In the recent case of Geophysical Service Centre Company Ltd v Dowell Schlumberger (Middle East) Inc. ([2013] EWHC147 (TCC)) the defendant applied for security for costs. The defendant said they had sufficient evidence that the claimant would not be able to pay an adverse costs order. For a security for costs application to be successful in England, the conditions set out in Civil Procedure Rule 25.13(2) must be met. Then it is at the court’s discretion as to whether to grant an order for security for costs.

The claimant insisted that it would be able to pay an adverse costs order as it had an After the Event insurance (“ATE”) policy. In response, the defendant argued that an ATE policy could not be considered effective security due to the inherent risk that an insurer may avoid or cancel the policy. They referred to the recent case of Michael Phillips Architects Ltd v Rilkin ([2010] EWHC 834) where it was stated that “the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs”.

In the Geophysical case the question was whether the terms of the policy in question were adequate to satisfy the court that the claimant would be able to pay an adverse costs order. The policy stated that withdrawal from the contract was permitted if there was a fraudulent non-disclosure or misrepresentation. The defendant argued that this was the case here and so it would be possible for the insurer to withdraw. The judge, however, dismissed the defendant’s argument and highlighted the key distinction between a rejection of evidence due to factual inadequacies and a finding that evidence is fraudulent. The judge also stated that breach of the ATE policy would not necessarily lead to avoidance given the lack of commercial interest in breaching the conditions.

There were several other determining factors in the judge’s decision, amongst others, the fact that there was a solid relationship between the claimant’s solicitors and the insurers. The judge therefore ordered that there was no evidence to suggest that the claimant could not meet an adverse costs order and therefore the application for security for costs was refused.

The position in Scotland

The same point was raised in the Scottish case of Monarch Energy Ltd against Powergen Retail Ltd ([2006] CSOH 102) where the defender enrolled a motion to have the pursuer find caution in terms of section 726(2) of the Companies Act 1985. The pursuer responded by offering an ATE policy as evidence of its ability to pay.

In Monarch, the Court highlighted that there were a number of restrictions on the insurer’s liability to pay under the policy which included unreasonable conduct on the part of the pursuer or a failure to comply with a court order. The Court accepted the point that these restrictions might seriously limit or even avoid the insurer’s liability if not complied with. There was also concern that ATE policies can be obtained through misrepresentation or non-disclosure of all material facts. The court thought that non-disclosure was “a particularly significant risk” in Monarch as the case concerned allegations of fraud. Ultimately, it was decided that such risks placed a “substantial limitation on the extent to which an ATE policy can be used to provide security for expenses”. The defender’s motion was therefore successful and the pursuer was ordered to find alternative security in the sum of £75,000 for the defender’s expenses.

These two cases point to a possible difference in approach towards ATE policies in security for costs applications in Scotland and England. It remains to be seen whether the two jurisdictions will come together or drift apart. In particular, it will be interesting to see whether the English position shifts in response to changes in the ATE insurance market brought about by the recent Jackson reforms to civil litigation costs and funding in England and Wales.