The Court of Appeal has overturned a High Court verdict relating to after the event insurance being a suitable substitute for security for costs.
In selected court cases, a security for costs is ordered against the plaintiff. This security for costs is imposed to ensure that, if the plaintiff loses their case, the defendant will be able to recover their legal costs of defending the claim.
A security of costs order can sometimes prevent a plaintiff from pursuing a claim for compensation because of the high level of security required. Legal costs in complex cases can run into substantial amounts, and a plaintiff may be unable to provide sufficient security – or unwilling to secure costs with their home if there is a chance that their claim may be unsuccessful.
In the UK, after the event insurance has been available to plaintiffs as an alternative to security for costs for some time. After the event insurance (sometimes abbreviated to “ATE insurance”) is a policy that can be taken out when plaintiffs make a claim for injury compensation in order to protect them from the defendant´s legal costs if their claim is unsuccessful.
No premium is charged for the after the event insurance policy until the result of the case is known; and, only if the plaintiff is successful is a premium paid at all – usually being deducted from an award of compensation. This safeguard against substantial legal bills can also be used to prevent financially powerful defendants from using security for cost applications as a strategy for forcing plaintiffs to abandon their claims for compensation due to a lack of resources.
In Ireland, during a High Court case last year, the defendant challenged the legality of the plaintiff to use after the event insurance as a substitute for security for costs as, he claimed, it was contrary to the common law of champerty – a law that makes it illegal for a third party (the third party being the insurance company in this case) to provide financial support to either party in a court case where the third party has no direct interest in the outcome other than profit.
The judge hearing the case – Judge Hogan – conducted a review into how the insurance product works, and found that the provision of insurance to plaintiffs was not “trafficking in litigation” – where the insurance company´s sole motive in supporting the plaintiff was to derive profit, which is what the law of champerty was designed to prevent.
Judge Hogan ruled that after the event insurance serves an important purpose by allowing access to justice to persons who might otherwise be denied that justice and (in this case) it was a suitable substitute for security for costs. However, the judge´s ruling was appealed by the defendant and was recently heard in the Court of Appeal.
At the Court of Appeal, Judge Kelly overturned Judge Hogan´s verdict on the grounds that (in this case), the insurance policy in question was “highly conditional” and payment of the defendant´s legal costs could have been avoided by the insurance company for a substantial number of reasons outside the defendant’s control and knowledge.
However, Judge Kelly said that the existence of an insurance policy is a factor for a court to give consideration to in exercising its discretion whether to order security for costs. The judge also provided some conditions for when after the event insurance should be considered a suitable substitute for security for costs.
Judge Kelly said that an insurance policy could be accepted as a substitute for security for costs provided that it did not contain terms that would entitle the insurance company to avoid paying the defendant´s costs in the event of an unsuccessful claim. Judge Kelly added that an insurance policy could also be used as part security of costs to reduce a financial burden on a plaintiff in certain circumstances.
The judge´s opinion is worth noting as the increased availability of after the event insurance will provide access to justice for many more plaintiffs – especially those involved in complex legal disputes – provided that the court agrees with any terms included in the after the event insurance policy.