After-the-event insurance which can be voided does not constitute adequate security for costs, the Court of Appeal has ruled.
Overturning the decision of Mr Justice Snowden, Lord Justice Longmore said the case raised “important questions of principle” because the original decision showed “there may be a tendency (I put it no higher) for judges at first instance to accept that an ATE policy can stand as security for costs.
Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor  EWCA Civ 1872 concerned an action being brought by the joint liquidators of the claimant companies against PwC and Lloyds Bank, which they say is worth up to £54m. The defendants estimated their costs at £7.2m between them and sought security for costs.
The liquidators have put in place a multi-tiered ATE policy worth £5m: the primary layer of £250,000 is provided by QBE Insurance, the next £750,000 by Elite Insurance, the next £1.75m by QBE, the next £750,000 by Elite, the next £500,000 by Acasta European Insurance Company, and the final layer of £1m by DAS.
Snowden J considered this sufficient to dismiss the application for security for costs.
He described the ATE market as “substantial and mature” and said insurers did not have a commercial incentive to fight tooth and nail to avoid paying out because of the damage it would do to their reputation.
Longmore LJ disagreed with Snowden J’s assessment that a particular witness’s disputed evidence was not as central as the defendants suggested; rather, he said, if the witness was not believed, the claim would fail.
“The judge said that ‘it was something of a leap’ to conclude that disbelief of [the witness] on the part of a judge would provide grounds for insurers to avoid the policies.
“Again I cannot with respect agree. 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 [citing the 2010 case of Persimmon v Great Lakes Insurance]… The landscape after trial may be very different from the landscape as it appears to be at present and it is unsatisfactory to have to speculate.”
Though the trial judge felt he could rely on the fact that the proposals to insurers were made by professional insolvency office-holders assisted by experienced solicitors and counsel, Longmore LJ said: “The best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know.
“Neither the defendants nor the court have been provided with the placing information put before the insurers but, even if that had been provided, it is unlikely that the court could be satisfied that the prospect of avoidance is illusory.”
The court noted that in Nasser v United Bank of Kuwait  1 WLR 1868, Mance LJ said the defendants were entitled to some assurance that the insurance was not liable to be avoided for misrepresentation or non-disclosure.
Longmore LJ said: “I cannot see that, on the facts of this case, these defendants have that assurance. It follows therefore that there is reason to believe that the [claimants] will be unable to pay the defendants’ costs if ordered to do so.”
He was also “not particularly impressed” that the claimant had declined to procure a deed of indemnity.
“If it is not a straightforward guarantee, I am not sure what a deed of indemnity is since no draft of any such deed was put before us but, on any view, it would mean that insurers were giving up their right to avoid and their rights under the endorsement.
“It is enough to say that the existence of those rights give sufficient reason to believe that the [claimants] will not pay the defendants’ costs if ordered to do so.”
With the agreement of Kitchen and Floyd LJJ, he concluded that each of the claimants should provide £2m in security for each defendant, in the form of form of a payment into court, a deed of indemnity from the claimants’ lead UK insurer, or a bank guarantee.