Is ATE insurance an answer to an application for security for costs against a funder?

Janine Alexander of Collyer Bristow LLP reports on the outcome of RBS’s application for security for costs against a third party funder in the Wall v RBS litigation [2017] EWHC 2068 (Comm)

Having obtained an order in October 2016 requiring the Claimant Mr Wall to disclose the identity of any litigation funder, RBS applied for security for costs against Mr Wall’s funder, Litfun Ltd (the Funder) in the amount of £17.69m in respect of RBS’s costs of defending Mr Wall’s c.£700m claim.

Prior to the security for costs hearing, Mr Wall had £7m of ATE cover from three reputable insurers and at the time of the hearing was working (with the Funder) to increase his ATE insurance cover (to a potential total of £13m by 1 September 2017). The proposed enhanced ATE/Security package would include a £2m Deed of Indemnity from one insurer and £11m of ATE cover with an “anti avoidance” endorsements (“AAE”).In the event that the final
£3m ATE cover was not obtained by 1 September 2017, the Funder offered a bank guarantee as an alternative “back up” security.

RBS argued that whilst the courts have confirmed in a number of recent decisions that Claimants can rely on appropriate ATE cover as security
provided the risk that the policy will fail to pay out if the claim fails is theoretical or fanciful in the particular circumstances, it should not be the case that litigation funders can rely on ATE insurance cover and that the court should apply a more stringent test, requiring funders to ensure that the defendant’s costs will be paid if the claim fails on the basis that the funder and not the defendant should take the risk of the ATE policy failing to pay out if the claim failed.

RBS argued that ATE cover even with “anti avoidance” endorsements is inherently unreliable as a form of security for a defendant and postulated numerous potential situations in which it suggested the ATE cover in the present case (even where it had anti avoidance endorsement “AAE”) might potentially fail to cover RBS’s costs. For example, the possibility that if fraudulent misrepresentations had been made by Mr Wall that might allow the policies to be avoided due to the public policy prohibition on parties contracting out of liability for their own fraud or otherwise, also by the operation of the Insurance Act 2015 in respect of any qualifying misrepresentations he might make. RBS pointed to the particular drafting of the policies and to numerous alleged remaining routes for insurers to decline cover in certain theoretical circumstances.

RBS also argued that any insolvency of Mr Wall would also present risks as the contract remained with Mr Wall (and not RBS directly), although it did acknowledge that the Third Party Rights Against Insurers Act may allow RBS to obtain the policy proceeds more easily.

RBS therefore argued that Litfun should be required to either pay funds into Court or provide a bank guarantee for the full amount of the security sought to ensure RBS’s costs would be paid if the claim failed.

The Funder pointed to the AAE and other endorsements and confirmations from the ATE insurers regarding how the AAE’s were intended to operate designed to prevent the situations RBS alleged would endanger its position, and rejected RBS’s arguments on both the drafting of the policies and on the basis that circumstances postulated by RBS were theoretical and/or fanciful. The Funder argued that the public policy argument did not apply in circumstances where the insurer had recourse to Mr Wall if it was required to pay where there had been fraud, and emphasised the need for the court to
consider real risks (as per the test applied in the similar application by RBS against funders in the RBS Rights Issue litigation [2017] EWHC 1217 (Ch)) .

The Court refused in the circumstances to make an order for security for costs against the Funder and confirmed that (on the basis of the proposed package totaling £13 million being put in place) the ATE insurance/guarantee arrangements were reasonably satisfactory to do overall justice in the case and therefore adequate.The Court allowed the Funder and the Claimant further time to get the package finalised.The Court agreed that the correct approach was to consider the position in the specific case, and that it should be concerned with real risks.

This was the first case to consider the test for security for costs against a litigation funder where ATE insurance was in place.The decision was overall supportive of the ATE insurance and third party funding markets by recognizing the value of the ATE insurance cover in place and by consequently refusing to order security for costs against the litigation funder. The court took into account not only the particular terms of the insurance policies but also the likely behaviour of the insurers and funders in this market and considered it relevant that if some of the arguments on the documentation as to the wording of the policies, the compass of endorsements and the circumstances of the broking were actually run by insurers or funders in due course those arguments may, or would, damage the insurers, the funders and the market.

Mr Justice Knowles CBE noting that the points argued in this case regarding security for costs and ATE insurance had arisen in many others made the following comments directed to solicitors, insurers and funders involved in litigation where security for costs is at issue:

“ could be healthy were there to be a means by which some of the points that have arisen for argument in this case, as in so many others, could be dealt with other than adversarially in one case followed by another and another. The present case has seen a battle in correspondence, a battle across a number of witness statements and, ultimately a battle through argument, written and oral, in court. In this case as in others, the points that have been raised and answered have developed as that battle continued.”

This pattern may occur again and again, expensively from case to case, unless another way is found. Another way might desirably promote greater certainty in this area. Perhaps there is room for more dialogue between solicitors as a body, funders as a body and insurers as a body, away from the heat of a particular case. A dialogue over terms, over arrangements, including on insolvency, and even, because these can be valuable, a dialogue over statements of intended approach on the part of funders or insurers. Of course care would require to be taken not to inhibit competition, but greater certainty –and transparency and understanding –might serve the wider public interest”

In funded and insured cases where security for costs comes up, the issues are often complex involving a number of parties interested in the litigation. The Court in this case confirmed that it will be concerned with “real risks” and acknowledged the commercial “market” context in which these issues arise. Each case raises individual issues as to the facts giving rise to the claim, and the nature are geographical location of the various entities involved also have a bearing. The Court has in this judgment issued clear guidance however as to how those involved in this market may assist the administration of justice by finding areas of general application where more consistency and certainty can potentially be achieved.

Janine Alexander
Partner -Banking and Financial Disputes
Collyer Bristow LLP
(Solicitors for Litfun Limited)
CLAN Technical Committee Chairperson