A recent High Court case has considered the effectiveness of an
'after the event' insurance policy
("ATE insurance") in
the context of a security for costs application (Greenclean
Waste Management Limited v Maurice Leahy Practising under the Style
and Title of Maurice Leahy & Co. Solicitors [2013] IEHC
7). It concerned a professional negligence claim by the plaintiff
company that the defendant solicitors failed to advise on the
extent of the plaintiff's obligations to make certain
reparations under a lease, failed to advise the plaintiff in
relation to a relevant limitation period and to disclose a relevant
conflict of interest.
An application was brought by the defendant for security for costs
under section 390 of the Companies Act 1963 where it was mutually
accepted that the plaintiff was "hopelessly insolvent"
although the plaintiff had ATE insurance to ensure the defendant
was paid its party and party legal costs, in the event that the
plaintiff was unsuccessful and a costs order was made against it.
Should the plaintiff succeed a relatively high premium would be
paid to the plaintiff's insurers.
Legal Considerations
The judge had to assess the defendant's application for
security for costs having regard to the ATE insurance. The
key consideration was the extent to which the insurer could
legitimately repudiate on its liability under the policy. If the
extent was great enough, it could be said that the insurance
provided no real security for costs.
The defendant argued that whilst policies of insurance were
generally relevant to these applications, the plaintiff's ATE
insurance policy had so many avoidance provisions that it had
serious doubts it would be able to recover costs if
successful.
The judge noted that, as the plaintiff was in voluntary liquidation
there was "no doubt" but that it was hopelessly
insolvent. He also acknowledged that the defendant had provided a
prima facie defence and was, therefore, prima facie entitled to an
order for security for costs, unless the ATE insurance sufficiently
mitigated the risk that the plaintiff would be unable to discharge
the defendant's costs.
The judge looked at English case law on the issue and followed the
rationale that the existence of a policy was in no way
determinative that the insured was, in fact, covered. What mattered
was whether the policy actually provided an effective means of
protecting the defendant's position should the plaintiff
lose.
ATE policy
The judge acknowledged that ordinarily an insurance policy would
be relevant to the proceedings, as an insured party would be
expected to be able to pay any award made against it. A distinction
was drawn however with situations where there was reason to believe
that the award was not within the scope of the policy in question
or where the party was guilty of conduct that would enable the
insurer to repudiate liability.
In this case, the defendant contended that such was the scope of
the avoidance provisions in the plaintiff's ATE policy, that it
did not give the defendant any real security if he obtained an
award of costs against the plaintiff. A number of clauses
were brought to the court's attention, most pertinently a
"prospects clause", which provided: "We can end
cover under this policy if we, after discussion with your
solicitor, are of the opinion that it is more likely than not that
you will lose your claim".
Other clauses in the policy were examined, such as a
"fraudulent claims" clause and a "cancellation
clause", both of which, while perhaps not phrased as generally
as the "prospects clause", allowed the insurer to
repudiate liability based on the occurrence of certain
events.
Evaluating the policy as a whole, the judge concluded that while
the insurer was not entitled to terminate for no reason, under the
prospects clause it could do so if agreed following discussions
with the plaintiff's legal advisors that the action was likely
to fail. This right to terminate could therefore
theoretically arise at any stage of the proceedings.
Conclusion
Ultimately the judge adjourned the application to allow the
plaintiff to review its policy with its insurers, but made it clear
that security for costs would be ordered in the circumstances,
given the policy as it then stood. He made specific reference
to the novelty ATE insurance brought to such security for costs
applications, and the additional factors that needed to be
considered in this regard.
The judge stated that, before he would consider the policy
sufficient to 'ward off' an order for security, he would
require a "binding assurance from the plaintiff's
insurers that it does not propose to exercise the right to
repudiate based on the prospects clause", stressing
however that this was entirely a matter for the insurers to
decide.
If no such assurance was forthcoming, then he would be compelled to
conclude that the plaintiff would be unable to discharge a costs
award which might be made in favour of the defendant, and in those
circumstances would make an order for security for costs.
The judgment is a timely reminder to plaintiffs and defendants
alike that, while the court may, in principle, accept the role ATE
insurance can play in litigation; a specific exclusion clause in a
policy may result in a court refusing to acknowledge the
effectiveness of that policy, which would render the policy
redundant.
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.