Posted by Nicholas Ellor, senior underwriter at Legal Futures Associate Temple Legal Protection
When does an after-the-event (ATE) insurance policy provide adequate security for a defendant’s costs?
The short answer is that it very much depends on the wording of the particular policy and provisions in it enabling the insurer to void the policy and/or exclude liability. This is a rather unhelpful answer but nonetheless probably true.
A defendant’s legal representatives will go through the policy wording with a fine toothcomb and attack any provision they think will enable the insurer to parachute out or deny cover.
The message seems to be that the fewer exclusions in the policy and the fewer circumstances legislated for which would enable the insurer to deny liability, the better the chance it has of passing muster.
This is not a very fair state of affairs from the insurer’s point of view, who has to strike a balance between giving the insured adequate cover and at the same time protecting itself against having to bail the insured out in circumstances, where for instance, they have been less than honest in their presentation of the risk (e.g. non-disclosure of material facts).
As Lord Justice Longmore seems to have implied in the leading case on this issue, Premier Motorauctions v PricewaterhouseCoopers and Lloyds Bank  EWCA Civ 1872, the prospect of avoidance by the insurer must be illusory in order for the policy to give sufficient protection.
Whether or not it is illusory is, of course, difficult to assess and it seems the benefit of the doubt will lie in favour of the applicant seeking security for its costs.
If the policy enables the insurer to terminate cover because the merits of the case materially deteriorate – a perfectly reasonable clause for a litigation/ATE insurance policy to have – this may be considered anything but illusory and a real, not theoretical, possibility or even probability.
The inclusion of an anti-avoidance clause in the policy, effectively tying the insurer’s hands but preserving its rights against the insured in the event of its breach of the terms of the policy, is a way of demonstrating both to the court and the defendant, that the insurer is serious in its commitment to the insured and its belief in the merits of the claim and prospects of succeeding at trial.
Such inclusion of an anti-avoidance clause will be persuasive in any threatened or actual security for costs application.
We frequently receive applications for insurance where provision is sought to deal with threatened or actual security for costs applications. So what should you be looking for from your insurer?
Our approach is to offer incorporation of an anti-avoidance clause into the policy by way of endorsement. The quid pro quo is that the merits of the claim and its prospects of succeeding at trial have to be higher than normal; the premium pricing is also higher than would normally be the case.
We will also specifically authorise the claimant to disclose the policy wording and anti-avoidance clause to the opponent’s solicitors. In most cases, they will then either withdraw the security for costs application or cease threatening to present such an application.
You should make sure that the terms of the anti-avoidance clause are not restricted, as some are, in limiting the circumstances in which it will not avoid cover.
So, in summary, going back to my original question, I think it is instructive to recite what Longmore LJ said in Premier Motorauctions: the correct test when assessing an ATE insurance policy being put forward as a security for the defendant’s costs is “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”.