ATE insurance policy held to be inadequate security for US$1.75 million of costs

Litigation Alert

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In a judgment handed down on 17 March 2017 (but which has only recently become publicly available) in Catalyst Managerial Services v Libya Africa Investment Portfolio,1 Mr Justice Teare held that an After The Event (ATE) insurance policy put before the court in purported satisfaction of a security for costs order, was not in a reasonably satisfactory form.

This follows a number of recent decisions relating to security for costs, including the court granting an order for security notwithstanding that there was an indemnity in place2  and separately, the refusal of the court to exercise its discretion to grant security for costs although the conditions were satisfied, having taken into account the amounts in the defendant's approved costs budget and that the defendant was already holding substantial amounts of the claimants' money.3 Most recently, we commented on the circumstances in which a court might require a third party funder to provide security for costs for periods where there was no ATE cover in place.4

On 10 March 2017, the court ordered the claimant to provide security for the defendant's costs in the action in one of three ways: a payment to their solicitors, a bank guarantee, or an ATE policy in a reasonably satisfactory form. The order provided that if the claimant intended to rely on an ATE policy as security, it would be required to provide the defendant with a final draft of the policy, following which the defendant could accept it, or give reasons why it believed it to be of unsatisfactory quality.

The risk of insolvency

The claimant company had already failed to prove sufficient assets or funds to resist the security for costs application; the court held that there was sufficient evidence to establish "a real risk of insolvency"5  that was not merely fanciful.

This risk was exacerbated by (i) the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act) being specifically excluded in the ATE policy wording, and (ii) the Third Parties (Rights against Insurers) Act 2010 being redundant since the claimant was a company incorporated outside of the United Kingdom, in the United Arab Emirates.

Although, the risk may have been mitigated by the claimant having its insurers amend the policy wording to remove the exclusion of the 1999 Act, the claimants only had a short time to attempt to effect this and come back to the court before its claim would be struck out.

The risk of avoidance by the insurer

The defendant claimed that a reactivation agreement (alleged by the claimant to reinstate an original agreement between the parties) was a forgery. If this defence was successful, then it was likely that the insurers would seek to avoid liability under the policy on the ground that they could not be liable where the reactivation agreement was forged.

There was a perceived risk that the insurers may have been misrepresented to when accepting the risk under the policy, resulting in an ability to avoid liability. This risk was exacerbated by the fact that the claimant's solicitors had only recently been instructed and may have had an incomplete knowledge of their client's case, heightening the risk that "they may fail to disclose some material matter or misrepresent some matter"6. As discussed in the judgment at paragraph 16, the claimant might have sought to remedy this defect in the quality of the ATE policy by having the insurer "insert wording in the policy by which it will agree that it will not rely on any finding by the court in relation to the matters currently pleaded by the parties as a ground for avoidance of the policy.". However, as with any other amendments sought to the policy, there would only be a short time during which to negotiate this before the claim was struck out.

Conclusion

An ATE policy may be sufficient security for costs if the likelihood that an insurer will seek to avoid paying out under the policy is sufficiently low. In this case, there was a real risk of insolvency coupled with allegations of fraud made against the defendant and a recent instruction of claimant solicitors. From the combination of these factors, the court was unable to conclude that the ATE policy in question was in a reasonably satisfactory form.

Update

In a judgment handed down on 21 December 2016 (but which has only recently become available) in Newwatch Ltd v Bennett [2016] EWHC 3506 (Comm), Carr J has granted £1.2 million in security for costs and ruled that an After The Event ("ATE") insurance policy was not adequate security for costs. This ruling re-iterates the English Court's reluctance to accept ATE policies as security where: the risk of a claimant becoming insolvent might result in a defendant becoming an unsecured creditor, a defendant is not named on a policy (nor can it assert any rights via relevant legislation), or, there is a "real, as opposed to a fanciful" risk that insurers will not honour a policy.

The Claimants had sought to avoid the problems that can befall an ATE policy in the context of security by offering to grant a Deed of Trust or charge (in respect of the ATE policies' proceeds) in favour of the Defendants and having their insurers confirm they were aware of the issues that the Defendants averred might preclude successful claims being brought under the policies. Carr J did not accept these attempts on the basis that other creditors might challenge such preferential treatment of the Defendants and, furthermore, because the insurers had not given a confirmation of the level requested by the Defendant to assure them the policies would be honoured. This suggests that short of a direct right of enforcement for a defendant under an ATE policy, there is a significant risk that such a policy will not constitute adequate security.


1 [2017] EWHC 1236 (Comm)
2 Dunn Motor Traction Ltd v National Express Ltd [2017] EWHC 228
3 Endeavour Energy Ltd v Hess Ltd [2017] EWHC 1087 (Comm)
4"£7.5 million security for costs awarded against foreign litigation funder"
5 Paragraph 7, Catalyst Managerial Services v Libya Africa Invsestment Portfolio [2017] EWHC 1236 (Comm)
6 Paragraph 14, Catalyst Managerial Services v Libya Africa Invsestment Portfolio [2017] EWHC 1236 (Comm)