By Legal Futures Associate Litica
An after-the-event “ATE” insurance policy generally provides cover for adverse costs orders arising out of a piece of unsuccessful litigation. As with any insurance policy, this is qualified by a series of standard conditions and exclusions relating to fraud and non-disclosure, amongst other things. As a result of this, the protection afforded to the insured is not absolute. Courts sympathise and depending on the wording of the policy and the circumstances of the parties, are likely to order that the ATE policy alone is inadequate security for costs in UK proceedings. At this point, without further action from the claimant, the case cannot proceed and will be struck out. This dilemma led to the development of the anti-avoidance endorsement or “AAE”.
AAEs are offered, at a price, to fortify an underlying ATE policy. They are provided in response to security for costs concerns from the defendant, and should not be offered for any other reason. Once incepted, they allow the claim to continue as they are accepted by the courts as providing adequate security for costs to the defendant. The AAE ultimately waives the insurers’ right to rely on the prescribed exclusions and conditions in the underlying policy. Insurers’ interests are thereafter protected by a clawback right which is maintained against the insured party for any claim made under the policy but which would have been excluded but for the AAE. In many respects the scope of AAEs in the ATE market is fairly settled.
However, there is an exception around termination rights. As with all contractual relationships, ATE policies can be terminated in prescribed circumstances, most notably where the merits of a case deteriorate below a certain agreed threshold. At this point, it is in no-one’s interests for the claim to proceed, especially the defendant’s. Claimants being immune from any adverse costs exposure, whilst continuing to pursue what has become an unmeritorious claim, undermines the public policy behind the ‘loser pays’ rule in the UK. It constitutes a moral hazard. Maintaining termination rights within AAE wordings is accepted as being in the interests of justice. Indeed in a recent Competition Appeal Tribunal case (Consumers’ Association v Qualcomm Incorporated ), the Tribunal held that no AAE would exclude all possibility of termination. Importantly, defendants, on whose sole behalf the AAE has been issued, should not wish for the very instrument that they demanded be entered into, to inadvertently end up increasing the costs and time they have to expend fighting a frivolous claim brought against them. Defendants should therefore not accept AAEs without reasonable termination rights as adequate security.
Litica, as the market leading ATE insurer, has ensured that their AAE rightly maintains a termination right. This is at odds with other AAEs commonly used in the market which inexplicably waive that fundamental right. As discussed, this inadvertently enables a claimant to continue to pursue their claim from that point on, come what may. Litica worked with a specialised costs counsel to ensure that the approach taken in its AAE is appropriate and just. The wording used ensures that no prejudice is suffered by a claimant or defendant as a consequence of the preservation of Litica’s termination rights. This is achieved by ensuring that notice of termination be given to the defendant, with cover continuing in place for adverse costs exposure for a reasonable period thereafter, to allow the defendant to raise the issue of security for costs anew. This was recognised In Hugh James Involegal . In addition, in Rowe & other v Ingenious Media Holdings  it was held that credit can be given where insurers terminate or exclude cover but remain liable for costs incurred up to that point. As an appropriate balance has been struck in Litica’s AAE, it is routinely accepted as adequate security.
Insurers should be extremely cautious of waiving their rights to terminate their AAEs. In doing so they overcommit beyond what is necessary or appropriate and they surrender the ability to mitigate exposure if told that a claim is more likely than not to lose. This could come at a serious cost to those who sit behind the instrument.
If you are interested in learning more about Litica’s AAEs, or any of our ATE insurance products, please contact: firstname.lastname@example.org.