High Court rejects security for costs application in face of £5m ATE policy

Gibraltar: some concern over insurer with little track record

Gibraltar: some concern over insurer with little track record

The High Court has accepted after-the-event (ATE) insurance cover of £5m as sufficient to dismiss an application for security for costs.

Mr Justice Snowden described the ATE market as “substantial and mature” and that 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.

However, the judge expressed some concern that part of the ATE was being provided by a Gibraltar-based insurer with little track record.

He was ruling in Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor [2016] EWHC 2610 (Ch), 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 have 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 said the starting point of any analysis of whether to order security for costs must be to ask the threshold jurisdictional question posed by CPR 25.13 – whether there was “reason to believe” that the liquidators would be unable to pay the defendant’s costs if ordered to do so.

Reviewing the case law, he followed the approach of Mr Justice Stuart-Smith in Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC).

Snowden J said: “The question is not whether the ATE policy provides the same security as cash or a bank guarantee, or indeed whether the ATE policy provides the same security as might a deed of indemnity from the same or another insurer.

“It is whether, having regard to the terms of the ATE policy in question, the nature of the allegations in the case and all the other circumstances, there is reason to believe that the ATE policy will not respond so as to enable the defendant’s costs to be paid.”

He added that there was also “a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders”.

The judge went on to dismiss the defendants’ various criticisms of the ATE policy, such as their questioning of whether full disclosure of material facts had been made to the insurers.

He noted that the policy had been taken out with the assistance of experienced lawyers and that the claimants had no commercial interest in breaching its conditions.

“Moreover… the joint liquidators have every incentive to ensure that the terms and conditions of the ATE policies will be adhered to and that they will respond. The companies have no assets, so that the joint liquidators must be well aware that if the companies were to lose and the ATE policies were not to respond as a consequence of any failure on their part, there would at least be a significant prospect of the defendants applying for a costs order against them personally under section 51 of the Senior Courts Act 1981.

“I would add that although the defendants suggested that an ATE insurer faced with an adverse costs order against the companies would be likely to fight tooth and nail to deny liability under the policies, I think that point was rather overplayed…

“The ATE market in the UK is now a substantial and mature one, and a significant part of that market relates to the funding of insolvency cases. It is also one in which the relevant professionals such as insolvency practitioners and solicitors are well-informed as to the reputations of the rival ATE insurers.

“In this situation, whilst ATE insurers are of course entitled to take a stand on their policy terms and conditions, they are unlikely to have a commercial incentive to take an unusually defensive line in seeking to avoid liability under the policies they issue. If they were to do so, this would soon become known in the market, and potentially profitable future business would be placed elsewhere.”

The defendants also argued that no reliance could be placed upon the policies with Elite and Acasta because they were based and regulated in Gibraltar, and have no credit rating.

Snowden J ruled: “A comparison between an ATE policy and the traditional requirements for the provision of cash or a ‘first class’ bank guarantee where security for costs is ordered is not appropriate when applying the threshold jurisdictional test under CPR 25.13. Where there is an ATE policy in place, the question is simply whether there is reason to believe that the insurer will not pay under the policy when called upon to do so.

“In that regard, whilst the absence of a credit-rating and concerns over the failure-rate of Gibraltarian insurers do suggest that there might, in general terms, be greater risk of Elite or Acasta defaulting on their obligations than, say, QBE, at least in relation to Elite there is evidence that it has an established track record, and there is nothing that gives me any particular reason to believe that it will not pay if called upon to do so under the policies that it has issued.

“That is not the case in relation to Acasta. The reality is that I have seen little or no evidence about its history or current operations, and the lack of any recent financial information and the points made by the defendants as to its balance sheet do give me reason to doubt its financial standing and ability to pay under the policy that it has issued.

“If Acasta stood alone, I would, on the basis of the evidence that I have seen to date, be inclined to think that the jurisdictional threshold under CPR 25.13 had been crossed.

“As it is, however, Acasta is the provider of only one layer of ATE insurance, of £500,000 in excess of £3.5m. On the basis of the current estimates, this layer of assessed costs will not be reached until well after disclosure and possibly much later.

“Accordingly, and consistently with the practice of the court to order the provision of security for costs in stages as a case progresses, I do not think that it would be appropriate, at least at this juncture, to order the provision of security for costs in place of the Acasta layer.”

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