Court challenges adequacy of ATE policy in security for costs ruling

In the recent decision of Asertis Ltd v Lewis Barry Bloch¹, the High Court scrutinised the adequacy of an after-the-event (ATE) insurance policy, which featured an anti-avoidance endorsement (AAE), as a shield against an application for security of costs. The judge found that the ATE policy did not provide sufficient protection due to an inadequate limit of indemnity alongside various termination provisions and conditions that could invalidate the policy. The case is in contrast to the decision last year in Saxon Woods Investments Limited v Francesco Costa and Ors [2023] EWHC 850 (Ch) in which the ATE policy was found to provide sufficient security. 

Background

The claim originates from the liquidation of Genesis Capital (UK) Ltd (Genesis), part of the Genesis Capital Group, an investment banking group based in South Africa. Genesis was wound up in July 2019 and its joint liquidators assigned certain claims against its sole director, the defendant, to Asertis Ltd (Asertis), a litigation funder.

Asertis has alleged that the defendant breached his fiduciary duties as a director of Genesis by authorising a substantial transfer of funds, amounting to £2.8 million, from Genesis to a third party, Mr. Warren Friedland, in December 2018.

The defendant is defending the claim and, as part of that, submitted an application for security for costs asserting that there was reason to believe that Asertis would be unable to pay his costs if ordered to do so. In support of the application, he cited Asertis’ financial statements, which demonstrated that the company was operating at a loss. In opposition, Asertis highlighted its revolving credit facility with US Bank Trustees Limited, and ATE policy, which included an AAE. Nevertheless, the defendant contended that the details provided regarding the revolving credit facility were insufficient and that the ATE policy, even with the AAE, did not offer adequate security.

On an examination of the limited financial information on Asertis that was available, the court concluded that there was “reason to believe” that Asertis would not be able to meet an adverse costs order. The court is not required to be satisfied that is so on the balance of probabilities – “reason to believe” is sufficient.  The court found that there was no evidence to support the contention that the revolving credit facility could be used to meet adverse costs orders. Consequently, it proceeded to consider whether the ATE policy provided sufficient protection for the defendant.

Previous case law on ATE policies

ICC Judge Mullen set out the existing case law in relation to ATE insurance policies in the context of security for costs application.  The case law demonstrates that while ATE policies can, in the right circumstances, provide sufficient protection, they may contain conditions that serve to undermine the protection.  Particular features that can be problematic include:  provisions allowing an insurer to withdraw cover; limits on the scope of coverage; redaction of relevant policy terms; or there is potential for the policy to be avoided on the grounds of fraud and/or reckless non-disclosure/misrepresentation where the risk is not ameliorated by any AAE.

In a security for costs application the defendant is required to show that there is a real, as opposed to fanciful risk, that the ATE policy will not respond in full.  The court will approach the matter with pragmatism (Versloot Dredging v HDI Gerling) and it is always a matter of discretion.

Application in this matter

Applying the case law set out above the court scrutinised numerous features of the ATE policy which raised doubts as to its reliability as security. These included:

1. Termination Provisions: The AAE removed the right of insurers to avoid for lack of fair presentation prior to policy inception for the first £160,000 of cover, but it did not address what would happen if there was a failure to disclose a material circumstance during the currency of the policy. The termination provisions in the ATE policy allowed the insurer to cancel the policy with 30 days written notice if Asertis' solicitors determined that the claim no longer had a greater than 50% chance of success or if "[the insurers] feel that [Asertis] have breached the requirements of the policy" (at clause 4). The judge held that whilst, no doubt, this language had been included so that the clause was in plain English, the insurer's right to terminate was not well defined and it was broad. 

This meant that the policy could, in theory, be terminated at any time during the litigation, potentially leaving the defendant without security for his costs. The lack of a requirement to notify the defendant of such termination further exaggerated the risk, as he might not even be aware that the policy had been cancelled.  This could be cured with a direction that termination be notified to the defendant but that would not address the question of whether costs would be covered up to the point of termination.

2. Lack of Direct Benefit: The ATE policy was structured in a way that any payments under the policy would be made to Asertis, not directly to the defendant. This posed a real risk since if Asertis were to become insolvent, the defendant would have no direct claim against the insurer. He would be reliant on Asertis to pass on any funds received, which might not happen if Asertis was unable to meet its liabilities.
3. Numerous Conditions: The ATE policy contained several conditions that Asertis had to meet to maintain coverage. These included obtaining the insurer’s written approval before changing solicitors or making any payments to the opponent. Failure to comply with these conditions could result in the policy being invalidated. These conditions were within Asertis’ control with potential for non-compliance, for example if a condition were overlooked, or delay if compliance was challenged.
4. Scope of Coverage: The ATE policy provided coverage of up to £250,000 for opponent’s costs. However, the costs budget submitted by the defendant was £524,989.63. The AAE removed the right of the insurer to avoid the policy for a failure to make a fair presentation of the risk prior to inception in respect of the first £160,000 of cover, but this was also likely below the level of an adverse costs order.

Decision

ICC Judge Mullen concluded that the ATE policy did not provide sufficient protection to the defendant. Given the numerous termination provisions and the uncertainties surrounding the policy, the court granted the application for security for costs.

Although prior case law demonstrated that the court may direct a lesser payment into court taking account of the value of an ATE policy, in this case the judge’s view was that no value could be ascribed to the policy for these purposes, particularly given the wide ambit of clause 4 and the potential that no opponent’s costs may be payable on termination.

Comment

The case is an interesting reminder that an ATE policy, even with an AAE, may not be an adequate shield to a security for costs application.  It is unclear from the judgment whether a specialist ATE broker was involved in placing and advising on the terms of the policy but given the specialised nature of ATE insurance using such a broker is strongly advised. 

In the writer’s experience it is common for the AAE to go beyond simply preventing the insurer from avoiding the policy for a fraudulent non-disclosure/misrepresentation.  It also extends to removing the insurer’s ability to cancel or terminate the policy for a variety of other causes that the judge in the present case found to be problematic.  In addition, in the event of an adverse costs award, the policy can provide that any indemnity is paid direct to the defendant and not to the insured thereby alleviating another of the judge’s specific concerns in the case. 

Whilst it is always ultimately a matter of the court’s or arbitration tribunal’s discretion, in the writer’s experience, a well drafted ATE policy with a sensible limit and an AAE provides a high hurdle for the defendant making the security for costs application to overcome.  It is likely that following this decision ATE brokers will be carefully scrutinising their standard wordings and checking these against the weaknesses identified by the judge.  In the event a claimant is taking out an ATE policy it would be worth checking the proposed policy wording against the specific issues identified by the judge to ensure that the policy provides the protection that is required.  Security for costs applications can add a significant amount of costs to any claim and prove to be an unnecessary distraction and so the more effective the policy, the better the shield, and the less likely a defendant will make the application (and be successful).  

Research provided by Pjotr Bonde – Trainee Solicitor.

For more information, please contact Adam Strong or funding@hfw.com to discuss further.

Footnote

1. [2024] EWHC 2392 (Ch)