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25 October 2016 0 Comments
Posted in Dispute Resolution, Opinion

After the event insurance – is it as good as cash or a bank guarantee?

Posted by , Associate

After the event (ATE) insurance can be purchased by parties after a dispute has arisen to protect against the risk of having to pay the opponents legal costs. In a recent case – an important decision for modern commercial litigation – the court was asked to consider whether or not an ATE policy is sufficiently robust to give the defendant security that its costs will be paid by the claimant if and when it is ordered to do so.

In some cases, the defendant may be confident of successfully defending a claim but may have concerns that the claimant will not or cannot pay any costs awarded against it. In these circumstances, the defendant can apply to the court for an order that the claimant must provide security for the costs it may become liable to pay.

In order to succeed with an application, the defendant must demonstrate to the court that its application for the claimant to provide security is justified. One of the court’s considerations will be that the defendant has reason to believe that the claimant will be unable to pay the defendant’s costs if ordered to do so.

Traditional methods of security for costs include a cash payment into court which is held like a bond pending the outcome of the claim, or some other form of bond or guarantee from a reputable bank or lender. These forms of security are considered to be “copper bottomed” meaning that they are widely accepted as being thoroughly reliable and are therefore sufficient to provide the defendant with the security that it needs.

In Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor, the court was asked to consider whether or not an ATE policy is sufficiently robust to give the defendant security that its costs will be paid by the claimant if and when it is ordered to do so.

The legal argument focused on whether or not an ATE policy is too uncertain due to the risk that the insurer could refuse to pay out for a variety of reasons, including the possibility that the claimant could breach the terms of the policy which would give the insurer an excuse not to respond to a claim. The court commented that the ATE market is now “substantial and mature”, and that it is not commercially in the insurers’ interests to take an excessively hard line on claims to avoid paying out because of the damage it would do to their reputation, nor is it in the interests of the claimants to breach the terms of their own policy. It did however comment that ATE insurance providers who are based outside of the UK or who don’t have an established trading history may give rise to doubts about their ability to pay under the policy if called upon.

The judge 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 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.”

This is an important decision for modern commercial litigation. There is clearly public interest in allowing ATE policies to provide access to justice for parties who would otherwise be unable to afford to continue with their claims. The courts have sent a clear message that these policies are to be treated as sufficiently robust enough for the defendant to have comfort that their costs will be paid.

For more information and expert legal advice, contact our team

0800 923 2076     Email uscdr.enquiries@roydswithyking.com

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