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Until now, the general wisdom has been that an After the Event (‘ATE’) insurance policy alone is unlikely to provide adequate security for costs (Michael Phillips Architects Limited v Riklin and another [2010] EWHC 834 (TCC)). However, very recently there has been an unreported case where the ATE insurance policy has been accepted by the court as adequate security.

At the moment, we don’t know whether the decision is dependent on specific facts of the case (for example, it seems that the issues in the case were complex technical points as opposed to contentious facts which could be affected by the usual ‘dishonesty clauses’ contained within ATE insurance policies) or whether there will be wider implications for how ATE insurance can be used, without the need for a Bond or a Deed of Indemnity.

In the circumstances, we thought we’d summarise how security for costs interacts with ATE insurance presently, whilst we await further details on this latest case.

SECURITY FOR COSTS

The English legal system currently employs a “loser pays” principle, which requires the losing party in the legal proceedings to pay the reasonable legal costs of the successful party. Consequently, where a defendant reasonably believes that the claimant will not be able to meet such a liability in the event that the defendant is successful (or indeed, and perhaps more often, for tactical reasons), the defendant can apply to the court for an order that the claimant provides security for costs. Typically, this occurs when the claimant is a foreign individual or a company, and security is usually provided in the form of a bank cheque paid into the court or a bond against which the successful party can subsequently enforce an order for costs.

AFTER THE EVENT INSURANCE

If your client is facing an application for security for costs, one of the ways in which they may choose to deal with the application is by obtaining a deed of indemnity (or a bond) which effectively guarantees payment of the defendant’s costs, via an ATE insurance policy. Insurers will typically charge an upfront, non-refundable fee for providing a bond, which is an additional cost to the insurance premium itself. The fee will generally be in the range of 10-15% of the amount of security provided and it is not a recoverable cost.

Consequently, a deed of indemnity enables claimants (or counter-claiming defendants) to pursue the claim without fear of being strangled out of the litigation by a deep pocketed opponent and without a huge upfront cost. Another possibility, where Third Party Funding is being used, is for the funder to put the money into court as security. However, in the event of a successful outcome, the funder will either take a percentage of the damages or a multiple of the amount committed by way of return, and this will inevitably amount to more than the cost of a deed of indemnity provided by ATE insurers.

If you would like to discuss how ATE insurance or Third Party Funding can assist your clients with regards to security for costs, contact us.