Stuart Evans from our Commercial Disputes Team examines whether ATE insurance can provide adequate security for a claimant's costs, with some conclusions that may surprise you.
ATE insurance can provide some security for defendants looking
to recover a costs award, but you may not be able to rely on it to
the same extent as conventional security.
The classic situation where security for costs is sought is where a
defendant is concerned about a claimant's ability to pay the
defendant's costs if it loses the case. If it can demonstrate
to the court that the claimant, through lack of funds or otherwise,
will not be able to meet a costs award, then the court may order
security to be provided. Often this is in the form of a payment
into court or bank guarantee. The failure to provide adequate
security can often result in the claim being stayed or potentially
dismissed.
With the advent of After the Event (ATE) Insurance, where a party
can get cover for adverse costs in return for a premium (currently
recoverable from the counterparty, but not for much longer), this
was used as a means of providing comfort to defendants that they
would get paid if they won and/or a device to defeat an application
for security for costs. So defendants could breathe a sigh of
relief, or emit a howl of frustration, depending on their agenda.
If the claimant lost, then the ATE insurer would in theory pay
instead. So, no need for security then?
Wrong. Perhaps surprisingly to some, the 2010 case of Persimmon
Homes v Great Lakes Insurance said otherwise. In that case
Persimmon (the defendant in the original action) relied on the fact
that the claimant had obtained ATE cover, and did not pursue an
application for security for costs. Unfortunately, the original
claimant went into liquidation, and the ATE policy was subsequently
avoided by the ATE insurers, given the findings at trial. The
result - the court said that the insurer was entitled to avoid the
policy, so Persimmon had nobody against whom it could claim its
costs of the action. A very bitter pill to swallow.
So where does ATE insurance fit in when security is considered?
This was explained in the further 2010 case of Michael
Phillips v Riklin, which lays down some principles to follow.
The court found that whilst there is no reason why ATE insurance
cannot provide some security for a party's costs, it
does not provide the same level of security as, say, a bank
guarantee, as the ATE policies are voidable and the ATE insurance
contract is not with the party seeking security. It is therefore
highly unlikely to provide adequate security for all costs sought
(as was found in the Phillips case).
Where there is reliance on an ATE insurance policy to avoid or
limit an application for security for costs, it must be
demonstrated that the insurer cannot readily but legitimately avoid
liability to pay out (which may involve some crystal ball gazing,
as there have usually been no findings of fact prior to any trial).
This could be assisted by some form of undertaking to this effect
direct from the insurer.
In short, an amount fixed by way of security can be reduced to take
into account a realistic probability that an ATE policy will
bite. But it will not eliminate it, i.e. other security must
also be found.
Of course, come April 2013 it's all change. If the Jackson
reforms go through as predicted, ATE insurance premiums will no
longer be recoverable from the losing party in English proceedings
(along with CFA success fees). If so, the number of ATE insurance
policies taken out is set to fall, and presumably the number of
tactical ATE policies taken out to mitigate the obligation to
provide security for costs will do the same. However, we expect
that the arguments raised in this article will carry on past 1
April 2013 in respect of security applications where there are
existing ATE policies, regardless of the recoverability of the
premium.
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.
