Security for costs: ATE insurance policy did not prevent order being made

In Asertis Ltd v Bloch [2024] EWHC 239, the High Court ordered the claimant litigation funder to pay funds into court as security for the defendant's costs, having found there was reason to believe the claimant would be unable to pay the defendant's costs if ordered to do so. This was despite the claimant having an after the event (ATE) insurance policy for ‘adverse costs’, with an ‘anti-avoidance endorsement’ for some portion of that cover. The Court considered that the policy terms did not provide sufficient protection to the defendant, even on the basis that the anti-avoidance endorsement applied.

The decision demonstrates that while an ATE policy may assist a claimant in resisting an application for security for costs, it may not be a complete answer, particularly where there is a real risk that the insurance policy will not respond in full. Claimants seeking to resist a security for costs application would be well advised to provide detailed evidence of their other assets and sources of funding that could be used to cover an adverse costs order.

Background

Asertis, a litigation funder and claims acquisition company, brought a claim against Mr Bloch, in relation to his directorship of a company that had been placed in liquidation.

The defendant made an application to court for Asertis to provide security for the costs that he would incur in defending the claim which the claimant could be ordered to pay in the event his defence succeeded, i.e. an adverse costs order.

The grounds for the application were that (i) there was reason to believe that Asertis would be unable to pay the defendant's costs if ordered to do so, and (ii) having regard to all the circumstances of the case, it was just to make such an order. The defendant argued that Asertis’ accounts showed it was trading at a loss. In resisting the application, Asertis relied on a revolving credit facility and an ATE insurance policy for £250,000 with an ‘anti-avoidance endorsement’ for the first £160,000 of cover. The ‘anti-avoidance endorsement’ removed certain conditions that would normally need to be met for a valid claim under the insurance policy, up to that value of cover.

Decision

General financial position and revolving credit facility

The Court, having reviewed the “very limited financial information” made available by Asertis, considered there was reason to believe that Asertis would be unable to meet an adverse costs order. Its reasons included that:

• Asertis was a relatively new company, which the Court found had been trading at a loss and had assets which were “overwhelmingly the value of the claims that it is pursuing”. Such assets were “inevitably uncertain and might not necessarily be easily realisable.”
• There was nothing to suggest Asertis would be trading profitably if required to pay an adverse costs order following a trial set for May 2025. In fact, the limited financial statements provided suggested “a worsening trading position and an eroding balance sheet.”
• The revolving credit facility did not alter the position. The Court had not seen its terms, so could not know if it would permit credit to be advanced to meet an adverse costs order or whether it would allow any drawings if Asertis’ financial position had significantly worsened at the point costs fell due.

The ATE policy

The principles

• The Court noted the following established principles: An ATE policy is “rarely” as good as a payment into Court or a bank bond or guarantee. This is because insurance policies can be voided or cancelled for many reasons which the defendant cannot control and the promise to pay is to the claimant, not the defendant.
• However, an ATE policy can provide at least some element of security for the defendant's costs, though whether it is sufficient protection depends on its terms.
• The ATE policy must provide security in reality (i.e. there must not be terms which readily and legitimately allow the insurers to avoid paying out for the defendant's costs).

For the defendant’s application to succeed, the Court had to be satisfied that there was a real, as opposed to fanciful, risk that the ATE policy would not respond in full. The Court had to assess this risk “with pragmatism”.

Application to the facts

On the facts, the Court considered that the ATE Policy could not be regarded as providing sufficient protection to the defendant, even on the basis that the anti-avoidance endorsement applied. There was a real risk that the policy would not meet an adverse costs order in full for a number of reasons, including:

• The ATE policy offered no protection for costs incurred before the policy was taken out and there was a risk that the £250,000 cover limit would be inadequate based on the defendant’s costs budgets.
• The defendant had no means of enforcing the policy directly for his benefit (which was especially relevant if Asertis went into an insolvency process).
• Payment under the policy was contingent on numerous conditions, compliance with which the defendant could not police.
• There were many termination provisions. It was also unclear if the policy covered any of the defendant’s costs if terminated.

The Court ordered Asertis to pay funds into court as security for the defendant’s costs. In light of the above points, the judge did not consider it appropriate to ascribe any value to the policy to reduce the amount of that payment.

Key takeaways

The decision illustrates that while an anti-avoidance endorsement can potentially help to establish an ATE Policy as sufficient security for adverse costs, it depends on its terms. If, despite the clause, there remain circumstances allowing the insurer to escape liability at the level required, and these are outside the defendant's control, the court is likely to require another form of security, such as a payment into court.

The decision also highlights that if a claimant provides limited financial information in response to an application for security for costs, there is greater risk that an application against it will succeed. Where possible, claimants resisting security for costs applications should provide full and up to date information on their financial position and sources of funding. For litigation funder claimants this may be difficult as their core assets are often the value of the claims they pursuing and so they are uncertain and less realisable.

With thanks to Sam Colman for his assistance in preparing this post.