Legg & Ors v Sterte Garage Ltd & Anor

An insurer may be ordered to pay a claimant’s costs as a non-party where it determined, funded and controlled the defence predominantly for its own benefit, and its intervention caused the claimant to incur costs. The court retains a broad discretion under section 51(3) of the Senior Courts Act 1981.

An appellate court will interfere with that discretion only where the judge considered irrelevant matters, omitted relevant matters, or reached a conclusion unsupported by the material. Insurance cover for litigation costs depends on the policy’s construction. Layout is relevant but may yield to the clause’s context, commercial purpose and objective meaning.

Residents obtained default judgment against an insolvent garage for property damage caused by diesel contamination. The garage’s public liability insurer had funded and controlled the defence while the claim alleged a sudden incident potentially within the policy. It withdrew after the pleadings added gradual leakage from underground tanks, although the original allegation remained.

Deputy District Judge Coppen ordered the insurer to pay the residents’ costs. He relied both on the non-party costs jurisdiction under section 51(3) of the Senior Courts Act 1981 and on the garage’s policy right to an indemnity, which had vested in the residents under the Third Party (Rights Against Insurers) Act 1930.

The insurer appealed on both grounds. The central issues were whether the non-party costs discretion had been exercised properly and whether the policy covered the garage’s liability for the residents’ costs.

1. Appeal dismissed. The judge was entitled to order the insurer to pay the claimants’ costs as a non-party under section 51(3) of the Senior Courts Act 1981. The insurer had determined, funded and effectively controlled the defence. It did so predominantly, and in substance exclusively, to defeat a pleaded claim which fell within the narrow pollution cover provided by its policy.

2. The garage could not have met an uninsured damages award and asserted no independent basis for resisting liability. When the insurer withdrew, the garage did not defend the claims. The reasonable inference was that, without the insurer’s involvement, the claimants would have avoided most of the costs they incurred. The insurer’s conduct was therefore causative of those costs.

3. The claim based on the sudden 1997 incident had not been abandoned when allegations of gradual leakage were added. It remained pleaded and had survived an earlier strike-out application. The judge deciding costs could not realistically determine the source of the pollution on the limited evidence before him.

4. An appellate challenge to the costs discretion required the insurer to show that the judge considered irrelevant matters, omitted relevant matters, or reached a conclusion unjustified by the available material. No such error was established, and there was ample material supporting the order.

5. Although unnecessary to the disposition, the policy argument provided an additional ground for dismissing the appeal. General Condition 11 was a subrogation clause. It enabled the insurer to enforce the insured’s rights against third parties and did not provide an indemnity against the claimants’ costs.

6. The relevant indemnity arose instead from the definition of “Costs and Expenses” in section E. Its closing words, referring to an event which was or might be the subject of indemnity, qualified the entire definition. Although the layout suggested that they applied only to the final paragraph, that reading would produce the commercially improbable result that defence costs incurred with the insurer’s consent were uncovered whenever the third-party claim failed. Context and commercial sense displaced the indication supplied by layout.

7. The garage was therefore entitled to indemnity against the claimants’ costs. That right vested in the claimants under the Third Party (Rights Against Insurers) Act 1930. Sales LJ and Gloster LJ agreed with David Richards LJ.

1. Court of Appeal (Civil Division): The insurer’s appeal was dismissed unanimously: [2016] EWCA Civ 97. The non-party costs order was upheld, and the policy indemnity provided an additional basis for the same result.

2. County Court at Bournemouth and Poole: Deputy District Judge Coppen ordered the insurer to pay the claimants’ costs under section 51(3) of the Senior Courts Act 1981 and on the basis of the insured’s policy rights vested under the Third Party (Rights Against Insurers) Act 1930.