History

The law firm Giambrone, (the Insured) had a professional indemnity insurance policy with AIG.

Group litigation proceedings were brought against the Insured concerning advice on property purchases. The Insured fought some significant issues, despite not being at all confident it would succeed. The Claimants in the end succeeded on all points.

This case was an application for a non party costs order again the insurer AIG under section 51 of the Senior Courts Act 1981 which permits the court to determine who should pay the costs of case and to what extent.

AIG’s coverage position under the Policy was that it could aggregate the claims against the Insured so that they amounted to one claim, so capping AIG’s limit. As the Insured had challenged AIG’s coverage analysis, the parties entered into the “HOTS” agreement in which they agreed the basis for aggregation of the claims against the Insured and AIG agreed to pay defence costs on that basis that AIG could withdraw the funding if “it reasonably considers that there is no realistic prospect of defending the claim”.

AIG claimed that once the HOTS agreement was in place, it was no longer in control of the case/defence. AIG argued that whilst it funded the defence costs, it did not receive any advice that there was no realistic prospect of success which would have permitted AIG to withdraw defence funding.

AIG also argued that the Insured would have caused the Claimants to incur materially the same costs even if AIG had not funded the defence costs.

The Court’s Decision

The court considered that the key question was:  if AIG had no effective control over the defence to the litigation, would that mean it was protected from a successful section 51 application?

The court held that the HOTS agreement did not protect AIG from being the subject of a non party costs order.

The judge held: “…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”.

The court concluded that it was reasonable to assume that the Insured had cause to be concerned about its ability to successfully defend the claims when it got to trail. The implication was that AIG may well have had grounds for withdrawing funding.

Even though AIG’s argued that the Claimants would have had to incur materially the same costs even if AIG had not funded the defence costs (due to the Insured’s behaviour), the court held that is was unable to conclude from the available facts that the Insured had sufficient resources to fund the defence of the claims without AIG’s support . The judge felt that without AIG’s funds, the Insured would have been much more circumspect about the potential exposure to an adverse costs order.

Therefore, the judge concluded that it was AIG’s funding of the defence which had caused the significant costs incurred by the Claimants in pursuing their claims.

The judge held that the Claimants had spent twice as much pursuing their claims as they would have done had AIG not funded the defence in the way it did. AIG was therefore required to pay half the Claimants’ costs.