The insurers’ liability for costs

Section 51(3) of the Senior Courts Act 1981 permits the court to order a non-party to pay the costs of the proceedings where it is just and equitable for such an order to be made. Insurers defending claims have often found themselves on the wrong side of such an order, on the basis that the decision to defend was theirs and the defence was for their benefit. In The Kamal XXVI, The Kamal XXIV and The Ariela [2010] EWHC 2531 (Comm) the issue was whether a costs order could be made against underwriters who had themselves been defrauded by their assured into bringing a subrogation action. That in turn raised privilege questions. On the facts Burton J felt that it was appropriate to order disclosure.

The Ariela: the facts

Kamal was the owner of two vessels (the dredger Kamal XXVI and the barge Kamal XXIV). The vessels were damaged, and the underwriters paid US$631,422.97. Having indemnified Kamal, the underwriters commenced subrogation proceedings against the owners of Ariela, alleging that the damage had been caused by that vessel. In two separate judgments, [2009] EWHC 177 (Comm) and [2009] EWHC 3256 (Comm), Burton J held that the claims were fraudulent and were based on false statements by Kamal as to the extent of the loss. In defending those claims, the owners of Ariela incurred costs of more than US$1,250,000 in defending the claim, and obtained an indemnity costs order against Kamal. Almost inevitably, Kamal did not satisfy the award, and Ariela turned their attentions to the underwriters.