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Can after-the-event insurance substitute security for costs?
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 insurance policies could effectively substitute security for costs. The court concluded that the policy could provide adequate security to a defendant only 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 courts. Security for costs can be an effective tool for a defendant that is being sued by an insolvent plaintiff, where the defendant believes that the case against it is without merit and there is a risk that 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 provide security serves as a condition of being permitted to proceed with the litigation, while 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 that it will hinder the plaintiff's right of access to justice.
The present case concerned an application for security for costs by a firm of solicitors which was being sued for professional negligence by an insolvent 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 after-the-event insurance policy and consequently security for costs was unnecessary. After-the-event insurance, a relatively new product on 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. In respect of such policies, the premium is generally high, but is payable only following successful costs recovery against another party.
The High Court was in no doubt that the existence of an insurance policy 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 unsuccessful. The court accepted that the plaintiff was "hopelessly insolvent", and that the defendants were entitled to security for costs unless the plaintiff's after-the-event policy sufficiently mitigated the risk that the plaintiff would be unable to discharge the defendant's costs. However, the court noted that after-the-event policies were quite different from other insurance policies, and that the policy before the court, while clear and unambiguously drafted, contained wide-ranging avoidance provisions and was contingent on 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. After-the-event insurance cannot be considered in the same way as a standard contract of insurance. The court held that if cover can be denied in such a range of circumstances it effectively leaves the insured with no security at all; this clearly provides insufficient comfort 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 advisers that the insured was likely to lose the case.
The court considered 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 (eg, following an expensive discovery or in the course of the trial itself). As such, the court felt that it had no means of determining the level of comfort available from the insurance policy. It 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 it stressed was a matter entirely for the insurer), it would make an order for security for costs. The court adjourned the proceedings for approximately three months to allow Greenclean and its insurers to make a final decision regarding the prospects of the litigation.
The court commented that while it was not concerned with the underlying merits of after-the-event insurance 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 it acknowledged it may well secure access to justice for those who would not otherwise have ready access.
The ruling demonstrates that the courts will accept after-the-event insurance as an effective substitute for security for costs and will not award security for costs against a plaintiff that has taken out after-the-event cover, provided that such policies do not contain terms pursuant to which the insurer can avoid liability to pay the defendant's costs.