Is After The Event insurance adequate security for costs?
A security for costs order is a common-law concept and usually sought by the defendants. It applies in jurisdictions that have cost shifting or fee shifting as it is otherwise known. This is where the losing party in the litigation must cover the others sides costs. Security for costs is a valid tool but can often be used to strangle the pursuit of even the most meritorious commercial disputes. Well-resourced opponents seek to stifle claims by insisting on security that can tie up the claimant’s capital.
In the United Kingdom, the legislation can be viewed at section 25 of the Civil Procedure Rules which came into force on the 1st of October 2015.
The extent to which litigation insurance policies are accepted by national courts and arbitral tribunals as adequate security for costs around the world is constantly evolving.
A recent decision in the Chancery Division of the High Court has tipped the scales in favour of claimants with After the Event insurance in security for cost applications. The case referenced is Premier Motorauctions Limited (in liquidation) v PWC LLP .
This case has brought some welcome and much sought after clarification to the relationship between security for costs applications and the provision of after the event (“ATE”) insurance. There are two particularly significant aspects of the judgement:
i) a claimant company’s insolvency will not of itself provide the defendant with sufficient grounds to successfully argue that there is ‘reason to believe that the claimant company would be unable to pay their costs if ordered to do so’ under CPR 25.13(2)(c) (the “Jurisdictional Test”);
ii) an ATE policy issued from a reputable (and rated) insurance company will likely defeat an application for security for costs as long as there is no real threat that the policy will be avoided.
It is important that the policy is supported by reputable insurers, ATE insurance should be presumed to be adequate security in the absence of specific reasons that present a higher than normal risk of a claim for adverse costs not being met.
Prior to this decision, there were two conflicting cases on the relationship between security for costs and ATE insurance:
i) Akenhead J in Michael Philips Architects Ltd v Riklin  BLR 519 suggested that an ATE insurance policy will rarely provide as good a security as a payment into court, bank bond or a guarantee. One of the reasons he gave for his conclusion was that insurance policies are voidable by the insurers and subject to cancellation.
ii) In contrast, Stuart-Smith J in Geophysical Services Centre v Dowell Schlumberger (ME) Inc  EWHC 147 (TCC) suggested that a properly drafted ATE policy provided by a reputable insurer is a reliable source of litigation cost funding.
In the present case of Premier Motorauctions Limited (in liquidation) v PWC LLP , Snowden J followed the second line of authority from Stuart-Smith J in Geophysical Services Centre v Dowell Schlumberger (ME) Inc . Snowden J accordingly refused the defendants’ application for security for costs on the basis that the Jurisdictional Test had not been met. In adopting this approach, Snowden J applied a more literal interpretation of CPR 25.13 and placed a great deal of confidence in ATE insurance providers. The relevant consideration was not whether an ATE policy was as good a security as cash or a guarantee, but whether the ATE insurance policies were large enough assets of the insolvent companies to prevent the Jurisdictional Test from being met. In this case, the judge held that they were.
The court dismissed the defendants’ argument that ATE insurance providers may not honour their policies by stating that:
i)The insurance market is very competitive;
ii) Experienced office holders risk personal liability under the Senior Courts Act 1981 for any adverse costs if the insurance policies were to fail.
Moreover, the theoretical possibility of an ATE policy being avoided, rescinded or cancelled (e.g. through misrepresentation or non-disclosure on behalf of the insured) was not enough to meet the Jurisdictional Test, and whilst the risk of avoidance of a specific ATE insurance policy is a relevant consideration for the purposes of CPR 25.12, the risk must be actual rather than theoretical.
There has been another key decision recently which echoes the decision in Premier Motorauctions Limited (in liquidation) v PWC LLP  reached by Snowden J. This is an arbitration Eskosol SpA v Italian Republic, ICSID Case No ARB/15/50, which is one of the many solar photovoltaic ECT cases being brought against Italy following changes to the tariff system. Italy sought to obtain two provisional measures:
i) Security for costs against Eskosol given the company is insolvent, and
ii) Disclosure of Eskosol’s third party funding arrangement.
Winston & Strawn, Eskosol argued against the applications made by the Respondent.
The tribunal ultimately concluded that it had authority to grant security for costs in support of arbitration, but it declined to so. Among other arguments, Eskosol contended that its insolvency would not have occurred but for Italy’s actions and it should not be further financially penalized by being required to lodge security for costs.
It appears the key issue which shaped the tribunals decision not to allow security was the fact that Eskosol had obtained adverse costs insurance to cover any costs ordered against them in Italy’s favour.
What if a court decides that an ATE policy does not satisfy security for costs?
If for any reason a court rules that an insurance policy does not satisfy a security for costs order there are alternatives available.
Deed of Indemnity. A deed of indemnity is an instrument which provides a guarantee from the insurer that they will pay an adverse costs order notwithstanding any reason why the underlying ATE insurance policy would not respond to a claim. This is something the client must apply for from the insurer. It will usually cost additional money and not all insurers will be willing to provide this.
Deeds or “Bonds”. Deeds and bonds have also been accepted as adequate security for costs in the English courts.
Premier Motorauctions Limited (in liquidation) v PWC LLP  is significant as regards the relationship between ATE insurance policies and security for costs orders, particularly for insolvent claimant companies and has provided much needed clarity.
The decision was based partly on public policy interests, including considerations that:
i) ATE insurance policies provide an opportunity for insolvent companies to seek justice against parties who have caused them harm and;
ii) the ATE insurance market is a maturing market which is heavily supported by the business of insolvent companies. If the judge had concluded that ATE insurance policies were not sufficient security to fend off an application for security for costs, it would have negatively affected the ATE insurance market.
For claimants, this decision is probably most significant for insolvent companies seeking to bring a claim as they have been provided with reassurance that if they obtain an ATE insurance policy with a reputable insurance company, it is unlikely that the defendant can pass the Jurisdictional Test and obtain security for costs.
For defendants, the judgment has placed a greater burden to be satisfied by a defendant seeking security for costs where a claimant has ATE insurance. It is clear that the defendant cannot rely solely on the claimant’s insolvent status to obtain security – they must draw the court’s attention to specific risks in the claimant’s individual ATE insurance policy in order to pass the Jurisdictional Test.