INVOLVED NOT INDIFFERENT

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London, UK, 16 February 2017After the Event Insurance as Security for Costs - a practical example

After the Event Insurance as Security for Costs - a practical example

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A recent judgment has found that After-the-Event (“ATE”) insurance policies are, in the correct circumstances, acceptable as security-for-costs without the need to obtain a bond, or deed of indemnity, or making a policy in support. This will give claimants seeking access to justice increased ability to defend applications for security, without having the additional expense that a bond or deed incurs.

In “Premier Motorauctions Limited v PriceWaterhouseCooper LLP & Anor (2016)”, the defendants suggested that as the claimant was insolvent and in compulsory liquidation without any substantial assets they would be unable to pay their costs if ordered to do so within the meaning of CPR 25.13. 

They argued that the ATE policies, obtained by the joint liquidators were insufficient to meet the jurisdictional threshold under CPR 25.13 (which would normally be achieved by something equivalent to cash or a first-class bank guarantee) principally for the following reasons:

  1. Because ATE policies might be avoided, rescinded or cancelled, and;
  2. Because two of the insurers within the tower are based in Gibraltar and could not be accepted as credit-worthy.

Mr Justice Snowden found in favour of the claimants and the application was refused. However, the submissions from both sides provide some fascinating insights and below we detail some of the debates and provide commentary as to our view of the conclusions reached:

Is an ATE policy sufficient to defeat a security-for-costs application?

The short answer is that Snowden J found that it was and that a deed of indemnity was not automatically required. He commented in judgment:

"if a claimant company is insured under an ATE policy giving it contractual rights which it could enforce in the event of an adverse costs order being made, its contractual rights are the property of the company like any other asset. I therefore see no reason in principle why the existence of that policy should not be taken into account together with its other assets at the first stage when deciding whether the jurisdiction to make an order for security for costs under CPR 25.13 is engaged."

"I see no principled basis upon which the court should simply ignore the existence of an ATE policy when applying the jurisdictional test in CPR 25.13. Moreover, I think that it must be acknowledged that there is a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders."

ATE vs. Cash, Deeds of Indemnity, a Bank Guarantee or Non-cancellable, Non-avoidable Policy

Interestingly the defendants accepted that an ATE with a deed-of-indemnity would provide them with the same level of comfort that they would receive had the claimants arranged cash or a bank guarantee and asked the Court to make an order requiring one of these three options to be put up as security.

This argument received little sympathy from the judge who took the view that:

"The question is not whether the ATE policy provides the same security as cash or a bank guarantee, or indeed whether the ATE policy provides the same security as might a deed of indemnity from the same or another insurer. It is whether, having regard to the terms of the ATE policy in question, the nature of the allegations in the case and all the other circumstances, there is reason to believe that the ATE policy will not respond so as to enable the defendant’s costs to be paid."

Snowden J later stated that:

"a comparison between an ATE policy and the traditional requirements for the provision of cash or a ‘first-class’ bank guarantee where security for costs is ordered is not appropriate when applying the threshold jurisdictional
test under CPR 25.13."

The Defendants Criticisms of the ATE policies

The defendants raised the objection 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 defendants also suggested that if the policy was cancelled by the insurer because of adverse instruction on the merits at any stage, the insurer might argue that, upon cancelling the policy, it would have no liability to pay any of the defendants’ costs unless they had previously been the subject of a court order.

Snowden J regarded it as unlikely that the joint liquidators would entertain the significant risks stated by the defendants should they be required to pay any of the defendants’ costs. Snowden J regarded

The defendants raised the objection 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 defendants also suggested that if the policy was cancelled by the insurer because of adverse instruction on the merits at any stage, the insurer might argue that, upon cancelling the policy, it would have no liability to pay any of the defendants’ costs unless they had previously been the subject of a court order.

Snowden J regarded it as unlikely that the joint liquidators would entertain the significant risks stated by the defendants should they be required to pay any of the defendants’ costs. Snowden J regarded

"the points made by the defendants on the interpretation of the ATE policies as unrealistic" 

and that the defendants’ suggestion that an ATE insurer faced with an adverse costs order would be likely to deny liability under the policies was “overplayed.”

"ATE insurers are of course entitled to take a stand on their policy terms and conditions, they are unlikely to avoid liability under the policies they issue as to do so would negatively affect their market reputation and potentially profitable future business would be placed elsewhere."

"To suggest, for example, that an ATE insurer could avoid liability by the simple expedient of cancelling the policy with immediate effect before a court order was actually made covering such costs would defeat the obvious purpose of the contract and would, to my mind, be a commercially absurd result."

The credit worthiness of the Insurers

It is a sad reality that some claimants have meritorious cases but not the means to meet the security for cost test and as such access to justice can be prejudiced. This welcome judgment has made clear that ATE policies provide cost-effective means by which worthy claimants can pursue litigation in these circumstances without compromising the level of protection afforded to the defendants.

It also acknowledges insurance as a credible and recognised financial instrument capable of standing alone alongside common solutions such
as a bank guarantee.

The judgment also provides helpful clarity on the quality and scope of the policy that has to be arranged in order for it to satisfy CPR 25.13. Namely, those policies should be placed with rated insurers.

Often deeds of indemnity, which we regard as an expensive and unnecessary burden, are only requested by the defendants for tactical reasons, for example to apply undue financial pressure on claimants already struggling to access justice. We do not agree with the defendants’ assertion that the additional premium payable for a deed is a reflection of the risk, more so it is simply a market driven price for this type of product.

We hope that this judgment goes towards settling a longstanding debate in respect of ATE satisfying the court on security-for-costs and more importantly can help redress the inequality of arms for other claimants in the future.

Download the After the Event Insurance as Security for Costs.pdf

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