In Asertis Ltd v. Bloch,[1] in the context of a security for costs application, the English High Court determined that it could give no value to an ‘after the event’ (ATE) insurance policy even though it was supplemented with an ‘anti-avoidance endorsement’ (AAE). The policy at issue does not appear to have met market norms – in particular, it did not provide benefits directly to the defendant.
Background
Asertis is a litigation funder and claims acquisition company. It was assigned certain claims against Lewis Bloch regarding breach of his duties as a director of Genesis Capital (UK), which had been wound up in 2019.
Asertis issued proceedings and, in advance of the first costs and case management conference, Bloch filed a cost budget for approximately £525,000. He also issued an application for security for costs on the basis that Asertis would be unable to pay his costs if ordered to do so. He relied on the company’s publicly available accounts for December 2022 (the most up to date available), which he said showed Asertis was trading at a loss.
Asertis did not provide up-to-date financial information to show its current financial position. It instead sought to rely on the fact that it had a 200-million-pound rolling credit facility with US Bank Trustees Limited to demonstrate that it would be able to pay Bloch’s costs if ordered to do so. Somewhat strangely, it chose not to disclose the facility agreement. It did, however, disclose an ATE insurance policy it had taken out in respect of the claim, supplemented by an AAE, which it submitted would provide sufficient security in the event that security was required.
Security for costs
The English courts have discretion to make an order that a claimant provide security for the defendant’s costs if certain conditions apply, including:
- The claimant is resident out of the jurisdiction but not in a state bound by the 2005 Hague Convention.
- The claimant is a company or other body, and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so.
- The claimant has changed its address with a view to evading the consequences of the litigation.
- The claimant has taken steps in relation to its assets that would make it difficult to enforce an order for costs against it.
If one of these conditions apply, and the court considers that it would be just to make such an order having regard to all the circumstances, the court may (not must) make an order.
The High Court’s decision
The High Court determined that, on the very limited financial information available, there was reason to believe that Asertis would not be able to meet an adverse costs order. Asertis only began trading in 2020, its 2022 accounts showed that it was trading at a loss, and Asertis provided no more up-to-date financial information to counter this. Its assets were overwhelmingly limited to the value of the claims it was pursuing (the value of which was inevitably uncertain and possibly not easily realisable), and even a reduced adverse costs order of £300,000 would represent nearly a third of the cash available to it. The existence of the credit facility did not assist Asertis, as the court did not have sight of it, and therefore could not determine whether credit could be advanced to meet adverse costs orders.
Having considered the circumstances of the case and the application for security, the court concluded it would be just to make an order for security. The court then turned to consider whether the ATE policy afforded sufficient (or indeed any) security to Bloch.
ATE insurance policies are often accepted as offering sufficient security for costs, as demonstrated, for example, by the judgment of the High Court in Saxon Woods Investment Limited v. Costa [2024] EWHC 387, a case involving a risk of avoidance on the grounds of fraud but where the defendant was adequately protected by an AAE.
The judge noted that while case law has established that there is no reason in principle why an ATE insurance policy could not provide sufficient protection for the defendant’s costs, it is usually not as good security as a payment into court, bank bond or guarantee. Accordingly, the courts will closely examine the policy as a whole to determine whether it provides sufficient protection to the defendant in practice. The judge identified various features that can undermine the sufficiency of protection – including the risk that a policy could be avoided for fraud. The court noted that AAE may ameliorate this risk, but that will depend on its terms and may be inadequate where:
- The indemnity limit of the AAE is below the costs required to be secured.
- There are limitations on the scope of the AAE.
- There is an objectively reasonable apprehension of avoidance.
- The AAE does not offer direct benefits to the defendant.
All the defendant is required to show on an application is that ‘there is a real, as opposed to fanciful, risk that the ATE policy will not respond in full’, or ‘an unjustifiable element of doubt about the extent of the cover’.
Here, the court noted that the ATE policy was limited to a sum significantly less than Bloch’s budgeted costs. Further, while the AAE removed the right of the insurer to avoid the policy for failure to make a fair presentation of risk prior to the inception of the policy, that only applied to the first £160,000. The court also identified several other circumstances that would allow the insurer to cancel the policy, including:
- If Asertis failed to disclose a material circumstance during the currency of the policy.
- If Asertis’ solicitor deemed that the company no longer had greater than 50% chance of success.
- If the insurer was to ‘feel’ that Asertis breached any of the requirements of the policy.
Finally, and unusually for an AAE, the policy conferred no benefit on Bloch directly, so Asertis would need to apply to the insurer to be paid, and would then – when put in funds – pay Bloch. This raised the possibility that Bloch would not be paid if Asertis was insolvent.
The court concluded that the ATE could not be regarded as providing sufficient protection, and therefore determined that it would direct a payment into court. Given the numerous failings of the ATE policy and AAE, the court did not ascribe any value to the policy so as to reduce the required payment into court.
Takeaway
ATE policies supported by an AAE typically provide adequate security for costs. However, claimants can often be under a misapprehension that any ATE policy will be a total answer to a security application. As this judgment demonstrates, that is not the case. When considering insurance options, claimants must be careful to secure a policy that will demonstrably provide the defendant with sufficient protection.
[1] [2024] EWHC 2392 (Ch).
Contributors
Alex Radcliffe