UK: Can After The Event Insurance Defeat An Application For Security For Costs?

The question has recently come before the Court of Appeal for the first time in Premier Motorauctions Ltd (in liquidation) v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872.

The Issue

When faced with an application for security for costs, is showing that you have ATE insurance sufficient to avoid being ordered to pay it?

The Background

The Claimants are a group of companies in liquidation. The joint liquidators of the companies brought proceedings against PWC and Lloyds Bank alleging that they had conspired together to take control over the companies through unlawful means, forcing their sale at an undervalue for the benefit of the bank. The liquidators are claiming losses of £45million - £54 million.

The defendants asserted that by reason of the Companies being in liquidation and the joint liquidators' communicating to creditors that there were no assets to be realised in the liquidations, they had reason to believe that the Companies would be unable to pay the defendants' costs if ordered to do so. Accordingly, the defendants issued an application seeking around £7.2million in security for costs from the liquidators.

The Arguments

The liquidators, whose claim was funded by a third party litigation funder, did not contest that ordering security would stifle their claim. Their defence of the application was based on the fact that they had the benefit of an ATE insurance policy, which provided them with indemnity of up to £5million if they were ordered to pay the defendants costs. They argued the existence of that policy meant that there was no reason to believe that they would be unable to pay the Defendants' costs if they were ordered to do so (that being one of the requisite conditions for ordering security set out under CPR 25.13(2)).

PwC's solicitors contended that "unlike the payment of money into court, a bank guarantee, or a deed of indemnity, the ATE policies were not adequate security because they could be avoided in certain circumstances by the insurers".

The Court's Findings

Counsel for the defendants argued that ATE insurance was no more than a contingent asset and therefore could not be taken into account when considering whether there was reason to believe that the Companies would be unable to pay the defendants' costs. The Court of Appeal disagreed, Longmore LJ stated that "If it is very probable that a contingent asset will mature before any order for costs is made, that asset cannot be excluded from consideration. It is therefore necessary to consider whether the particular ATE insurance in this case does give the defendants sufficient protection."

Longmore LJ noted that the ATE policy in this case contained a significant number of exclusions and conditions precedent which would, if triggered, provide insurers with a basis to avoid liability. Many of these turned on whether the insured had made full and honest disclosure when taking out the policy but there were also various claims controls and settlement provisions, including an option for the insurer to withdraw cover if the merits of the claim fell below 60%.

Against that background, Longmore LJ approved of Mance LJ's comment in Nasser v United Bank of Kuwait [2002] 1 WLR 1868, that "I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere. PwC's solicitors pointed out that the ATE policies in question could be avoided for non-disclosure or misrepresentation and that they were therefore not the equivalent of a payment into court, a bank guarantee, or a deed of indemnity issued by an insurer. In considering whether the ATE policy provided sufficient protection, Longmore LJ noted that the policy in this case did not contain anti-avoidance provisions of the sort envisaged by Mance LJ.

The Court of Appeal also held that the evidence of a Mr Elliot (whose knowledge was also arguably within that of the respondents when purchasing the insurance) would likely be significant in determining key questions in the case and, consequently, if Mr Elliot was not believed, the Companies would likely lose and be liable for the defendants' costs. Longmore LJ (with the possibility of avoidance for non-disclosure or misrepresentation in mind) went on to say "Of course it does not follow that insurers would avoid but the difficulty is that neither the defendants nor the court has any information with which to judge the likelihood of such avoidance. One knows that ATE insurers do seek to avoid their policies if they consider it right to do so". Longmore LJ went on to state that "I cannot see that on the facts of this case these defendants have that assurance. It follows therefore that there is reason to believe that the Companies will be unable to pay the defendants' costs if ordered to do so and that the jurisdictional requirement of CPR 25.13 is satisfied."

The Court of Appeal held that on the facts of this case, the Court had jurisdiction to make an order for security of costs and ordered the claimants to provide security of £4 million.

Comment

The principles applied by the Court of Appeal were not new. All had featured in various High Court cases previously. It is helpful in adding certainty to the position that whilst ATE insurance can potentially defeat an application for security for costs, it is far from the default position and the policy terms remain the key.

Longmore LJ emphasised remarks made in Geophysical Service Centre Co v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), that to be able to rely on ATE cover, insureds must check that their policies are "properly drafted" and the outcome will depend "on the terms of the policy in question".

We have seen the drafting of ATE policies develop significantly over the last few years to address a number of the issues noted by the Court of Appeal.

Whilst this policy did not include them, it is common for similar policies to provide for the provision of a Deed of Indemnity in the event that an application is made for security for costs. It is also relatively common for policies to contain non-avoidance wording in the event of an application being made for security. Given the judge's comments in this case, it is likely that, had the policy been drafted in that way, security would not have been ordered.

The case emphasises the importance of being properly advised on and, if necessary, challenging the wording of ATE Insurance Policies before they are purchased if it is likely that you may be asked to put up security for costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.