Ireland: Can An ATE Insurance Policy Defeat An Application For Security For Costs?

Last Updated: 2 August 2015
Article by Donogh Crowley, David O'Donohoe and David Strahan

What is the effect of an After the Event ("ATE") insurance policy on an application for security for costs? The Court of Appeal considered this question for the first time in Greenclean Waste Management Ltd v Leahy [2015] IECA 97, where a "hopelessly insolvent" company was seeking damages against its former solicitor for professional negligence.

What is ATE Insurance?

ATE insurance enables plaintiffs to insure against the risk of having to pay a defendant's legal costs, and cover their own outlay, in the event that they lose. The cover is taken out after the dispute has arisen and the premium is usually only payable if the plaintiff's claim is successful.

As we reported last July, the High Court in Greenclean upheld the legality of an ATE insurance policy for the first time in this jurisdiction, finding that it does not offend against the torts of maintenance or champerty. Maintenance is the improper funding of litigation by somebody who has no legitimate interest in it. Champerty is an aggravated form of maintenance that involves a person maintaining another's action to share in the proceeds of that action.

The High Court further held that the specific policy sufficiently mitigated the risk that Greenclean, as plaintiff, would be unable to pay the defendant's costs in the event that it lost its action. Accordingly, the High Court refused to grant an order for security for costs. The defendant, who was seeking the security, appealed this decision to the Court of Appeal.

CAN AN ATE INSURANCE POLICY DEFEAT AN APPLICATION FOR SECURITY FOR COSTS?

An order for security for costs is an order requiring a plaintiff to provide security (usually by way of cash lodged in Court or a bond) to cover the costs that the defendant is likely to incur in defending the case. If the defendant successfully defends the case, the plaintiff may be liable for his costs.

In this case, the Court of Appeal held that there is no reason in principle why an ATE policy cannot provide sufficient security for a defendant's costs so as to justify a refusal of an order for security. In deciding whether to order security in circumstances where a plaintiff has ATE insurance, the Court must consider the following questions:

  • Is the plaintiff unable to pay the defendant's costs?
  • Has the defendant established a prima facie defence?

If the answer to these questions is yes, the Court will have regard to the ATE insurance policy when considering whether to exercise its discretion to make an order for security for costs.

WAS THE ATE POLICY IN THE PRESENT CASE SUFFICIENT TO DEFEAT THE APPLICATION FOR SECURITY FOR COSTS?

No, the Court of Appeal concluded that on the basis of the information put before it, there was no justification for refusing an order for security for costs.

The policy was expressly conditional on the existence of a no-win no-fee agreement which provided that Greenclean's solicitor would not take a fee if the claim failed. Kelly J stated that Greenclean's failure to put this agreement before the court, as a "fundamental proof", was the first and most important matter. It effectively meant that the Court could not be satisfied that the ATE policy had come into effect.

The Court found that even if the no-win no-fee agreement had been produced, the ATE policy was so conditional that it could not provide sufficient security to the defendant to warrant the refusal of an order for security for costs. Kelly J noted that the policy was voidable for many reasons which were outside the control, responsibility and knowledge of the defendant.

One such clause, which had particularly concerned the High Court, was the "prospects clause". This clause allowed the insurers to end cover under the policy if they, after discussion with Greenclean's solicitor, were of the opinion that Greenclean would more likely than not lose the case. An undertaking by the insurers not to exercise the "prospects clause" satisfied the High Court that the policy negated the need for an order for security for costs. However, the Court of Appeal disagreed stating there were numerous other issues which had not been similarly resolved. Examples of these included the fact that the policy would terminate "at once" if Greenclean's solicitor "refuse[d] to continue acting for [Greenclean] with good reason" or the "no-win no-fee agreement end[ed] for any reason".

GENERAL PRINCIPLES ADOPTED BY THE COURT OF APPEAL

The Court noted that while ATE insurance has only recently "crept" into this jurisdiction, it is relatively common in England and Wales and the courts there have previously considered how it can impact on applications for security for costs. The Court adopted the following general principles from the English courts:

  • There is no reason in principle why an ATE insurance policy cannot provide sufficient security for costs, even if it cannot provide complete security for costs.
  • An ATE insurance policy will rarely provide as good security as a payment into court or a bank bond or guarantee due to its conditionality and voidability.
  • An ATE insurance policy must provide security as a matter of fact.

WHAT DOES THIS MEAN FOR PLAINTIFFS, DEFENDANTS AND ATE INSURERS?

The High Court and Court of Appeal judgments in Greenclean suggest that ATE insurance might be a legitimate means of financing litigation in this jurisdiction. This method will likely prove most attractive to plaintiffs in financial difficulties (including the liquidators of insolvent companies). It will also allow plaintiffs to manage risk and obtain more certainty as regards their likely expenditure on the litigation in question. It may provide an opportunity for Irish companies to transfer some of the risks of litigation, which can be costly and unpredictable. However it is worth noting that, in general, ATE insurance policies are expensive. In Greenclean, the premium was €52,500 for a maximum policy cover of €210,000.

A plaintiff who seeks to rely upon an ATE policy to defeat a defendant's application for security for costs will need to avoid the pitfalls of conditionality and voidability which proved fatal in the Greenclean case. This will involve reviewing in detail the provisions of the policy before signing. The plaintiff will also need to be fully prepared to address any potential weaknesses in the policy in the event of an application for security for costs. In Greenclean, Kelly J commented on the fact that the defendants had raised fourteen criticisms of the ATE policy and the plaintiffs had at no stage addressed these.

Reliance upon an ATE policy to avoid an order for security for costs being made against a plaintiff is not without consequences for the insurer involved. The insurer may be asked to give an undertaking not to exercise certain provisions under the insurance policy, such as a "prospects clause."

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

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