The Court of Appeal has recently overturned a High Court decision and limited the circumstances in which an After the Event (ATE) insurance policy can be used to defeat an application for security for costs. What should claimants and defendants consider when deciding whether to offer or accept such a policy?
The guidance in Premier Motorauctions Ltd v PricewaterhouseCoopers LLP will be of particular relevance for impecunious claimants (who otherwise face having to pay cash into Court or to produce a bank guarantee) and for parties defending claims brought by them. In a rapidly evolving area, it is important for parties and practitioners to understand the limits of relying on ATE insurance in these circumstances - an ATE policy is not necessarily a silver bullet.
The Court of Appeal judgment arises from a long running dispute flowing from the administration and pre-pack sale, and subsequent liquidation, of a Leeds-based car auction business and a company selling registration plates for the DVLA. The claimants seek damages of over £45m.
The claimants obtained ATE insurance (in six separate layers from four separate insurers) in the total sum of £5m to cover adverse costs order that might be made against them. They provided redacted policy documents to the defendants. They refused however to obtain deeds of indemnity from the insurers.
As a result, the defendants sought security for their costs in the sum of approximately £7.2m.
Can ATE insurance provide security for costs?
The question facing the Court was whether ATE insurance which has no anti-avoidance provisions (and which confirmed the insurers' common law rights to avoid the policies in the event of a material non-disclosure) constitutes adequate security for an opponent's costs should the insured be ordered to pay those costs?
At first instance, Mr Justice Snowden answered that question in the affirmative (in other words, the ATE insurance policies were sufficient security). That decision was unanimously overturned by the Court of Appeal.
The security for costs regime requires a party seeking security to clear one of the jurisdictional hurdles in Part 25.13(2) of the Civil Procedural Rules - in this case, in light of the claimants' financial status, the Court's power to order security turned on whether the claimants would be unable to pay the defendants' costs if required to do so.
The Court of Appeal confirmed, despite the lack of any substantial appellate authority on the point, that an appropriately framed ATE policy could, in theory, be a complete answer to a defendant's application for security. If the ATE policy provided "sufficient protection" to the defendant, then there would be no reason to believe that a claimant would be unable to pay costs if so ordered: the Court would have no jurisdiction to award security at all.
An ATE policy can therefore protect a claimant which is otherwise vulnerable to a security for costs application from becoming subject to an order. Similar considerations are likely to apply if a party seeks to satisfy an obligation to fortify a cross-undertaking in damages by way of an ATE policy.
The key issue is whether, based on the terms of the ATE policy or policies in question, the defendant will be sufficiently protected.
What constitutes sufficient protection?
It will be for the claimant to show that the ATE policy is sufficient to protect the defendant - this is not surprising given that, as the Court of Appeal noted, the defendant will rarely have had any input into the terms of the policy or a direct right to enforce it. At the very least therefore, to have any chance of avoiding an order for security by relying on an ATE policy, the claimant will have to produce a copy of the relevant policy documents (most likely in redacted form).
In terms of the policy's content, in Premier Motorauctions the absence of anti-avoidance provisions in the ATE policies was conclusive. The Court of Appeal concluded that insurers do seek to avoid their policies if they consider it right to do so, and may well want to do so after trial if the case fails, especially in cases which are likely to turn on issues of factual evidence and the truthfulness of witnesses' accounts. It is well conceivable that, if a case fails, the findings of fact of the Court will be inconsistent with what the insurer was told at the outset.
As a result of the policies' terms, and in particular the absence of anti-avoidance wording, the ATE insurance policy was not deemed sufficient to provide security in this case and the Court of Appeal therefore ordered the claimants to provide security for the defendants costs.
Amount of security required
The Court of Appeal also considered the quantum of security and awarded each of the defendants £2m (creating a total security obligation of £4m on the claimants). This was significantly less than the amounts sought notwithstanding that the £7.2m claimed already represented a reduction to 80% of the defendants' estimated total costs - the security awarded was therefore less than 50% of the defendants' anticipated legal bill.
This case does not mark the end of ATE insurance as a means to defeat security for costs applications. One of the key factors in Premier Motorauctions was that, if the claimants lost, it would most likely have been because the claimants' factual evidence would have been rejected. This would increase the likelihood of the ATE insurance policies being voidable.
There are plenty of other cases where these issues will not apply and the risk of potential avoidance of the ATE insurance policies would be slight or specifically waived by the insurers, such that they do give "sufficient protection" to the defendant(s). In those cases, it is likely that an application for security would be unsuccessful.
It is also notable that deeds of indemnity were not provided in this case. That too is likely to be sufficient to defeat an application for security for costs in many circumstances.
Where you are putting forward an ATE insurance policy by way of security, or challenging the same, you should therefore:
- Consider whether the case turns on the factual witnesses - if it does, there is a greater risk that the policy can be avoided and won't be accepted as security.
- Review the policy documentation provided carefully - consider in particular any anti-avoidance clauses in light of the nature of the claim being faced. Where there are allegations of fraud against the claimant, for example, it will be imperative to obtain confirmation that the insurance will not be avoided following judgment against the insured.
- If there are concerns over the ATE policy, investigate whether the ATE insurer will provide a Deed of Indemnity and, if so, at what cost.
- Consider the quantum of the ATE insurance against the likely amount that would be awarded by the Court as security for costs, and whether the terms of the policy permit those funds to be applied elsewhere. Remember that if the claimant is creditworthy but out of the jurisdiction, you can still get security for the extra costs of enforcing a costs award, but not the underlying costs