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Court of Appeal: voidable ATE insurance is not adequate security for costs

Out-Law News | 27 Nov 2017 | 10:30 am | 2 min. read

After the event (ATE) litigation costs insurance which can be voided is not adequate security for costs, the Court of Appeal has ruled.

While the existence of an ATE policy should be taken into account when the courts are considering an application for security for costs, that policy had to provide the other party with sufficient protection. Whether it did so would depend on the terms of the policy, and the likelihood that the insurers would seek to avoid liability where there had been non-disclosure or misrepresentation, Lord Justice Longmore said.

The trial judge in the case, Mr Justice Snowden, had ruled that the policy was sufficient security. He relied on the fact that the policies had been taken out by "independent professional insolvency officeholders", and that it was "something of a leap" to conclude that a reputable insurer would be seeking a reason to avoid the policy.

The Court of Appeal disagreed. Even though there were no explicit anti-avoidance provisions in the ATE insurance policy, the insurer was still entitled to rely on its common law right to avoid liability in cases of non-disclosure or misrepresentation, Lord Justice Longmore said.

"Of course it does not follow that insurers would avoid, but the difficulty is that neither the defendants nor the court has any information with which to judge the likelihood of such avoidance," he said.

"One knows that ATE insurers do seek to avoid their policies if they consider it right to do so … The landscape after trial may be very different from the landscape as it appears to be at present and it is unsatisfactory to have to speculate," he said.

The fact that the policies had been taken out by independent insolvency professionals was irrelevant, the appeal judge said. This was because "the best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know".

"Neither the defendants nor the court have been provided with the placing information put before the insurers but, even if that had been provided, it is unlikely that the court could be satisfied that the prospect of avoidance is illusory. Even at the jurisdictional stage of considering security for costs, the defendants must … be entitled to some assurance that [the insurance] was not liable to be avoided for misrepresentation or non-disclosure. I cannot see that on the facts of this case these defendants have that assurance," he said.

The court was also "not particularly impressed" that the policyholder had not sought a deed of indemnity from the ATE insurer.

"If it is not a straightforward guarantee I am not sure what a deed of indemnity is since no draft of any such deed was put before us but, on any view, it would mean that insurers were giving up their right to avoid and their rights under the endorsement. It is enough to say that the existence of those rights give sufficient reason to believe that the companies will not pay the defendants' costs if ordered to do so," Lord Justice Longmore said.

He ordered the policyholders to provide £2 million security for costs for each of the two defendants in the case.

Legal costs expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that the case was "good for defendants seeking security for costs in claims brought by impecunious claimants, but not a good day for ATE insurers who have been actively promoting the taking of ATE as a means of providing security for costs, as opposed to having to make a payment into court, or provide a deed of indemnity or a bank guarantee".

"It is assumed ATE insurers will not take avoidance provisions out of their policies," he said.

"The judgment clarifies an important question of principle not previously considered by the Court of Appeal in respect of ATE standing as security for an opponent's potential entitlement for costs. It is now clear that the risk of potential avoidance of an ATE policy will restrict their acceptance in security for costs applications," he said.