Mr and Mrs Riklin retained Michael Phillips Architects (MPA) to provide architectural and other services in respect of a property which was being renovated and refurbished.

MPA issued proceedings seeking payment of £147,387.04. The defendants denied that there was any agreement that such sum would be payable, and they put forward a counterclaim for damages exceeding £162,000.

MPA entered into a conditional fee agreement with its solicitors. The defendants sought security for their costs under CPR Part 25.13 on the basis that there was ground for believing that MPA would be unable to meet a costs order, and MPA responded by saying that it had applied for after the event insurance to fund the litigation costs.

The question for the court was whether the existence of ATE insurance justified a refusal by the court to refuse to order security for costs in favour of the defendants, on the basis that the ATE insurance provided the necessary security that if the claim was dismissed the ATE insurers would pay the defendants’ costs. Akenhead J reviewed the authorities (Nasser v United Bank of Kuwait [2001] EWCA 556, Al-Koronky and another v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123, Belco Trading Co v Kondo [2008] EWCA Civ 205) and put forward the following propositions:

"(a) There is no reason in principle why an ATE insurance policy which covers the claimant's liability to pay the defendant's costs, subject to its terms, could not provide some or some element of security for the defendant's costs. It can provide sufficient protection.

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant's costs.

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant."

On the facts, the ATE policy was held not to be sufficient security for the defendants: the policy was ambiguous as to whether it would cover costs awarded in respect of a successful counterclaim; the sum insured could be eroded by first party costs; the policy applied only where there was a reasonable prospect of success, so the insurers could withdraw cover once it had seen the witness statements from the defendants; the policy would not respond if any of its conditions were broken; the insurers were off risk in the event of a fraudulent claim; and there were various rights to cancel. The ATE policy thus provided little security to the defendants, and security for costs would be ordered.

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