Law Report: Legal expenses insurer need not pay costs

Law Report: 6 December 1996

Murphy and another v Young & Co's Brewery plc and another; Court of Appeal (Lady Justice Butler-Sloss, Lord Justice Phillips, Sir John Balcombe) 20 November 1996

An order for costs against a non-party, such as the legal expenses insurers of an unsuccessful plaintiff, should only be ordered where exceptional circumstances made it reasonable and just to do so. The mere fact that the insurers had funded the litigation under a commercial agreement was not enough to justify such an order.

The Court of Appeal dismissed an appeal by the first defendant, Young & Co's Brewery plc, against the refusal of Mr Griffiths- Williams QC, sitting as a deputy High Court judge on 9 May 1995, to order the second defendant, Sun Alliance & London Insurance plc, to pay the first defendant's costs of an action brought against it by the plaintiffs, Daniel Joseph Murphy and Christine Anne Murphy.

The Murphys were employed by Youngs to manage a public house. Youngs dismissed them for breach of duty. The Murphys brought an action for wrongful dismissal. Their claim was dismissed and Youngs were awarded pounds 16,000 on their counterclaim together with almost all the costs, taxed at pounds 42,806.

The Murphys were insured by Sun Alliance under the American Express Legal Expenses plan. Their limit of cover in respect of any one claim was pounds 25,000. They exhausted their right to indemnity in respect of this action, their own expenses having exceeded that limit. In these circumstances Sun Alliance denied any liability to meet Young's costs in the event of the Murphys being unable to do so.

Andrew Hillier (Druces & Attlee) for Youngs; Stuart Isaacs QC and Neil Calver (Osborne Clarke) for Sun Alliance.

Lord Justice Phillips said that the jurisdiction provided by section 51(1) of the Supreme Court Act 1981, under which costs "shall be in the discretion of the court, and the court shall have full power to determine by whom and to what extent the costs are to be paid", was not subject (as had been believed) to an implied limitation that costs could only be awarded against those who were parties to the litigation: see Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965.

However, an order for the payment of costs by a non-party would always be exceptional. The ultimate question was what was reasonable and just on the facts of the individual case.

In Chapman Ltd v Christopher (unreported; 23 May 1996) the plaintiffs recovered damages in excess of pounds 1m from an impecunious defendant who was covered against liability for damages and costs up to pounds 1m under his mother's household policy with Sun Alliance. Judge Zucker QC ordered Sun Alliance to pay the plaintiffs' costs.

But it would not always be appropriate to order liability insurers to pay the plaintiff's costs where they had unsuccessfully defended a claim against their insured if the result would be to render them liable beyond their contractual limit of cover.

In this case, Sun Alliance had funded the Murphys' litigation under a commercial agreement, but that seemed the only ground that could validly be advanced for ordering Sun Alliance to pay Youngs' costs. In particular:

1) Sun Alliance had no interest in the result, save insofar as this affected their liability to pay costs.

2) Sun Alliance did not initiate the litigation. They were contractually bound to fund it up to the limit of pounds 25,000 and would have been better off if the litigation had never commenced.

3) Sun Alliance exercised no control over the conduct of the litigation.

4) Sun Alliance could not be accused of "wanton and officious intermeddling" in the dispute.

Legal expenses insurance was in the public interest, particularly if it was on the terms of the cover in this case.

An order under section 51 that a non-party pay costs would only be justified when exceptional circumstances made such an order reasonable and just. This case did not fall within any of the categories of exceptional circumstances that might justify such an order.

The existence of legal expense insurance with a limit of cover that had been exhausted did not make it reasonable or just to order the insurer to pay the costs of the adverse successful party.

Paul Magrath, Barrister