The insurers’ liability for costs

Section 51 of the Supreme Court Act 1981 is something of a nightmare provision for liability insurers. It seems harmless enough on its face, stating simply that the court may order any person to pay the costs of proceedings. Once it became established, however, that the section could be used to order a non-party to pay costs where the proceedings were funded or otherwise for the benefit of a non-party, liability insurers were immediately put at risk of facing costs orders following their unsuccessful defence of their assured in circumstances where the assured had no real interest in the outcome of the proceedings. The practical effect of such an order is that where policy limits are exhausted in meeting any judgment against the assured, the insurers can be called on to make additional payments to meet the claimant’s costs. The most recent case in the line of authorities is Palmer v Palmer [2008] EWCA Civ 46.

Palmer: the facts

This was a truly tragic case. In January 1996, the claimant, then aged six, was travelling in the front seat of a car being driven by her father, the defendant. He died at the wheel, the car crashed and the claimant suffered injuries described by the court as ‘devastating’. The defendant had a motor policy, but this was avoided by the insurers for non-disclosure. The claimant then joined the Motor Insurers Bureau to the action, seeking to recover the amount of any judgment from the MIB under the Uninsured Drivers Agreement. That Agreement in the version then current (and also under the current version) authorises the MIB to insist that the claimant brings an action against any other person responsible for the loss, with the MIB being able to deduct the sum recovered from the amount payable under the Agreement. The MIB in the present case instructed the claimant to bring proceedings against a third party, PZP, the manufacturer of a ‘Klunk-Klip’ device which was attached to the claimant’s safety belt and which was designed to prevent the belt from tightening inappropriately. The MIB was of the view that the device suffered from design defects and, had it not been used, the claimant would not have suffered injury. In the event, judgment was given on liability for the claimant against PZP. Damages remained to be assessed, but were likely to exceed £2m.