Can ATE insurance constitute adequate security for costs?

19 February 2018

The Court of Appeal in Premier Motorauctions Ltd (in liquidation) v Pricewaterhousecoopers LLP[1] has considered the extent to which an After the Event (ATE) insurance policy is relevant when the court is considering granting security for costs. The case is significant because it raises questions of principle which had not previously been considered at an appellate level.

The general position in English law so far as costs are concerned is that the unsuccessful party in litigation must pay the successful party’s legal costs. An application for an order for security for costs is commonly made in high-value proceedings when a defendant is concerned that its opponent will be unable to pay any costs awards that are ordered against it. If an order for security for costs is made, the claimant must provide an acceptable form of security which serves as an assurance that the defendant’s costs will be paid if the claimant’s case fails. In practice, the form of security for costs is usually a cash payment into the Court Funds Office or a bank guarantee in an amount determined by the court, or Deed of Indemnity (typically provided where an existing ATE policy is in place). A well-timed application for security for costs can also have tactical or strategic advantages for a defendant as if it is successful, the claimant could be forced to put up a sizeable amount of money in order to continue with the proceedings. The court has a wide discretion when it comes to considering an application for security for costs but its principal focus will be whether or not there is reason to believe that the claimant would not be able to pay the defendant’s costs in the event that it was ordered to do so.

This particular case concerned an action being brought by the joint liquidators of the claimant companies against PwC and Lloyds Bank, which was estimated to be worth up to £54 million. The defendants estimated their costs at £7.2 million and sought security for costs. The liquidators had obtained various ATE policies with a total value of £5 million. At first instance, Snowden J considered this sufficient to dismiss the application for security for costs. The defendants appealed.

The Court of Appeal upheld the general proposition that an “appropriately framed” ATE insurance can defeat an application for security for costs if the policy can offer the defendant “sufficient protection” that the claimants will be able to pay the defendant’s costs if it is ordered to do so.

However, whether or not an ATE insurance policy can offer the defendant “sufficient protection” will depend on the terms of the policy in question, particularly whether there are any provisions which may permit the insurer to avoid the policy in certain circumstances (for example, if it emerges in the course of the proceedings that the claimant withheld or misrepresented key information regarding the facts of the case from the insurer). If the claimant’s ATE insurance policy contains such terms and does not contain any anti-avoidance provisions, it may struggle to convince the court of the certainty that the policy will cover the defendant’s costs if the claimant’s claim is unsuccessful. Ultimately, a defendant is entitled to some assurance that the policy was not liable to be avoided (whether for misrepresentation, non-disclosure or otherwise). Here the court held that the defendants did not have that assurance, and thus there was a chance that the claimants would be unable to pay the defendants’ costs if ordered to do so.

This decision confirms that whereas an ATE policy can defeat an application for security for costs, claimants should be aware that the mere fact that they hold an ATE policy will not automatically prevent a defendant from obtaining security if that policy can be voided as a voidable policy cannot constitute adequate security for costs.

[1]Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872

Alice Morrissey Author
Alice Morrissey
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