Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL: Security for Costs for Insurers

A security for costs application allows a defendant to seek an order from the court requiring the plaintiff to pay a sum of money to the court as security for the potential costs likely to be incurred by the defendant in the proceedings. The application usually arises in circumstances where it appears unlikely that the plaintiff would be unable to cover the defendant’s legal costs if the plaintiff was unsuccessful in the proceedings.

The issue of security for costs is contentious and one that most clients involved in expensive litigation consider at some stage of proceedings. For insurers, the issue can be more problematic due to a common belief that there exists a presumption against granting an insurer security for costs, especially in indemnity or coverage disputes with their insured.

In Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221, the Supreme Court of NSW considered the issue as part of a security for costs application.

Background

The substantive proceedings involved an indemnity dispute between Nonox Australia (Nonox), and their insurer and insurance broker (collectively, the Insurer). In brief, indemnity pursuant to the policy of insurance was denied on two grounds:1

  • that the cover offered by the policy did not extend to the particular business operations of the plaintiff that gave rise to the claim; and
  • that the plaintiff was guilty of material non-disclosure of misrepresentation and that if the true and complete state of affairs been disclosed, the underwriters would have declined to accept the risk.

The Security for costs application

During the course of proceedings, the Insurer made an application for security for costs pursuant to s 1335 of the Corporations Act 2011 (Cth) and r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW).

Having reviewed the evidence, his Honour found that the first ground required by the legislation had been made out, that is, Nonox would not be able to meet costs if ordered to do so.2

Importantly, in dealing with the discretionary grounds, his Honour was required to address an “underlying submission” to the effect that “insurers are in a different category to other applicants for security for costs”.3 His Honour disagreed with this submission and whilst conceding that there was some authority supporting that proposition, in reviewing the authorities, the Court found that there was no inherent limitation on the right of an insurer to obtain, in an appropriate case, security for costs (emphasis added).4 Moreover, in exercising the discretion to award security for costs, it was found that there was no basis for concluding that the effect of ordering the security would stultify the litigation, and thus to prevent the plaintiff from advancing its claim.5

Lessons learnt

Focussing on the type of applicant (specifically an insurer) in a security for costs application is not a valid limit on the exercise of the Court’s discretion to award security for costs. The only inherent limit on the discretion is that it must be exercised judicially and that decided cases are no more than guides as to how the discretion ought to be exercised.6 Any presumption that an insurer is not entitled to security for costs solely due to the nature of its business is simply not correct.