Palmer v The Estate of Kevin Palmer Deceased & Ors

A liability insurer may be ordered under section 51 of the Supreme Court Act 1981 to pay litigation costs personally where the circumstances are sufficiently exceptional. The central inquiry is whether the insurer funded, controlled and directed the defence exclusively, or so predominantly, for its own benefit that it became the true defendant in all but name.

The court examines the commercial reality rather than merely the insured’s expressed wish to defend. Where the policy limit may be exceeded, the insurer must have proper regard to the insured’s separate exposure and commercial interests. Contractual authority to control the defence does not determine whether a non-party costs order is just.

RSA insured PZ Products Limited under a product liability policy with a £500,000 costs-inclusive limit. PZ Products unsuccessfully defended claims alleging that its seat-belt device was unsafe and had contributed to the claimant’s serious injuries. The claimant’s damages were expected to exceed £2 million, while PZ Products was close to insolvency.

His Honour Judge McKenna ordered RSA under section 51 of the Supreme Court Act 1981 to pay personally the post-1 September 2003 costs previously ordered against PZ Products. He found that RSA had financed and controlled the defence in its own exclusive interest.

RSA appealed, contending that the defence served the mutual interests of insurer and insured and that the exceptional jurisdiction was unavailable. The central issue was whether the judge could properly find that RSA was, in commercial reality, the true defendant in all but name.

1. Appeal dismissed. The judge was entitled to order RSA personally to pay the relevant costs under section 51 of the Supreme Court Act 1981. The evidence supported the finding that RSA funded, controlled and directed the defence to protect the only real interest at stake, namely its own.

2. The jurisdiction to order costs against a non-party is exceptional and must be exercised cautiously. In limited-cover insurance litigation, the relevant inquiry is whether the insurer’s self-interest was exclusive, or predominated over the insured’s interest to such an extent that the proper balance was lost. Exclusivity is not an inflexible requirement. Exceptionality serves the overriding requirements of reason and justice: Alan Cormack v Excess Insurance Company Limited, 16 March 2000, applied.

3. The court must examine the commercial reality. Although PZ Products and its director expressed a wish to defend the claim, the company’s relevant business had virtually disappeared, it was close to insolvency, and an adverse judgment would end the company. Settlement within the policy limit offered the only rational means of preserving its unrelated business. Its objective commercial interest therefore lay in settlement, not trial.

4. RSA knew that PZ Products was small, that its relevant business was struggling and that a judgment exceeding £2 million would be terminal. It nevertheless made no inquiry into the company’s finances. It also rejected a £300,000 offer without first consulting PZ Products. Those facts justified the inference that RSA gave no material consideration to the insured’s separate commercial interest. The case was accordingly analogous to T.G.A. Chapman Ltd v Christopher [1998] 1 WLR 12.

5. An insurer’s contractual right to control a defence does not govern the court’s exercise of section 51. Nor does apparently reasonable legal advice about the merits answer whether the insurer conducted the litigation solely or predominantly for itself. Pill and Sedley LJJ agreed with Rimer LJ.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court upheld the personal costs order against RSA.

2. High Court, Queen’s Bench Division: His Honour Judge McKenna ordered RSA under section 51 of the Supreme Court Act 1981 to pay the receiving parties’ costs incurred after 1 September 2003.