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Timing of Policy Repudiation and Possible Cost Implications for Insurers

18 April 2018
Insurance
An analysis of the potential cost implications for insurers who repudiate policies of insurance during litigation

An insurer may repudiate a policy of insurance for a failure to comply with certain policy conditions. A decision to repudiate may have cost implications for insurers depending on the timing of repudiation and whether a plaintiff has incurred cost. It is for this reason that insurers need to fully investigate and decide on indemnity issues as soon as possible as a failure to do so could result in insurers having to discharge significant costs to plaintiffs.

In a number of cases the courts have looked at the behaviour of insurers when applications are made by defence lawyers to come off record. In some situations, the courts have imposed cost penalties on underwriters as a condition of defence solicitors being permitted to come off record, (even were there is no issue raised or enquiry made about their entitlement to repudiate). In O'Fearail v McManus [1994] 2 ILRM 81, Byrne v O'Connor & Co. [2006] IESC 30 and McKiernan v Quinn-Con Developments (Waterford Limited) and Anor. IEHC Unrep. Laffoy J. (27 April 2007), insurers solicitors were permitted to come off record in each case subject to them agreeing to pay a cost penalty to the plaintiffs because of the prejudice encountered by the plaintiffs in continuing with the litigation only to discover late in the day that no indemnity is being provided.

The Supreme Court in the decision of O'Fearail v McManus [1994] 2 ILRM 81 ruled that both the costs of the High Court and the Supreme Court, on appeal, be paid by the insurance company for the defendant as a condition to defence solicitors coming off record. The Court sought and obtained an undertaking from the insurer involved to discharge the costs of each party. In deciding the matter the court noted that the decision to impose a cost penalty was due to the failure of the insurer to conduct a thorough investigation in relation to policy considerations before instructing the firm of solicitors to act in the defence of the case.

In the later decision of Byrne v O'Connor & Co., the underwriter was joined as a notice party to the defence solicitor's application to come off record. The Court permitted the firm of solicitors to come off record but directed that insurers pay the plaintiff the costs of the proceedings to date and the costs of the motion to come off record. Mr Justice Kearns in the Supreme Court stated, "…the interests of justice do not favour excessive delay on the part of an insurer who eventually elects to repudiate, unless reasonable and diligent enquiries would have failed to reveal the material upon which reliance is ultimately place to avoid the policy". In this case the application to come off record was only heard on the day when the main action was listed for hearing.

A court will not usually refuse an order giving liberty to a firm of solicitors to come off record following a repudiation of insurance but it can impose conditions in terms of costs. When such applications are made and opposed by a plaintiff, a court will likely enquire about the reasons for the delay in seeking to come off record and the impact the belated application has had on the Plaintiff in terms of costs.

In the case of Ye Shi v Ernst & Young Limited and RMC Leisure Limited trading as event Works [2017] IEHC 804, Ms Justice Faherty granted a firm of solicitors' liberty to come off record subject to the underwriter giving an express undertaking to discharge the plaintiff's costs up to the date of the application. The facts concern a lady that fell over an uneven surface and injuring herself whilst working for her employer at a sporting event in Dublin. It was an express condition of her policy of insurance that she would have to discharge a policy excess of €2,500, when requested, as a condition of indemnity. The insurer requested payment of the excess but this was not paid. The insurer repudiated the policy and instructed their lawyers to come off record. The application to come off record was opposed by the plaintiff's solicitors. Ms Justice Faherty refused to consider the merits of the policy repudiation and in terms of the application she stated, "…to refuse an application to come off record would be to insist on a forced liaison and compel the solicitor applying to come off record to act for the defendant". The Court noted that the only issue to be decided is whether any conditions should be imposed in granting an order giving liberty to come off record. An order was made giving the defence solicitors liberty to come off record subject to an undertaking by the defendant's insurer to pay the costs of the plaintiff up to the date of the application.

Conclusion 

These authorities serve as a warning to insurers that there may be costly implications for delaying repudiation of a policy and coming off record were decision to repudiate and come off record could have been taken at an earlier stage. On the hearing of such applications a court will focus on the timing of declinature and whether a Plaintiff was unfairly prejudiced in terms of costs.

In view of the risks facing insurers, it is recommended that insurers act quickly and thoroughly in investigating policy issues. That said, if an insurer can justify and provide reasonable explanation for the timing of the repudiation and the subsequent application to come off record, then a Court may not impose a cost penalty and instead direct each party to bear their own costs.

Further Reading

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