Levelling The Costs Playing Field

The Court of Appeal overturns the High Court decision concerning ATE insurance policies lacking anti-avoidance provisions as adequate security for costs.

In an important recent decision in Premier Motorauctions Limited (in liquidation) et anr -v- PricewaterhouseCoopers LLP et anr [2017] EWCA Civ 1872, the Court of Appeal overturned an earlier High Court decision and granted the Defendants' application for security for costs holding that the after-the-event ("ATE") insurance policies taken out by the insolvent Claimant companies did not provide the Defendants with sufficient costs protection in circumstances where the policies were avoidable for material non-disclosure and misrepresentation.

Background

The Defendants had acted as advisor and bank respectively for the Claimant companies before the companies were placed into administration (and subsequently liquidation).

Following the issue of the claim, the Claimants took out ATE insurance policies which contained standard provisions permitting insurers to avoid the policy for material non-disclosure or misrepresentation.

The Defendants applied for security for costs order under CPR 25.13 on the grounds that: (1) there was reason to believe that the insolvent Claimants would be unable to pay the Defendants' costs if ordered to do so (CPR 25.13(2)(c)); and (2) in all the circumstances it was just to make the order (CPR 25.13(1)(a)).

The Claimants resisted the applications on the basis that they had ATE insurance to cover the Defendants' costs in the event that the claim failed at trial.

The High Court decision

The judge at first instance found that there was no reason why the existence of an ATE insurance policy should not be taken into account, together with the company's other assets, when deciding whether there is reason to believe that a claimant will be unable to pay an adverse costs order.

On the important question of whether the fact that the ATE insurance policies were avoidable for material non-disclosure or misrepresentation meant that there was reason to believe that the Claimants would be unable to pay the Defendants' costs, the Court held that the test was not whether the ATE insurance policies provided the same security as cash or a bank guarantee but whether there was reason to believe that the ATE policies would not respond (and whether the Defendants could point to this reason).

In considering various aspects of the specific ATE insurance policies, Snowden J considered that...