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Industry 30 January 2018

ATE insurance as security for costs – “Quick Take”

Ironbark Litigation Funding’s “Quick Takes” are for time poor people – we do the work distilling the subject matter so you don’t have to.

The case law

People often ask me whether an After-The-Event policy of insurance (ATE) is an acceptable form of security for costs.  The short answer is very likely yes, if a few conditions are met.

In 2016 the Victorian Supreme Court of Appeal delivered the following 2 decisions which considered the use of an ATE policy as a form of security for costs:

  1. Australian Property Custodian Holdings Ltd (in liquidation) (receivers and managers appointed) v. Pitcher Partners & Ors [2016] VSC 399; and
  2. DIF III Global Co-Investment Fund LP & Anor v. BBLP & Ors [2016] VSC 401.

(Victorian Cases)

The Victorian Cases were backed by a litigation funder who had arranged for the ATE policy from Am Trust Europe Limited to be backed by a deed of indemnity (Deed).  The court found the Deed was an acceptable form of security in circumstances, relevantly, where:

  • the claimant was in Victoria;
  • the terms of the Deed of indemnity were irrevocable and unconditional;
  • the Deed was directly enforceable by the defendant against Am Trust which was based in the UK
  • the Deed was governed by the laws of Victoria and enforceable in the courts of Victoria;
  • Am Trust had significant assets in the United Kingdom;
  • as a large, regulated insurer and being involved in the business of underwriting legal expense risk, it was unlikely that Am Trust would default on the Deed;
  • there were clear and straightforward arrangements for the enforcement of Victorian judgments in the UK; and
  • extra security in the form of a $20k bank guarantee was provided to cover the cost of any enforcement in the United Kingdom.

In reaching this decision, the Court noted a defendant was not necessarily entitled to the most advantageous security available. Rather, the security must offer the defendant “sufficient protection”, whilst minimising the disadvantage suffered by the plaintiff.

In the decision of Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited [2017] FCA 699 the Supreme Court of Queensland rejected a proposed ATE policy provided by Am Trust as a form of security for costs because of the conditional nature of the policy.  Like the Victorian Cases this matter was backed by a litigation funder, but unlike the Victorian cases, the ATE policy was:

  • not in the form of deed of indemnity that was irrevocable and unconditional; and
  • not directly enforceable by the defendant against Am Trust.

Following a thorough analysis of the cases, the court rejected the ATE policy in the form submitted as security for costs for, amongst other things:

  • The defendants were not parties to the policy, and no obligations were owed to them by the insurer under the policy;
  • the policy excluded liability for any negligent acts or omissions by Petersen’s legal representatives and the insurer was able to reduce liability or cancel the insurance contract due to non-disclosure.  Both of these exclusions were out of the control of the defendants.

While Yates J decided that the Am Trust policy was deficient as a form of security for costs, he expressely left open the possibility that insurance policies in general could constitute an adequate form of security. Indeed, his Honour stated that “depending on the circumstances of the given case, an appropriately worded ATE policy might be capable of providing sufficient security for an opponent’s costs”.

Summary

An ATE policy is likely an inadequate form of security unless it is unconditional and directly enforceable against an insurer which has sufficient assets to meet any liability and that insurer is in a jurisdiction with straight forward rights of enforcement of Australian judgments.  The Victorian Cases show that backing an ATE policy with a deed of indemnity with those characteristics is an acceptable form of security for costs.

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