In some respects the recent decision in Persimmon Homes Ltd v Great Lakes Reinsurance (UK) Plc1 was an unspectacular application of established insurance law. However, it sends a stark warning to defendants in civil litigation that a claimant’s after-the-event insurance is sometimes no substitute for security for costs.
After-the-event insurance refl ects the principle of full costs recovery in English litigation,2 whereby the costs of litigation follow the outcome. If a claimant wins, it can recover its costs from the defendant; if it loses, it must pay the successful defendant’s costs.
Claimants can agree with their lawyers that they will not be charged if they lose. This is the basis of a conditional fee agreement. In exchange, the lawyers charge higher fees in the event of a successful outcome. These success fees are recoverable from the defendant - at least at present.3 A claimant that brings a claim under a conditional fee agreement runs the risk that it may have to pay substantial costs to its opponent if it loses the claim.
After-the-event insurance is intended to cover this risk. If the claimant loses and is ordered to pay the defendant’s costs, the claimant should be protected by the policy. In the event of a loss, the claimant is normally indemnifi ed against having to pay the premium. If it wins, the premium is usually recoverable from the defendant.
Persimmon Homes Ltd, a large UK house builder and developer, was sued by a small property development company called CHP Estates, which was run by a father-and-son team. CHP claimed that Persimmon had agreed to pay it an introductory fee in relation to a development project (in which Persimmon had taken over from CHP when the latter had been unable to fi nance the purchase of the site). CHP claimed that this understanding had been reached in telephone calls between Persimmon and BT, the father, and was later translated into a binding oral contract at a meeting between Persimmon and PT, the son. In relation to the latter, CHP relied on a manuscript note that PT was said to have made at the meeting.
Based on this evidence, CHP’s lawyers believed that CHP had the better of the arguments. They agreed to take the case under a conditional fee agreement. They agreed on a maximum uplift of 100% as a success fee. This percentage refl ected the extent to which the case hinged on oral evidence of what had been agreed between the parties, as the result would rest on the unpredictable nature of the witnesses’ performance under cross-examination. CHP’s lawyers assisted their client in securing an after-the-event insurance policy from Great Lakes Reinsurance.
Inevitably, the materials put before Great Lakes when seeking to obtain the policy set out CHP’s version of events.
Great Lakes’ policy included the following standard provisions, reinforcing the common law right to avoid insurance policies for material non-disclosure:
“This insurance does not cover… (a)ny payment by the Insurer under the Policy where there has been misrepresentation or material nondisclosure by the Insured Litigant or Insured Solicitor.”
A further provision stated that:
“The Insured Litigant must give all information and assistance required by the Insured Solicitor. This must include a complete and truthful account of the facts of the case and all relevant documentary or other evidence in the Insured Litigant’s possession.”
CHP’s case collapsed at trial. The judge found that CHP had fabricated its case. The meeting note was revealed to be a forgery. The judge held that CHP and its principals had acted dishonestly “in the way in which evidence [had] been given and…documents… [had] been created after the event for the purpose of creating a false impression”. He awarded indemnity costs to Persimmon. Shortly thereafter, CHP became insolvent.
Persimmon brought an action against Great Lakes under the Third Parties (Rights Against Insurers) Act 1930, which enables those with a claim that would have been covered by an insolvent third party’s insurance cover to seek to enforce the policy directly against the insurer, rather than merely making a claim in the insolvency as a general creditor.
Persimmon had successfully persuaded the judge in the underlying matter that CHP had systematically fabricated its case. However, in its action against Great Lakes, Persimmon was faced with the diffi cult task of persuading Justice David Steel that CHP had not been dishonest and had believed in the truth of its claim. It failed to do so. Accordingly, Great Lakes was entitled to void the policy in common law and refuse the claim under the contractual provisions.
The judge considered whether the position would have been different if, as Persimmon had argued, CHP had believed in the truth of its claim and the fabrications had been mere embellishments on a genuine claim. Persimmon contended that Great Lakes would have written the policy even if it had been informed that the case had been bolstered by the embellishments, such as the forged meeting note. Unsurprisingly, this argument did not persuade the judge.
The decision reinforces the message that after-the-event insurance policies are intended to benefi t the claimant by protecting it against the costs risk of an unsuccessful outcome of its claim. CPH would have been in no position to complain that Great Lakes was voiding the policy, as its principals knew they had procured the policy by lies and fabrications. In seeking to enforce the policy, Persimmon could do no better against Great Lakes than CHP could have done. An after-the-event policy cannot be relied on as protection for a defendant; instead, defendants should seek to obtain security for their costs.
There is nothing new in the issue of potential material non-disclosure in relation to after-the-event insurance and the consequent lack of security for defendants; the Great Lakes decision simply underlines the consequences. In the context of applications for security for costs, several cases have considered whether the existence of an after-the-event insurance policy is suffi cient alternative security for a defendant.4 Although no rules have been established, issues such as voidability for non-disclosure have been identifi ed as factors which suggest that after-the-event is not a direct substitute. Persimmon’s lawyers were aware of this issue. In a letter to CHP’s lawyers, they stated as follows:
“We do not regard an after-the-event Insurance Policy as being adequate security for costs. One of our fundamental concerns arises out of the fact that such policies normally contain provisions which entitle the insurer to avoid the policy as a result of any material nondisclosure. Our client would have no assurance that grounds do not exist (or will not arise) entitling insurers to avoid the policy. We trust, therefore, that your client will not seek to offer any [after-the-event insurance] policy as security for costs.”
Nevertheless, in the judge’s words, “following (it would appear) gloomy advice from counsel, Persimmon decided not to pursue an application for security”. It would be wrong to try to second-guess that decision or to assume that an application would have been successful. However, the outcome of the case serves as a strong reminder of the importance of security for costs, underlining that after-the-event insurance is sometimes no substitute for security. Moreover, it is when a defendant is most deserving of having its costs paid - because a claimant has knowingly pursued a fraudulent claim - that after-the-event insurance is likely to evaporate.