In the case of Newwatch Ltd v Bennett, the court ruled that After The Event insurance (ATE) policies could not be used as adequate security for costs by the claimant companies who were based in Denmark and Jersey.
Security for costs is a mechanism whereby claimants are required to pay some money into court as a safeguard to protect defendants in the event of the claimant losing the case and not being able to pay the defendant’s costs.
Some argue that ATE policies are sufficient security for costs. ATE policies cover certain legal costs and are taken out after a dispute has arisen as protection in the event of the case being lost. While this provides some comfort that the defendant would be able to recover costs, it was deemed not enough in this case because:
- The defendants’ costs were likely to be in excess of £1.8 million.
- The defendant was not named on the policies.
- The claimants would become insolvent in the event of a substantial costs order being made against them. Any payment from the insurers would go to the appointed insolvency practitioner and the defendants would stand as unsecured creditors in a foreign insolvency.
- There was a risk that insurers would rely on exclusion clauses to avoid payment, due to issues of illegality and fraud regarding documentation upon which the claimants relied in the case.
Whilst courts have reached differing views on whether ATE policies provide sufficient protection, most have ruled that it will not, particularly where there is a foreign element and issues of fraud.