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After-the-event insurance and litigation funding
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution
Under Irish law, the common law principles of maintenance and champerty(1) still apply, to the extent that there is limited scope for third-party litigation funding. However, after-the-event insurance (ATE) – which is designed to offer protection when or after a party becomes aware of the need to litigate to protect their interest – has recently been approved (in theory at least) as not contravening either of those principles.
In Green Clean Waste Management Ltd v Leahy(2) the Court of Appeal accepted that an ATE insurance policy could, in principle, provide security for costs, albeit based on the facts in this case the specific policy involved did not satisfy the requirements to constitute sufficient security (for further details please see "After-the-event insurance given amber light"). The plaintiff issued proceedings against its former solicitors for alleged professional negligence. Subsequently, the plaintiff entered into liquidation and the defendant sought security for costs to oblige the plaintiff to provide security for the defendant's costs in the event that the plaintiff failed at trial. In resisting the security for costs application, the plaintiff relied on its ATE insurance policy to say that it would be in a position to discharge the defendant's costs.
In the High Court, Judge Hogan upheld the ATE policy, stating that it was not contrary to the torts of maintenance and champerty. Based on the policy and an undertaking from the insurers not to repudiate cover on the basis of a 'prospects of success' clause, Hogan declined to order the plaintiff to provide security for cost pursuant to Section 390 of the Companies Act 1963. His ruling was appealed.
Judge Kelly gave the decision on behalf of the Court of Appeal. He acknowledged that but for the ATE policy Judge Hogan would have made the order sought. He proceeded to undertake a detailed review of the provisions of the policy relied on by the plaintiff. Kelly observed that ATE insurance was introduced as a change to legal practice in England and Wales through the Access to Justice Act in 1999 and commented that:
"Despite the absence of legislative change of the type that was introduced in England in 1999, ATE Insurance has nonetheless crept into this jurisdiction. It is still comparatively novel."(3)
In relation to the policy at issue, Kelly noted that it had obviously been written for the English market and had undergone some minor modifications for Ireland. However, he acknowledged that such policies had figured in security for costs applications in England and Wales. He stated that he found Judge Akenhead's decision in Michael Philips Architects Limited v Riklin(4) (which summarised other authorities) very helpful and cited at length in the following terms:
"(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."
Kelly stated that such views also apply in Ireland.
In considering Hogan's High Court ruling, he noted that Hogan had concerned himself only with the prospects clause. However, from Kelly's perspective, this was "just one" of a number of matters which needed to be taken into account. For Kelly, "fundamental proof" was the existence of a 'no-win-no-fee' arrangement, which was a condition precedent to the policy being in effect at all. Further, before the ATE policy could become effective, the arrangement would have to comply with Section 68 of the Solicitors (Amendment) Act 1994. Even if the policy were in force, it was clear that it was "highly conditional and could be avoided for a substantial number of reasons over which the defendant had no control or, in some instances, no knowledge".(5)
In overturning Hogan, Kelly concluded:
"Even if such proof [of the no win no fee agreement and its compliance with section 68] had been placed before the court, the policy here is so conditional (even with the 'prospects clause' neutralised) that it does not provide sufficient security to the defendant to warrant refusal of an order for security for costs. The policy is voidable for many reasons which are outside the control, responsibility or, by times, knowledge of the defendant. None of these were taken into account by the trial judge whose sole concern was the 'prospects clause'.
This ATE policy does not, in my view, raise sufficient inference of an ability to discharge the defendants costs to justify the refusal of the section 390 order. It falls far short of providing as good a security as a payment into court or a bank or insurance bond".(6)
The decision is important because it confirms that an ATE insurance policy can, in principle, provide security for costs, although such a policy can only provide as good a security as a payment into court bank bond guarantee in rare cases. For such a policy to be relied on for security for costs, it must provide some security and not contain terms which entitle the insurer to avoid liability in the future. However, an appropriately worded policy may suffice and providers will need to give some consideration to satisfying the limited guidance available to ensure that such policies constitute sufficient security for similar applications in the future.
(1) Lord Steyn, Giles v Thompson  3 All ER 321 at 328:
"In modern idiom maintenance is the support of litigation by a stranger without just cause. Champerty is an aggravated form of maintenance. The distinguishing feature of champerty is the support of litigation by a stranger in return for a share of the proceeds."
(2)  IECA 97.
(3) Ibid, Paragraph 47.
(4) Michael Philips Architects Limited v Riklin  EWHC 834 (TCC).
(5)  IECA 97, Paragraph 54.
(6) Ibid, Paragraphs 56 and 57.
This article first appeared in the International Law Office Litigation newsletter, 4 August 2015.