Liability insurance - The award of costs against liability insurers

(Monkton Court Ltd v Perry Prowse (Insurance Services) Ltd forthcoming in [2000] Lloyd’s Rep IR.; Cormack and Cormack v Excess Insurance Co forthcoming in [2000] Lloyd’s Rep IR.)

Section 51 of the Supreme Court Act 1981 allows the court to order the costs of an action to be paid by any person. It is now settled law that in exceptional circumstances an order for the costs of the successful party may be made against a non-party. The conditions for such an award have been considered in a number of cases and it is clear from those cases that liability insurers who have unsuccessfully defended their assured against a third party claim will be liable to have an order made against them in respect of the third party’s claim only if they controlled the defence and acted for their own benefit in so doing. The point is of no real significance if the sum awarded against the assured, plus costs, does not exceed the policy limits, as in such a case the insurers will simply indemnify their assured to the full amount and the third party will be paid. The point becomes important only where the amount of the judgment plus costs exceeds the sum insured, as in that situation the effect of a costs order is to impose a total liability on insurers in breach of policy limits. Two recent contrasting cases illustrate the risks run by insurers in this regard: in Monkton Court Ltd v Perry Prowse (Insurance Services) Ltd an order against insurers was made, but in Cormack and Cormack v Excess Insurance Co an order was refused. Both cases are forthcoming in [2000] Lloyd’s Rep IR.