A recent judgment in the High Court has considered the effectiveness of an after-the event insurance policy (ATE Policy) where the insured party is insolvent. An ATE Policy typically indemnifies the insured in respect of its opponent’s legal costs associated with court proceedings should those proceedings be unsuccessful. An ATE Policy is usually linked with a “no win, no fee” arrangement with the insured’s legal team.  

The insured in this case was a company in liquidation and the liquidator was maintaining a claim against the insured’s former solicitors for professional negligence regarding a commercial lease. The insured claimed that negligent advice from its former solicitors resulted in the insured settling associated legal proceedings for in excess of €450,000 (including a contribution to costs).

As the insured was in liquidation, the former solicitors applied to the Court for an order requiring the insured to provide the former solicitors with some form of security regarding their legal costs should the company lose the case. The Court described the company as “hopelessly insolvent” and noted that the former solicitors would therefore at first glance be entitled to the order sought.

However, the insured argued that the ATE Policy, which was intended to cover such costs, was sufficient to mitigate the costs risk faced by the former solicitors.

A clause in ATE policy, described as the ‘prospects clause’, allowed the insurer to end cover at any time if it was of the opinion that it was more likely than not that the insured would lose its claim. As a result, the Court concluded that the policy could not be viewed as providing sufficient security for the former solicitors.

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 take final counsel on the prospects of the litigation.  

The Court made it clear that if the insurer provided a binding assurance that it would not exercise its rights to repudiate under the prospects clause that it would make no order as to costs. On the other hand, if the insurer was not prepared to provide such a binding assurance, then the Court would make the required order for security for costs against the insured.

The Court made this decision in mid-February and we understand that the proceedings remain adjourned at the direction of the Court. Nonetheless, the terms of the decision may have implications for the effectiveness of ATE Policies for receivers and liquidators of insolvent companies.