In the recent case of Greenclean Waste Management Limited v
Maurice Leahy & Co. Solicitors, the High Court had its first
opportunity to consider whether "after the event"
("ATE") insurance policies could effectively be a
substitute for security for costs. Judge Hogan concluded that
the policy before the Court could only provide adequate security to
a defendant in circumstances where the plaintiff's insurer gave
an assurance that it would not rely on a "prospect of
success" clause to deny cover.
As companies struggle to remain solvent during the economic
downturn, security for costs is increasingly sought before the
Irish courts. Security for costs can be an effective tool for
a defendant who is being sued by an insolvent plaintiff where the
defendant believes that the case against it is without merit and
there is a risk the plaintiff will not be in a position to pay the
defendant's costs in the event that the litigation is
unsuccessful. In such cases, the Court orders the plaintiff
to lodge money in Court, or take other appropriate steps, to
demonstrate its ability to pay costs. If ordered by the
Court, the requirement to give such security serves as a condition
of being permitted to proceed with the litigation and the inability
to provide the required security can bring an abrupt end to the
litigation. However, the courts are reluctant to order
security for costs for fear it will hinder a plaintiff's right
to access to justice.
This case concerned an application for security for costs by a
firm of solicitors which was being sued for professional negligence
by an insolvent plaintiff company (Greenclean) which had recently
entered voluntary liquidation. Greenclean argued that it
would be able to discharge the defendant's costs by virtue of
its ATE insurance policy and consequently security for costs was
unnecessary. ATE, a relatively new product in the Irish
market, is taken out in the wake of a specific event and is often
closely linked to "no win no fee" arrangements in
litigation. The premium in respect of such policies is
generally high, but is only payable following successful costs
recovery against another party.
In the High Court, Judge Hogan was in no doubt that the existence
of a policy of insurance would generally be highly relevant to the
question of whether Greenclean would be able to pay the
defendant's legal costs in the event that its case was not
successful. The Court accepted that the plaintiff was
"hopelessly insolvent" and the defendants were entitled
to security for costs unless the plaintiff's ATE policy
sufficiently mitigated the risk that the plaintiff would be unable
to discharge the defendant's costs. However, he noted
that ATE policies were quite different to other insurance policies
and the policy before the Court, while clear and unambiguously
drafted, contained wide-ranging avoidance provisions and its
operation was contingent upon matters into which the Court could
not legitimately inquire.
The Court considered the crucial question to be the extent to
which an insurer can legitimately repudiate liability so as to
deprive the insured, and by extension, the defendant, of any real
security in respect of costs. ATE insurance could not be
considered in quite the same way as a standard contract of
insurance. The Court held that if cover can be denied in such
a range of circumstances that it effectively leaves the insured
with no security at all, this will clearly provide insufficient
comfort to the Court that the defendant's costs will be
met.
When the Court considered the cancellation provisions contained in
the policy, it was particularly influenced by the "prospects
of success" clause which provided that the insurer could deny
cover, at any stage of the litigation, if it formed the opinion
following discussion with the insured's legal advisors that the
insured was more likely to lose the case than not.
Judge Hogan was of the view that this conferred considerable scope
on the insurer to deny cover and noted that this could occur at a
particularly inopportune time for a defendant (for example,
following an expensive discovery or in the course of the trial
itself). As such, he felt that he had no means of determining
the level of comfort available from the insurance policy. The
Court held that unless a binding assurance was provided by
Greenclean's insurers that it did not propose to exercise the
right to deny cover based on the prospects clause (which he
stressed was entirely a matter for the insurer), he would make an
order for security for costs. The Judge adjourned the
proceedings for approximately three months to allow Greenclean and
its insurers to make a final decision regarding the prospects of
the litigation.
It is interesting to note the comments by the Court that while in
this case he was not concerned with the underlying merits of ATE or
questions of its legality, this type of policy may possibly involve
features of champerty (ie, sharing in the profits of litigation in
which the party has no legitimate interest) although he
acknowledged it may well secure access to justice for those who
would not otherwise have ready access.
Judge Hogan's ruling demonstrates that the Irish courts will
accept ATE insurance as an effective substitute for security for
costs and will not award security for costs against a plaintiff who
has taken out ATE cover, provided such policies do not contain
terms pursuant to which the insurer can avoid liability to pay the
defendant's 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.