The existence of costs budgeting may increase the amount of security for costs a party is required to provide, it has been suggested, in the wake of a ruling about the adequacy of after-the-event (ATE) insurance as security.
A briefing from the law firm Stewarts said that, in a recent unreported judgment, Deputy Master Nurse found a real possibility that the ATE policy taken out by the claimants could be avoided by the insurer, with the effect that only 50% of the policy’s value could be ascribed as security.
That meant that the litigation funder in Addlesee and Ors v Dentons Europe LLP was required to provide a further amount, calculated by the parties to be between £1.3m and £1.6m.
The defendant’s successful application for security for costs was the latest interim skirmish in a large group claim brought by around 240 investors in a gold dust investment scheme promoted by a since-dissolved Cypriot company, Anabus Holdings. The defendant, which before merging into Dentons was known as Salans, advised Anabus and is alleged to have negligently or fraudulently facilitated the scheme and induced investment by endorsing it.
Managed Legal Solutions is funding the claim and one of its shareholders has also provided an ATE policy providing £1.25m of cover and the benefit of a capped indemnity of £750,000.
Stewarts reported that Dentons was concerned that clauses in the policy enabling the insurer to avoid payment where the claims were “fraudulent, dishonest or exaggerated” meant there was a real possibility that the policy would not respond – the focus was specifically on the defendant’s suggestion the claims had been overstated and what the insurer had been told before incepting the policy.
Deputy Master Nurse largely sided with Dentons’ submissions and granted it security for costs, calculated as being 100% of budgeted costs (not including contingencies), in addition to 65% of incurred costs.
He accepted that there was a real possibility that the insurer could avoid payment and, on that basis, allowed only 50% of the ATE policy’s face value to be put towards the security for costs. This was subject to the proviso that both parties were expressly granted permission to apply to increase or reduce that amount if new evidence surfaced as to the responsiveness of the policy.
Stewarts said: “The fact that the deputy master granted security over all Denton’s estimated costs is striking. It suggests that where costs budgeting applies, there is a possibility this may increase the amount of security required to be given.”
It went on that the breadth of the exclusion clauses in the policy in the event of exaggerated clauses provide Dentons “with enough ammunition to persuade the court that there was a credible threat that the policy could be avoided”.
“If faced with similar circumstances, it is worth asking the insurers if they are prepared to amend their policy to remove or temper this type of language. This is particularly relevant in cases where there is limited scope for claimants to exaggerate their claims in a way that materially increases the insurer’s exposure to an adverse costs order.”
More broadly, the briefing said the ruling leant support to Mr Justice Nugee’s point in his judgment in his ruling on the same issue in the Ingenious litigation that, at present, ATE policies were not designed to provide security for costs.
“It would be helpful if a standard wording for anti-avoidance endorsements were accepted by ATE insurers and endorsed by the courts to clarify what is required to provide sufficient security for defendants without requiring lengthy argument in each case. Until then, the courts will inevitably have to determine further disputes over this issue.”