Security for costs: Court of Appeal rules that avoidable ATE insurance offered insufficient protection to defendants – Premier Motorauctions reversed

Earlier today, the Court of Appeal handed down a significant judgment dealing with the adequacy of standard form after-the-event (“ATE”) insurance to defeat an application for security for costs.

In an unanimous ruling, the Court of Appeal overturned the High Court’s judgment on the defendants’ security for costs applications in Premier Motorauctions Limited (in liquidation), Premier Motorauctions Leeds Limited (in liquidation) v PricewaterhouseCoopers LLP and Lloyds Bank plc [2016] EWHC 2610 (Ch).

The security for costs applications

The defendants, by way of applications made in 2016, sought security for costs on the grounds that there was reason to believe the insolvent claimants would be unable to pay the defendants’ costs if ordered to do so (the jurisdictional test in CPR 25.13(2)(c)) and that, in all the circumstances, it was just to make such an order (the discretionary test in CPR 25.13(1)(a)). The claimants resisted the applications on the basis they had ATE insurance to cover the defendants’ costs.

The High Court judgment

The question for the High Court was whether the claimants’ ATE insurance, which was avoidable for material non-disclosure or misrepresentation (whether innocent, negligent or fraudulent), caused the defendants to fail the jurisdictional test.

The Court held that the claimants’ ATE insurance (insofar as it was underwritten by a reputable insurer) trumped the defendants' applications for security for costs unless the defendants could point to a specific reason to believe it would be avoided. The defendants argued that, just as the claim was based upon the evidence of the managing director of the claimants, so too would have been the placing information put before insurers, such that the Court’s rejection of the claimants’ evidence risked the consequent avoidance of the policy. The Court was not persuaded that was a specific reason to believe the insurance would be avoided and so dismissed the applications on the basis that they failed the jurisdictional test. In doing so, the Court noted there was a public interest in allowing insolvent companies to use ATE insurance to access justice.

Impact of the High Court judgment

The High Court’s judgment quickly became the “go to” authority for insolvent companies faced with the prospect of a security for costs application. As long as they had ATE insurance in place, they considered themselves “safe”.

In many instances, they were. Often a defendant will be concerned that ATE insurance is capable of being avoided, but it is hampered in its ability to point to a specific reason to confirm this when it has no access to the placing information the claimant put before insurers. For example, a defendant may be able to see that an ATE insurance policy is voidable for material non-disclosure but will have no right to see what disclosures have been made. The High Court’s judgment left such defendants having to “wait and see” if the ATE insurance would pay out in due course.

The Court of Appeal judgment

The Court of Appeal observed a tendency for judges at first instance to accept that an ATE policy can stand as security for costs. In this case, it thought the High Court had accepted this too readily.

The Court of Appeal held that the claimants’ ATE insurance, avoidable for material non-disclosure and misrepresentation, did not offer “sufficient protection” for the defendants’ costs and that there was therefore reason to believe that the claimants would be unable to pay the defendants’ costs if ordered to do so. The claimants’ case would necessarily fail if the managing director’s evidence was rejected. Whereas it did not follow that insurers would (inevitably) avoid, it was unsatisfactory for that to be a matter of speculation. It followed that the ATE insurance could not offer “sufficient protection” for the defendants’ costs.

In all the circumstances of the case, and in particular where an order for security would not stifle the claim, the Court ordered security in the sum of £2 million per defendant. The effect of the provision of the security would be to level the playing field between the parties, any of whom could then pay the winner’s costs in the event they lost the claim.

Concluding remarks

The Court of Appeal was clearly influenced by the lack of anti-avoidance provisions in the claimants’ ATE insurance policies (where insurers can avoid for fraud but not otherwise). The Court did not go so far so say it would not have ordered security if the claimants’ policies had contained anti-avoidance provisions or if the claimants had obtained a deed of indemnity, and stressed that every case will need to be evaluated on its facts. However, such measures are likely to weigh in the balance when courts consider security for costs applications in the future.

It is likely that the Court of Appeal’s judgment will spark a number of defendants, who hitherto felt constrained by the High Court’s decision, to write to claimants seeking proposals for security for costs. Insurers might expect to be approached to by claimants to discuss endorsements and deeds – that is, in so far as claimants’ funders are prepared to meet the costs of them.

(CMS acts for the second defendant, Lloyds Bank plc.)