A recent decision of the Court of Appeal has cast further light on the use of after-the-event (ATE) insurance policies in litigation in Ireland. Whilst the High Court previously accepted the legality of such policies in principle, the Court of Appeal identified significant difficulties in relying on such policies in practice where a party is insolvent.

Background

In 2000, Greenclean Waste Management Limited (Greenclean) entered into a lease agreement for a building which required significant refurbishment. The lease committed Greenclean to repair and refurbish the premises. Greenclean alleged, amongst other matters, that its solicitors had failed to advise it of the extent of those obligations which ultimately led to the company incurring liabilities in excess of €400,000.

Greenclean went into liquidation in 2011 and its liquidator issued proceedings against Greenclean’s solicitors. The solicitors argued that Greenclean did not have the means to pay their costs if Greenclean was ultimately unsuccessful. On that basis, the solicitors argued that they were entitled to security for costs from Greenclean. Such security typically takes the form of a cash lodgement in court or a cash bond to cover the defendant’s costs if the plaintiff is unsuccessful.

Whilst Greenclean could not provide such security, it argued before the High Court that its ATE cover, which insured its liability for legal costs up to €200,000, provided sufficient protection for the solicitors and that an order for security for costs was not required.

High Court decisions

The proceedings came before the High Court twice. In the first case, the Court accepted that the ATE policy was highly conditional and without a commitment from the insurer not to rely on a clause which would allow it to end cover (the ‘Prospects Clause’), it would order Greenclean to provide security for costs. However, the insurer ultimately provided a commitment, albeit limited to non-reliance on the Prospects Clause, to maintain the cover in place throughout the proceedings, thereby allowing the Court to hold that the policy was sufficient security for costs.

That decision was appealed to the Supreme Court which immediately sent it back to the High Court for consideration of the underlying legality of ATE cover for litigation costs. At the second hearing, the Court accepted in principle the lawfulness of the ATE insurance as a valid aid to litigants (see our previous report on this decision here).

Court of Appeal

The matter was appealed by the solicitors to the Court of Appeal. The Court examined the terms of the ATE policy in detail and found it to be so conditional (even with the insurer’s commitment regarding the Prospects Clause) that it did not provide sufficient protection for the solicitors by way of security for costs.

Whilst the decision ultimately turned on a separate evidential issue, the Court adopted the following principles when considering the effectiveness of ATE insurance in the context of a security for costs application:

  • An ATE policy can provide sufficient security for a defendant’s costs
  • ATE insurance will rarely, if ever, be as strong a security as a payment into the court or a bank bond or guarantee given the conditional nature of ATE policies
  • The policy should not permit the insurer to avoid liability to pay the other party’s costs
  • The existence of an ATE policy may reduce the quantum of the security required by the Court

In doing so, the Court of Appeal implicitly accepted the validity of such policies. However, given the highly conditional nature of the company’s ATE cover, the Court of Appeal found that the High Court should not have relied on the ATE policy as a basis for not awarding security for costs.

Conclusions

The decision of the Court of Appeal demonstrates the significant difficulties that an insolvent company (or company without the means to discharge the other party’s costs) will face in seeking to rely solely on ATE insurance cover when disputing an application for security for costs.

However, the second decision of the High Court established that ATE insurance is a valid aid for litigants and the Court of Appeal judgment does not overturn that element of the High Court decision. Consequently ATE cover could provide a useful funding method for individual or solvent corporate litigants before the Irish courts. The area of litigation funding is likely to see further developments in the near future as an application in another case to approve an alternative form of third party litigation funding is reportedly pending before the High Court.