In the recent case of Greenclean Waste Management Limited v Maurice Leahy & Co. Solicitors, the High Court had its first opportunity to consider whether “after the event” (“ATE”) insurance policies could effectively be a substitute for security for costs. Judge Hogan concluded that the policy before the Court could only provide adequate security to a defendant in circumstances where the plaintiff’s insurer gave an assurance that it would not rely on a “prospect of success” clause to deny cover.

As companies struggle to remain solvent during the economic downturn, security for costs is increasingly sought before the Irish courts. Security for costs can be an effective tool for a defendant who is being sued by an insolvent plaintiff where the defendant believes that the case against it is without merit and there is a risk the plaintiff will not be in a position to pay the defendant’s costs in the event that the litigation is unsuccessful. In such cases, the Court orders the plaintiff to lodge money in Court, or take other appropriate steps, to demonstrate its ability to pay costs. If ordered by the Court, the requirement to give such security serves as a condition of being permitted to proceed with the litigation and the inability to provide the required security can bring an abrupt end to the litigation. However, the courts are reluctant to order security for costs for fear it will hinder a plaintiff’s right to access to justice.

This case concerned an application for security for costs by a firm of solicitors which was being sued for professional negligence by an insolvent plaintiff company (Greenclean) which had recently entered voluntary liquidation. Greenclean argued that it would be able to discharge the defendant’s costs by virtue of its ATE insurance policy and consequently security for costs was unnecessary. ATE, a relatively new product in the Irish market, is taken out in the wake of a specific event and is often closely linked to “no win no fee” arrangements in litigation. The premium in respect of such policies is generally high, but is only payable following successful costs recovery against another party.

In the High Court, Judge Hogan was in no doubt that the existence of a policy of insurance would generally be highly relevant to the question of whether Greenclean would be able to pay the defendant’s legal costs in the event that its case was not successful. The Court accepted that the plaintiff was “hopelessly insolvent” and the defendants were entitled to security for costs unless the plaintiff’s ATE policy sufficiently mitigated the risk that the plaintiff would be unable to discharge the defendant’s costs. However, he noted that ATE policies were quite different to other insurance policies and the policy before the Court, while clear and unambiguously drafted, contained wide-ranging avoidance provisions and its operation was contingent upon matters into which the Court could not legitimately inquire.

The Court considered the crucial question to be the extent to which an insurer can legitimately repudiate liability so as to deprive the insured, and by extension, the defendant, of any real security in respect of costs. ATE insurance could not be considered in quite the same way as a standard contract of insurance. The Court held that if cover can be denied in such a range of circumstances that it effectively leaves the insured with no security at all, this will clearly provide insufficient comfort to the Court that the defendant’s costs will be met.

When the Court considered the cancellation provisions contained in the policy, it was particularly influenced by the “prospects of success” clause which provided that the insurer could deny cover, at any stage of the litigation, if it formed the opinion following discussion with the insured’s legal advisors that the insured was more likely to lose the case than not.

Judge Hogan was of the view that this conferred considerable scope on the insurer to deny cover and noted that this could occur at a particularly inopportune time for a defendant (for example, following an expensive discovery or in the course of the trial itself). As such, he felt that he had no means of determining the level of comfort available from the insurance policy. The Court held that unless a binding assurance was provided by Greenclean’s insurers that it did not propose to exercise the right to deny cover based on the prospects clause (which he stressed was entirely a matter for the insurer), he would make an order for security for costs. The Judge adjourned the proceedings for approximately three months to allow Greenclean and its insurers to make a final decision regarding the prospects of the litigation.

It is interesting to note the comments by the Court that while in this case he was not concerned with the underlying merits of ATE or questions of its legality, this type of policy may possibly involve features of champerty (ie, sharing in the profits of litigation in which the party has no legitimate interest) although he acknowledged it may well secure access to justice for those who would not otherwise have ready access.

Judge Hogan’s ruling demonstrates that the Irish courts will accept ATE insurance as an effective substitute for security for costs and will not award security for costs against a plaintiff who has taken out ATE cover, provided such policies do not contain terms pursuant to which the insurer can avoid liability to pay the defendant’s costs.