The High Court has ruled that an after-the-event (ATE) insurance policy does not provide sufficient security for defendant’s costs of up to £2.75m, because of the risk of insolvency proceedings in a foreign jurisdiction.
The court heard that property developers Harlequin claimed over $60m from accountants Wilkins Kennedy, on the grounds that the defendants were “responsible for the delays and cost overruns” on a resort in the Caribbean.
Coulson J said that construction works on the Buccament Bay development in St Vincent and the Grenadines (SVG) were “significantly delayed and are still ongoing”.
He went on: “There is an investigation into the scheme by the Serious Fraud Office, and there have been a number of different sets of proceedings, some started by disgruntled investors, and some involving attempts to put the claimant companies into liquidation.”
Coulson J said that, under the terms of the ATE policy provided by DAS, there was a “real risk” that if Harlequin became the subject of insolvency proceedings in SVG, “any sums under the ATE policy may have to be paid out by DAS, not to the defendant, but to the claimants’ insolvency practitioner in SVG”.
Delivering judgment in Harlequin Property (SVG) and another v Wilkins Kennedy  EWHC 1122 (TCC), Coulson J said: “That would be significantly detrimental to the defendant’s rights. It could even make the ATE cover worthless for them”.
The judge went on: “Whilst I accept that DAS’ reputation is such that they would not get together with the claimants and commute the policy behind the defendant’s back, it is quite another thing if DAS had a legal liability to pay an insolvency practitioner in SVG rather than the defendant.”
Coulson J said that unless DAS was “contemplating paying the same sum twice over”, the defendant would have no protection.
Mr Justice Coulson said this concern linked back to the “principal difficulty for all defendants faced with the offer of an ATE insurance policy, namely that they are not parties to that policy, and are therefore being offered protection which is, in one sense at least, at arms’ length”.
Earlier the judge said some of the issues in the case were “rather different” from those arising in an ordinary Technology and Construction Court case, “involving as they do allegations of fraud involving both the employer and the contractor, and an allegedly fundamental conflict of interest on the part of the defendant”.
Coulson J agreed with Harlequin’s counsel that there was no “realistic risk” that DAS would enter into an arrangement with the claimants to commute the ATE policy.
“I find that there is no realistic risk that DAS will enter into some arrangement with the claimants in order to deprive the defendant of the security otherwise provided by the ATE policy.
“I can see no basis for saying that it is even a possibility that DAS would risk their reputation in the insurance market by acting in a way that they have expressly disavowed.”
However, he ruled that the defendant’s second ground of objection to the ATE policy, based on the risk that they might not recover anything in the event of insolvency, was made out.
The judge added that he had previously made it clear to the parties that this should not “be seen as some sort of nuclear option, whereby only the payment of a sum into court or the provision of a bank guarantee” would be sufficient.
“It seems to me that the parties have come so far in endeavouring to reach agreement on the basis of the ATE policy that it would be a great shame if they could not go the extra step and deal with the single point that I consider to be outstanding.
“It seems to me that this could be dealt with either by the provision of a direct indemnity, or an endorsement which provided that any costs ordered to be paid to the defendant would be paid directly, without set-off.”