After the Event (ATE) insurance policies provide many advantages to parties to litigation. By providing cover for the adverse costs risks inherent in litigation and, in some cases, cover for the insured’s own costs and disbursements, ATE policies allow parties to have access to justice which they might otherwise be denied. Such policies may also assist parties against whom the adverse party is seeking security for costs.
In this regard, earlier this year the Court of Appeal[1] upheld the general proposition that an “appropriately framed” ATE insurance can defeat an application for security for costs if the policy can offer the defendant “sufficient protection” that the claimants will be able to pay the defendant’s costs if it is ordered to do so. In broad terms, parties could provide a policy as security instead of having to put forward the usual cash or bank guarantee. This would be particularly useful where the claimant itself was insolvent or otherwise unable to satisfy an order for security for costs in the usual way.
However, the Court of Appeal also held that whether or not an ATE insurance policy can offer the defendant “sufficient protection” will depend on the terms of the policy in question, particularly whether there are any provisions which may permit the insurer to avoid the policy in certain circumstances (for example allowing the insurer to cancel the policy where they formed the view the claimant’s claim was unlikely to be successful). Such policies would be inadequate to satisfy a defendant’s request for security for costs. In that case, the Court of Appeal was of the view, without ruling on the point, that ATE policies with exclusions limited only to fraudulent or false claims might provide adequate security, depending on all the circumstances.
What, then, of ATE policies with other standard exclusions? A recent ruling of the High Court confirms they are likely to render the ATE policy inadequate for security purposes. In Lewis Thermal Ltd v Cleveland Cable Co Ltd[2] the ATE policy in question excluded cover in cases of failure to disclose material facts, fraud, misleading misrepresentation or insolvency – all standard exclusions. The court held that these exclusions all provided opportunities for the insurer to avoid the policy, leaving the defendant at an unacceptable risk that neither the claimant nor its insurer would pay its costs if it won. The ATE policy provided inadequate security; the claimant’s shareholders would have to put up funds in the usual way.
Claimants should take note of these decisions and carefully consider whether the terms of their ATE policies are likely to prevent reliance on them in defence of a security for costs application. Where claimants are unable to provide cash or bank guarantees by way of security for costs, comprehensive anti-avoidance endorsements to policies and/or a stand-alone deed of indemnity from the insurers to the defendants should be considered – standard ATE policies with their usual exclusions are unlikely to be adequate.
[1] See our article 'Can ATE insurance constitute adequate security for costs?' on the decision in Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872.
[2] Lewis Thermal Ltd v Cleveland Cable Co Ltd QBD (TCC) (O’Farrell J) 15/08/2018 (Unrep.)
