Court of Appeal orders security for costs where ATE insurance policy did not contain an anti-avoidance provision
The defendants applied for a security for costs order on the basis that 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 r25.13(2)(c)). The defendants had acted for the claimants before the claimants were placed into administration (and subsequently compulsory liquidation). After the claim form was issued, the claimant took out ATE insurance cover. The issue in this case was whether the security for costs order should be made in light of the ATE insurance cover.
At first instance, the judge held that the existence of an ATE policy should be taken into account when asking whether there is reason to believe that the claimant will be unable to pay an adverse costs order (ie the threshold jurisdictional question), rather than only after a security for costs order has been made (and it is necessary to decide whether the policy is as good as cash or a bank guarantee). On the appeal, the Court of Appeal did not disagree with that approach and held that "an appropriately framed ATE insurance policy can in theory be an answer to an application for security".
The judge had then refused to find that there was reason to believe that the ATE policy in question would not respond, and in particular, that the insurers would avoid for non-disclosure or misrepresentation. That was despite the underlying case involving doubts about the credibility of the claimant's managing director. The Court of Appeal has now allowed the appeal from that finding.
It held that "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. One knows that ATE insurers do seek to avoid their policies if they consider it right to do so". Disbelief of the managing director by a judge could provide grounds for the insurers to avoid.
A key point taken into account by the Court of Appeal was that the policy did not contain any anti-avoidance provisions. It was also unimpressed by the claimant's failure to procure a deed of indemnity from the insurers, which would have confirmed that insurers were giving up their right to avoid. Reference was also made to the recent case of Holyoake v Candy in which, on a different point, it was concluded that even an ATE policy which provided for avoidance only in cases of fraud was not suitable to stand as fortification for a cross-undertaking in damages.
Accordingly, there was jurisdiction to order security for costs and the Court of Appeal ordered security of £4 million to be provided.
COMMENT: The lack of an anti-avoidance provision in an ATE insurance policy will not necessarily be fatal when the court is considering whether the claimant would be able to pay the defendant's costs, if, for example, it is genuinely very unlikely that the insurers would avoid. However, this case demonstrates that that is an issue which the court will need to spend some time considering. The Court of Appeal recognised that it is "inevitable" that a security for costs application could therefore be blown up into a large interlocutory hearing involving great expenditure of both money and time.
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