Insurance: Plaintiff's costs recovered from non-party insurer

In 1991, a fire took place at the premises of Citibank. Very considerable damage resulted.

Citibank brought proceedings against the parties responsible. There were separate trials on liability and quantum. Overall, Citibank was awarded damages of approximately £2.5 million, plus costs against three Defendants. One of the Defendants, Lebihan, was required to meet 60% of the award.

Lebihan had public liability cover with Excess. The limit of indemnity was £2 million and Excess took the view that this was inclusive of defence costs. On that basis, the figure of £2 million was considerably exceeded by Lebihan's share of the damages and defence costs. Excess paid Citibank the limit of £2 million after first deducting defence costs. Accordingly, Citibank received nothing from Lebihan in respect of its own costs.

As a result of Lebihan's uninsured liability for Citibank's costs, it went into liquidation. The other two Defendants therefore faced the prospect of having to meet Lebihan's share of Citibank's costs themselves.

In the circumstances, Citibank and the other two Defendants applied to the court for a declaration that (a) there were, in fact, two limits of indemnity under the Excess policy, and (b) the limit of indemnity under Lebihan's policy did not include defence costs. These parties also sought an Order that Lebihan's share of Citibank's costs should be met by Excess under Section 51 of the Supreme Court Act 1981, in accordance with the principles set out in TGA Chapman v Christopher (Insurance & Reinsurance Bulletin Issue 32).

Held:

The reality of the position was that there was one claim by Citibank for the damage caused by the fire and therefore only one limit of indemnity applied.

The limit of indemnity did not, however, apply to defence costs. The policy stated that the limit of indemnity applied to, "damages, costs and expenses payable by the insured". In practice, defence costs are not payable by an insured, but are paid by underwriters direct to the solicitors instructed by them to conduct the litigation. The only costs payable by the insured are the VAT element and this is the only element which could fall within the limit of indemnity.

In relation to the application under Section 51, three questions arose:

• Did Excess decide that the claim should be defended? On the facts, it was held that the primary decision to defend the claim was that of Excess; under the terms of the policy, it had assumed the defence and settlement of the claim.
• Did Excess have the conduct, control and direction of the litigation? It was held that, throughout the litigation, the major decisions were taken by Excess on the advice of their solicitors and Counsel; Lebihan was not a party to the decisions as to how the action was to be directed and controlled.
• Did Excess defend the claim exclusively to defend their own interests? Citibank argued that, as neither Lebihan nor Excess considered at any stage until after the Judgment on quantum that there was any exposure beyond the limit of indemnity, the action must have been fought entirely for the purpose of reducing the sum that might have to be paid by Excess under the insurance policy. The case was therefore defended exclusively in the interest of insurers. For their part, Excess contended that the action was not defended entirely in their interests; it was being defended to maintain the reputation of Lebihan and to avoid any exposure to Lebihan beyond the limit of indemnity of £2 million.

The court held that, until liability was determined, the case was not defended solely for the benefit of Excess but was, in part, defended to protect Lebihan's reputation.

After the trial on liability, however, the protection of Lebihan's reputation was not a motive for defending; no one believed the limit of indemnity would be exceeded. Thus, the dispute on quantum was conducted exclusively in the interests of Excess. Accordingly, Excess was ordered to pay Citibank's costs as from the Judgment on liability.

Note:

• There have been a number of recent decisions on Section 51 applications which are difficult to reconcile. The law will not be clarified until the outcome of the appeal to the House of Lords in TGA Chapman v Christopher, which is due to be heard in the spring of next year. In the meantime, (and following the decision of Judge Bowsher in Gloucestershire Health Authority v Torpy (1998)), this Judgment will give some further comfort to the professional indemnity market in that the Judge recognised that the protection of an insured's reputation can be a valid consideration in the defence of proceedings. This provides a basis for seeking to resist a Section 51 application (subject, of course, to the particular facts).
• The Judge commented that the solicitors instructed by Excess should not have assumed that the limit of indemnity included defence costs. This issue was, "at least highly arguable", and a solicitor should not act for the benefit of one client and to the detriment of another, but should have advised Lebihan and Excess to obtain independent advice on this issue. The Judge also observed that, where solicitors are appointed by insurers to defend a claim where the indemnity is limited, the terms of the solicitors' retainer should be clearly spelt out and the involvement of insurers and the insured in the decision making should be contemporaneously recorded.
• Where the parties' intention is to have a costs-inclusive limit of indemnity, it is necessary to ensure that the policy wording is sufficiently clear and unambiguous to make that intention clear (Citibank NA & Others v Excess Insurance Company Limited, QBD: Judgment 7th August 1998).