REUTERS | Lucy Nicholson

ATE insurance and security for costs applications: the pendulum swings back

The Court of Appeal has recently handed down a significant judgment in the case of Premier Motorauctions Ltd (in liquidation) and another v PricewaterhouseCoopers LLP, Lloyds Bank Plc.

The judgment is of interest as it marks a change of direction in the way the courts take account of after the event (ATE) insurance cover at the jurisdictional stage of security for costs applications against insolvent claimant companies.

In particular, it signals a move by the courts back to a position where an existing ATE insurance policy will only defeat an application for security for costs if it offers the defendant “sufficient protection” in the event the claimant is ordered to pay costs.

In PMA, the court included the ATE cover in its analysis of the claimants’ ability to pay any costs order (if so made). Having considered the terms of the policies and all the circumstances of the case, the court found that the policies afforded insufficient protection.

The absence of anti-avoidance provisions in the ATE policies was influential in its analysis.

The jurisdictional test

CPR 25.13 sets out the requirements to be satisfied before the courts may order security for costs. These requirements comprise a “jurisdictional test” and a “discretionary test”.

Rule 25.13(2)(c) sets out the relevant jurisdictional test, namely that “there is reason to believe that [the claimant company] will be unable to pay the defendant’s costs if ordered to do so”.

Development of the case law

A standard ATE insurance policy will, of course, contain a number of exceptions and conditions to be satisfied before it will respond to a claim. In light of the inherent uncertainty in the availability of cover when needed, for many years, courts would readily accept that there was reason to believe that insolvent claimant companies with ATE cover would not be able to pay the defendant’s costs, if so ordered.

However, in recent years, there has been a shift by the courts in favour of ATE cover.

This was particularly evident in Geophysical Service Centre v Dowell Schlumberger (ME) Inc. There, the court considered the claimant’s ATE insurance, which contained anti-avoidance provisions (which limited the exceptions to instances of fraud on the insurer). The court evaluated the risk of non-payment of the defendant’s costs, in the circumstances of that case, as being “theoretical”, not real. It declined to order security on the basis that the jurisdictional test had not been met.

The “swing of the pendulum” in the court’s approach to ATE insurance was further extended towards the end of 2016 in the first instance decision in PMA. In that judgment, the court went further than Geophysical and ruled that the claimants’ ATE insurance policies would provide sufficient protection to the defendants should a costs order be made, even though they did not include anti-avoidance provisions. The court indicated that its decision was partly policy driven and reflected ATE’s role in providing access to justice. The defendants appealed.

The PMA appeal

In its judgment, the Court of Appeal reviewed the previous authorities and agreed with the “tendency” of the courts below to find that “a properly drafted ATE policy provided by a substantial and reputable insurer” can be a reliable source of litigation funding. However, it emphasised that this was on the basis that the policy was “properly drafted” and was also “depending on the terms of the policy in question”.

The Court of Appeal further stressed that the absence of anti-avoidance provisions in an ATE policy did not mean, in itself, that the insurance policy “would” be avoided. However, the court concluded that findings on the reliability of the claimants’ key witness at a future trial could affect the availability of the ATE insurance. It was concerned that, without knowing what insurers had been told when they issued the ATE policies to the claimants, both the court and the defendants lacked the information with which to assess the likelihood of the ATE policies being avoided. The court held that it would be “unsatisfactory to have to speculate” on the outcome of the case and the likelihood of avoidance of the ATE policies. Accordingly, it found that the policies did not provide the defendants with “sufficient protection”.

The jurisdictional test was, therefore, established.

The court commented that access to justice was a relevant consideration; however, not when considering the jurisdictional test but, later, when considering the discretionary test of whether it is just to make an order for security in all the circumstances, in particular whether such an order might stifle the claim.  As the claimants themselves accepted there was no basis upon which to suggest an order for security would stifle the claim, the Court of Appeal ordered that security be provided.

Comment

The court’s approach to ATE insurance cover has, therefore, like a pendulum, swung back and, in our view, now come to rest in a more balanced position. Insolvent claimant companies will be reassured that ATE policies can be taken into account as part of the jurisdictional test. Defendants will be reassured that ATE policies will be unlikely to pass that test unless they:

  • Are properly drafted.
  • Are from a substantial and reputable insurer.
  • Can be considered to provide sufficient protection in all the circumstances of the case.

It is only right that the protection is relatively certain. Unlike claimants, defendants have no choice over whether to commence or continue litigation. Justice requires a level playing field and that is not afforded to a defendant who is effectively left to wait and see if the ATE policy pays out in due course.

Security for costs applications will, therefore, involve an evaluation exercise on the part of the courts to consider the sufficiency of the protection provided by ATE policies in all the circumstances of the case. Following PMA, it appears likely that ATE cover which does not include anti-avoidance provisions will not be found to provide sufficient protection and will not, therefore, be sufficient per se to meet the jurisdictional test in a security for costs application.

CMS Cameron McKenna Nabarro Olswang LLP Elizabeth Lombardo Philip Woodfield

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