were argued to have been wasted by the insurers' unreasonable act.

If successful (the point has yet to be determined by the court) the insurers' exposure could sound a cautionary tale for other insurers.

Section four of the Courts and Legal Services Act 1990 allows the court to order a third party to meet the whole or part of any "wasted costs", defined as costs incurred by a party, either as a result of any improper, unreasonable or negligent act omission on the part of any legal or other representative, or which, in the light of any such act or omission occurring after they were incurred, the court considers is unreasonable to expect that party to pay.

The plaintiff's argument was that after Symphony Group Plc v Hodgson (1993), insurers with a direct interest in the outcome of the action and effectively responsible for the conduct of their insured's defence, had been maintaining or financing the defence, rendering themselves liable for the plaintiffs' costs when the trial had to be adjourned at the last minute.

For reasons as yet undisclosed and in circumstances as yet unclear, the insurers wrote to their insured telling him they had decided to avoid his insurance cover, leaving him, days off a 10-day trial, with neither cover nor legal representation. He then sought and obtained an adjournment of the trial. The plaintiffs had to demur and while they were entitled to their wasted costs incurred by the adjournment, who should pay them?

The court ruled it could not decide whether the insurers' late avoidance constituted unreasonable conduct without knowing what had prompted them to make their decision so late. The insurers could not explain the background for fear of prejudicing the defendant's case in the main action and breaching their duty of confidentiality to him.

So the court adjourned the costs liability issue until after the main trial.

In the Symphony Group case, the Court of Appeal summarised the guiding principles for judges exercising their discretion on the liability of third parties for costs in the light of the Aiden Shipping case, determined seven years before.

The principles, enunciated by Balcombe L J in the leading judgment, are in the fourth cumulative supplement to the White Book under RSC O.62/2/7.

Insurers of a party to proceedings, against whom no separate cause of action lies, at least prior to their insured's bankruptcy/liquidation/receiv-ership etc, after which the Third Parties (Rights against Insurers) Act 1930 may apply, appear well placed as a target for wasted costs orders if their acts or omissions can be shown to be unreasonable, improper or negligent and their insured's protagonist, who has incurred costs prior to that act or omission, can satisfy the court it is reasonable that the insurer should pay for such costs.

Many insurers take too long to confirm or deny cover when the court might be willing to make its finding. Insurers should consider their potential exposure to third parties for wasted costs before taking a decision based solely on what they consider to be their exposure to their insured. They may find their liability is wider than they thought and the courts are willing to penalise insurers on costs, even though they may be justified in repudiating cover to their insured.

Clare Ferguson is a partner with Taylor Joynson Garrett.