If you win a case you should usually expect to be reimbursed for the legal expense incurred as a result of wrongful allegations having been made. In this case the insurance broker won, but was left to bear its own costs. That decision by the trial judge was unusual, but the broker has successfully appealed and recovered its costs. This case emphasises the unpredictability of litigation and suggests that the courts want to try to apportion some blame by making costs awards even if a party is exonerated of negligence.
Aon was joined to an action between a reinsured and its reinsurer. Allegations of professional negligence were made by the reinsured in case they were unable to secure an indemnity from the reinsurer. Aon successfully defended the claim and the reinsurer was found liable to indemnify the reinsured. The usual rule in English litigation is that costs follow the event so that a successful litigant should be reimbursed for the majority of their legal costs by the losing party. But, even though Aon won the case, it was ordered to pay its own legal costs because its actions were said to have caused the litigation. Aon appealed and was able to recover 90% of its costs from the losing party. A summary of the facts and issues in the case is attached below.
The trial judge took the view that the cause of the litigation was a change made to a fax by Aon. Although he found that the change to the fax was not negligent and had not affected the validity of the cover in any way, it had introduced ambiguity such that the reinsurer was able to raise a defence to the claim for indemnity, hence the litigation. The judge was swayed in his costs decision by the apparent injustice that if the normal rule applied, the reinsurer would have to bear the costs of two litigants, the reinsured and the broker.
Aon appealed, relying on the contradiction between the judge's finding that Aon's alteration to the fax had not been negligent on the one hand, and his castigation of Aon by ordering them to bear their own costs on the other. In essence Aon submitted that a bad case had been brought by the reinsured and they ran the risk, by making certain allegations, that the reinsured and the broker would need to defend themselves. If they decided to run that bad case they should bear the consequences of losing.
The Appeal Court allowed the appeal. In considering whether to award costs they found that the trial judge was entitled to take into consideration the conduct of the parties before, as well as during the proceedings in accordance with CPR 44. Lord Justice Brooke reviewed the authorities and confirmed that this means conduct during the proceedings, and prior including even the conduct in the matters which give rise to the litigation. So the trial judge was entitled to consider that fact that Aon had altered the fax, although the Appeal Court conceded that to have regard to those issues is inconsistent with current practice in the Commercial Court where the court will usually only consider the conduct of the parties in the litigation itself.
However, the Appeal Court considered that the trial judge had given insufficient weight to the interests of Aon in wanting to instruct lawyers to represent its interests when they had been joined to a proceeding as a direct result of an allegation made by the reinsured. It therefore exercised a fresh discretion and awarded Aon 90% of its costs to be paid by the losing litigant.
The Appeal Court's decision is entirely logical, since Aon was found not liable, and to a significant degree is resumption of 'normal service'. But, the court at first instance always has a discretion in costs awards and interference with costs awards by the Appeal Court is very rare. The Appeal Court confirmed that the trial judge was entitled to do what he did, but disagreed with his balancing of the interests of the parties. That is not to say that the judges in the Commercial Court and other courts will be deterred from exercising their discretion in cases where they feel one party should shoulder some of the hurt flowing from litigation and seek to do that by a punishing costs order. It is clear from the review of the CPR in Lord Justice Brooke's judgment that it may not enough for a party to behave impeccably in litigation or even in the pre-action exchanges; the whole course of events from the very root of the dispute can be considered by the judge when deciding what costs award to make.
This experience serves as a reminder not to take anything for granted in litigation, no matter how strong one's defences appear; there may be a sting in the tail in the form of a costs order and the Appeal Court may not be able to draw that sting, though they were able on this occasion.
CMS Cameron McKenna
17.12.03
Facts and issues summary
The Claimant, Groupama, sought payment of unpaid claims and an indemnity for future losses under a marine personal accident quota share treaty retrocession by which it insured various Lloyd's syndicates. Lloyd's insured various US companies involved in the maritime industry. The Defendant, Overseas Partners Re, was the retrocessionaire.
The original insurances provided liability cover in respect of bodily injury and death, amongst other risks. It was the bodily injury and death liability which Lloyd's 'carved out' to be reinsured by Groupama. Groupama in turn obtained a 50% retrocession cover reinsured by OP Re in early 1998.
When Groupama's broker approached the OP Re underwriter regarding the 50% retrocession, the OP Re underwriter asked for information about (i) the experience /expertise of the Groupama underwriter and (ii) Groupama's written premium and incurred claims to date. The picture presented was accurate and showed profitable business and so the OP Re underwriter accepted a 50% share.
Shortly afterwards, Groupama indicated to the syndicates' broker that they could only accept further marine bodily injury carve out business from Lloyd's if their participation could be reduced, either by coinsurance or by extending the retrocession protection. OP Re were approached to see whether they would be prepared to increase their 50% quota share to a 75% quota share.
The broker placed that increase to 75 % in June 1998, but OPRe subsequently alleged they had been misled as to the loss position on the treaty by a key exchange of faxes during the course of placing that increased treaty. OPRe denied Groupama cover and Groupama issued proceedings for a declaration that the 75% retrocession cover was valid.
The central issue in the case concerned the interpretation of two faxes. The OP underwriter sent a fax to Groupama's broker dated 18 June 1998 in the following terms:
"This is to confirm our increased participation from 50% to 75% on the LDG [part of Groupama] marine personal accident program effective 1/1/98 subject to satisfactory warranties as to no losses incurred on the program to date."
The fax was shown to the Groupama underwriter by the broker and he asked the broker to answer the request. The broker checked with their own claims department and they, in their capacity both as broker on the retrocession and broker on the reinsurance of Lloyd's, found that no losses had been reported to them.
The broker sent a fax to OP Re on 30 June 1998 in the following terms:
"Following on from your fax of 18 June I am pleased to confirm that LDG have noted the contents therein and we can confirm that there have been no losses advised to date that would effect [sic] any of the declarations ceded hereunder".
In fact a number of losses had been advised to the underlying Lloyd's syndicates but not advised to the syndicates' broker or to Groupama as of 30 June 1998. OP argued that this rendered the statement in the broker's fax untrue because losses had been advised to Lloyd's. Groupama argued that the broker's response was perfectly true because it stated, in effect, that neither Groupama nor its broker were aware of losses reported to the retrocession cover since inception.
Aon was joined to the action not only because the words in the fax of 30 June were said to be ambiguous but particularly because Groupama had approved a slightly different, and unambiguous, version of the fax to be sent. The draft of the 30th June faxed seen and approved by Groupama included the words "to LDG" after "no losses advised" (LDG being part of Groupama). These two words, if retained, would have made the no loss statement clear because there could have been no argument that the fax was only making a statement about losses advised to LDG/Groupama/its agent. Since the words were taken out by Aon (for reasons unexplained but not dishonest) OP were able to argue for their far wider interpretation of the words.
The Judge found that OP did not, by their fax of 18 June, wish to enquire as to any matter other than the loss position on the retrocession. He also found, that as a matter of ordinary language the words "the losses incurred on the program to date" meant the losses incurred on the book of business written by Groupama as opposed to losses incurred by Lloyd's or any other party in the chain of insurance and reinsurance. Aon therefore were exonerated from any negligence and OP were bound to indemnify Groupama.
For further information, please contact Susan Hopcraft at susan.hopcraft@cms-cmck.com or at +44 (0)20 7367 3056.
