The High Court has recently confirmed that an After the Event (ATE) insurance policy with anti-avoidance wording could be used as security for costs. It is often considered whether ATE insurance can provide sufficient security for costs in litigation. The Court has full discretion and will usually take ATE insurance policies into consideration when assessing the need to grant security for costs.

In the case of Saxton Woods Investments Limited v Francesco Costa and Ors [2023} EWHC 850(Ch), the High Court allowed the Petitioner’s application to modify an order that ordered security for the costs of the First Respondent in an unfair prejudice petition.

This modification allowed the Petitioner’s after the event insurance policy and anti-avoidance endorsement to serve as an acceptable alternative to payment into Court. The judgment specifically addressed the effectiveness of anti-avoidance endorsements in the context of providing sufficient protection.

An Overview of the Case

Saxon Woods Investments Limited (“Saxon Woods”), a minority shareholder in Spring Media Investments Limited, alleged that the director and Chairman of the Company, Mr Costa, had a controlling interest and violated provisions in a shareholders’ agreement regarding the “exit process” of the company.

Mr Costa denied the allegations. At a December hearing, Mr Costa obtained an order for Saxon Woods to make a payment into Court as security for costs. Saxon Woods made the argument that it held assets in the form of shares with the company and had an after-the-event insurance (ATE) policy (without an anti-avoidance endorsement at this point). The Court held that this was not adequate security for costs.

In early 2023, Saxon Woods applied to vary the order, stating that they were unable to obtain an anti-avoidance endorsement before the December hearing due to allegations of fraud raised by Mr Costa.

The key issues before Deputy ICC Judge Agnello KC were whether there was a change in circumstances justifying varying the original security order and whether Saxon Woods’ ATE and an anti-avoidance endorsement adequately protected Mr Costa’s costs.

Anti Avoidance Endorsements, ATE Insurance and Security for Costs

The Court examined whether Saxon Woods’s ATE and anti-avoidance endorsement adequately protected Mr Costa against the risk of the insurer avoiding the policy due to fraudulent or reckless non-disclosure or misrepresentation of the insured risk.

To determine this risk, the Court considered the policy’s meaning, the legitimate grounds for avoidance, and the likelihood of circumstances arising that would enable avoidance. The wording of the ATE and anti-avoidance endorsement needed to be clear and express an intention to exclude fraud remedies.

Saxon Woods’s ATE policy included a provision that honoured the policy if it failed to provide a “fair presentation” of the risk without deliberate or reckless intent. Whilst neither the ATE nor the anti-avoidance endorsement explicitly mentioned fraud or reckless misrepresentation, the wording of the endorsement indicated that the ATE policy was non-voidable and non-cancellable. This meant that any claim would be upheld regardless of exclusions or provisions that could render the ATE unenforceable. This clear and unambiguous wording highlighted the insurer’s understanding of the agreement.

Considering the factual context, the Court assessed the likelihood of avoidance for non-disclosure. The anti-avoidance endorsement was obtained after Mr Costa raised allegations of fraud, allowing the insurer to consider these allegations before agreeing to provide the endorsement.

These circumstances made it difficult for the insurer to avoid the policy based on fraud or non-disclosure since the new allegations were central to their decision. The Court also noted that Saxon Woods’s agent, not Saxon Woods itself, was accused of fraud, which distinguished this case from previous ones concerning contracting out of fraud.

Addressing public policy concerns, the Court found the anti-avoidance endorsement’s wording unambiguous and broad enough to cover reckless and fraudulent non-disclosure. Therefore, there was no real risk that the anti-avoidance clause could not be enforced due to public policy. The Court also highlighted that, even if fraud was proven, it would not absolve Mr Costa from allegations of unfair prejudice, and he may not be entitled to his costs.

Considering all these factors, the Court concluded that Saxon Woods’s ATE and anti-avoidance endorsement provided sufficient protection and modified the security for costs order accordingly.

The Court exercised its discretion, acknowledging the difference between cash and an ATE policy but focusing on whether the proposed protection offered sufficient security to the defendant’s costs. Based on the terms of Saxon Woods’s ATE and anti-avoidance endorsement, the Court found Mr Costa adequately protected in terms of costs.

How can Annecto Legal assist with Security for Costs Applications?

A security for costs order is an effective method for defending against potentially troubling claimants and helping to obtain financial security when a claimant faces the brink of insolvency. Annecto Legal can discuss the best options available to meet a request for security for costs in commercial litigation.

We provide our services to a range of clients, including businesses, liquidators, insolvency practitioners and solicitors, commercial insurance brokers and individuals.

We can also assist our clients by putting them in touch with professional solicitors for dispute resolution purposes, as well as assist in the presentation and preparation of claims in order to maximise success in the underwriting and due diligence phase.

Get in contact with an expert member of our team today to find out more regarding applications for security for costs and which litigation cover is the appropriate litigation funding choice for you.