ATE insurance update: will the claimant's ATE policy respond effectively?

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

After the Event (ATE) insurance is where an insurer provides an indemnity for legal costs in the event that a client loses a piece of litigation or arbitration. Unlike traditional insurance, ATE insurance is only available to parties who are already involved in or contemplating a legal claim.

Premier Motorauctions Ltd (in liquidation) v Pricewaterhousecooper LLP [2016] EWHC 2610 (Ch)

In Premier Motorauctions Ltd (in liquidation) v Pricewaterhousecooper LLP [2016] EWHC 2610 (Ch), the court refused a security for costs application by the defendants under CPR 25.13(2)(c) in an action brought by liquidators of two claimant companies on the basis that, having regard to the terms of the ATE policy, the nature of the allegations in the case and all the other circumstances, there was reason to believe that the ATE policy would not respond so as to enable the defendant's costs to be paid.

Overview

Under CPR 25.13, the court may make an order for security for costs if it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order and one or more of the conditions specified in CPR 25.13(2) applies. One of the most common conditions debated in security for costs applications is where the claimant is a company and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so: CPR 25.13(2)(c).

A claimant with the benefit of ATE insurance will often respond to an application by the defendant for security for costs by stating that the insurance policy will cover the defendant’s costs in the event that the claimant loses and therefore there is no reason to believe that it will be unable to pay the defendant’s costs under CPR 25.13(2)(c).

Defendants naturally reply by stating that this does not dispel their concerns since reliance on such a policy is inherently uncertain as the propensity of insurers to avoid such policies is a real risk, particularly where the ATE policy includes a clause allowing for termination, cancellation or avoidance for misrepresentation or non-disclosure.

Background

In response to a claim brought by two liquidated companies, the defendants indicated that they would be seeking security for costs under CPR 25.12 despite the fact that the companies, via their liquidators, had put in place £5m of adverse costs cover underwritten by ATE insurers.

The defendants contended that there was reason to believe that the claimants would be unable to pay their costs if ordered to do so within the meaning of CPR 25.13 because they were insolvent and in compulsory liquidation without any substantial assets. They submitted that the ATE policies did not guarantee payment of their costs since there were significant risks that the ATE policies might be avoided, rescinded or cancelled in the event that the defendants won and the ATE insurers who were based in Gibraltar were not creditworthy.

The defendants submitted that something “equivalent to cash or a first-class guarantee” should be provided as the ATE insurance coverage was insufficient security.

Decision

The judge in this case, Snowden J, applied the same principles as those applied in Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC) and declined to order security.

Geophysical had marked a change in emphasis from earlier case law in that it considered that the central question was whether there was reason to believe that the claimant would be unable to pay the defendant’s costs despite the existence of the ATE policy. Earlier case law had been to ask whether the ATE policy was a suitable form of alternative security to cash or a bank guarantee.

In this latest case, Snowden J followed Geophysical and stated:

“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.” [40-41]

The defendants in this case failed to satisfy the judge that there was reason to believe that the companies will be unable to pay the defendants’ costs already incurred and of the initial stages of the proceedings if ordered to do so. The jurisdictional threshold under CPR 25.13 had not been crossed and therefore the judge refused the defendants’ application for security for costs.

Snowden J further commented that the liquidators were unlikely to have made any misrepresentations or material non-disclosures when seeking to obtain the policy and that they had a personal incentive to ensure that the policy would respond. He also noted the importance of ATE insurance in offering an important and cost-effective means by which insolvent companies can obtain access to justice. Modern, commercial ATE insurers were also unlikely to take “an unusually defensive line” to avoid liability.

Conclusion

Snowden J noted that he had determined the application on the basis of the evidence presented to him. The defendants would have liberty to apply as the case progressed and in particular they could do so if the costs incurred and to be incurred at the next stage of proceedings were to threaten the ATE layer currently provided or if subsequent events cast a materially different light on the risks of the ATE policies not responding.

This case may offer some welcome reassurance to impecunious claimants who may have previously had their claims stifled by an inability to satisfy an order for security for costs. However, this case combined with the approach taken in Geophysical should not automatically lead to the conclusion that ATE policies will now always defeat applications for security, even where the claimant is an insolvent company. The focus has simply shifted to whether there is reason to believe that the insurer will not pay under the policy when called upon to do so.