A recent High Court judgment has considered the effectiveness of an ‘after the event’ insurance policy (‘ATE Policy’) in the context of a security for costs application. The purpose of the ATE Policy was to indemnify the insured against its opponent’s legal costs (in this case the defendant’s) associated with court proceedings should those proceedings be unsuccessful. An ATE Policy for court proceedings is usually linked to a “no win, no fee” arrangement with the insured’s legal team.

The insured (i.e. the plaintiff) was a company which was in liquidation. The liquidator was maintaining a professional negligence claim against the insured’s former solicitors. The insured claimed that negligent advice from its former solicitors had resulted in its having to conclude a settlement in excess of €450,000 (including a contribution to costs).

As the company was in liquidation, the defendants applied to the court for an order for security for costs. If such an order were made, the plaintiff would have been required to provide the defendant with some form of security regarding their legal costs should the plaintiff’s underlying claim prove unsuccessful. The court described the company as “hopelessly insolvent”, and noted that on the face of it the defendant would therefore be entitled to the order sought.

The insured argued, however, that the ATE Policy (which was intended to cover such costs) was sufficient to mitigate the costs risk faced by that the defendant.

Consequently, the court undertook a review of the terms and scope of the ATE Policy. The court noted that the ‘prospects clause’ gave the insurer the right to end cover under the policy at anytime if the insurer (following discussion with the insured’s solicitor) was of the opinion that it was more likely than not that the insured would lose its claim. 

Following that analysis and consideration of English cases dealing with similar (although not identical) policies, the court concluded that, given the breadth of the repudiation provisions in the ATE Policy, it could not be viewed as providing sufficient security for the defendant.

Given the insolvency of the insured, the likely effect of an order directing the insured to give security for costs would be the end of the litigation and the insured’s claim against its former solicitors. Rather than make that direction, the court adjourned the proceedings for three months to permit the insurer to consider the prospects of the litigation. 

The court made it clear that if the insurer provided a binding assurance that the insurer would not exercise the rights to repudiate under the prospects clause, the court would make no order as to costs. On the other hand, the court indicated that if the insurer was not prepared to provide such a binding assurance, that it would make the required order for security for costs against the insured. In any event, the court made it clear that the decision whether to provide the binding assurance was a matter for the insurer solely.

The judgment was delivered in mid-February and we understand that the proceedings remain adjourned at the direction of the court. Nonetheless, the terms of the judgment may have implications for the effectiveness of ATE Policies for receivers and liquidators of insolvent companies.