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After-the-event (ATE) insurance policies fortified with anti-avoidance endorsements (AAEs) have increasingly been offered as security for costs in litigation. However, where there are allegations of fraud, courts have taken a more cautious approach. The recent decision in Lloyds Developments Ltd v Accor Hotel Services UK Ltd [2025] EWHC 1238 (TCC) provides a timely reminder that such policies are not a guaranteed solution.

 

Lloyds v Accor

Lloyds Developments Ltd v Accor Hotel Services is the latest in a spate of recent decisions relating to the use of an ATE insurance policy with an AAE to satisfy a security for costs application made by the defendant. In this matter, the High Court considered whether an ATE insurance policy—supplemented by an AAE could serve as sufficient security for costs. The court ultimately held that it could not. In Lloyds, Mr Justice Constable highlighted the test set out in Re Ingenious Litigation [2020] EWHC 235 (Ch) which is that in order for a defendant to succeed in a security for costs application where the claimant has an ATE policy, there should be a “real, and not a fanciful risk, that the ATE policies will not respond in full. Applying that, he found that there were three main reasons why the policy and AAE proffered by the claimant as security were together insufficient:

  • The policy contained a clause excluding coverage where the litigation funding agreement had been terminated which created a real risk of non-payment in circumstances where the coverage could end without the defendant being aware;
  • The ATE policy named the litigation funder, rather than the claimant, as the policyholder which created a lacuna in drafting, creating a risk that a “Security Claim” could not be made by the opponent; and
  • The AAE did not expressly exclude the insurer’s right to avoid liability for fraud by the policyholder and there was a realistic risk of the insurer properly arguing no liability in the case of fraud by the claimant. Arguably this was the main point to consider for the court given the other points were effectively drafting issues.

 

Revisiting Saxon Woods

This decision invites comparison with Saxon Woods Investment Ltd v Francesco Costa [2023] EWHC 850 (Ch), the last case to examine whether an ATE policy with an AAE could act as security in the context of allegations of fraud or dishonesty.  In that case, the High Court found that the ATE policy did provide sufficient security despite the AAE keeping a ‘carve out’ for fraud and dishonesty. (For our blog on that case, see here.)

 

Why was Lloyds different?

The Saxon Woods decision is particularly relevant to the Lloyds v Accor case as both claimants had an ATE policy fortified with an AAE with identical wording in respect of fraud. However Mr Justice Constable noted in Lloyds that “it may be that insurers have been overly reliant upon the decision in Saxon Woods to frame the AAE in this way” and emphasised that “an AAE clause of itself is not a panacea: the outcome will depend on the precise wording and, particularly in the context of fraud, potentially the substance of the litigation.”

In Saxon Woods, there were allegations of dishonesty against the director of the petitioner although a finding a fraud against him would not necessarily equate to a failure of the petitioner’s case. The court considered public policy issues and decided that whilst the law since Patel v Mirza [2016] UKSC 42 shows that no one can claim an indemnity for their own wilful crime, public policy here militated towards enabling an innocent third party (the defendant seeking its costs) to benefit, despite any fraud from the insured.

Also of relevance in Saxon Woods, was that the allegations of dishonesty were “front and centre” for the insurers when deciding whether to provide an AAE and therefore it would be very difficult for them to avoid should the allegations be proven. The court reached a different conclusion in Lloyds, finding that “the answer in Saxon Woods cannot simply be transplanted to the present case”. Saxon Woods was not “on all fours”  with the circumstances in Lloyds and its own factual matrix – including the risk of findings of fraud- had to be considered against the wording of the AAE.

Mr Justice Constable’s view was that “even the prospect of a dispute with insurers, providing that prospect is not fanciful, means that the security provided by an ATE insurance policy is materially less beneficial to a defendant than a payment into Court” and therefore “why not simply refer in clear and express terms to excluding the right to avoid for fraud if that is the intention? As a matter of construction, if it did so, the ATE insurance would meet the concern head on”. In reaching his decision he echoed the finding in Saxon Woods that public policy does not prevent an ATE insurer providing indemnity in circumstances where the defendant (rather than the dishonest policyholder) is seeking to benefit from the insurance particularly “where there is clear public policy in positively enabling products like ATE insurance to allow claims to be brought where the provision of security might otherwise be impossible.”

Mr Justice Constable made it clear that in any event he was not bound to follow the decision in Saxon Woods and perhaps tellingly said “it is unnecessary for me to decide whether I would have decided Saxon Woods differently…”

 

Criticism of the Defendant’s Conduct

It is worth noting that the defendant, Accor, was criticised in the judgment for not putting Lloyds on notice of their concerns relating to security. This denied Lloyds the opportunity of addressing them with insurers beforehand and Mr Justice Constable remarked that “it was obviously incumbent upon it in the context of co-operative case management and in an attempt to narrow issues to identify those concerns in good time. …..The failure to do so deprived Lloyds not only of the opportunity to deal with points in its skeleton argument (and thus reduced the efficiency of the hearing, and wasted the Court’s time) but also deprived Lloyds of the opportunity to see if any of the points could be resolved with changes to the policy wording.”

In these circumstances, where Accor “failed to engage constructively in advance of the hearing”, the court was prepared to provide Lloyds with a short period of time in which to seek to have the policy amended to meet the areas of concern of the court. This highlights to defendants the importance of transparency and co-operation when it comes to security for costs applications.

 

Payment Out of Court Funds

A final noteworthy point is that although the court wasn’t asked to consider it at this hearing, the claimant had said that it intended to make an application that money previously paid into court be released. Mr Justice Constable made it clear that there was no evidence before him that there was “material change of circumstances or other factors such as a particular hardship or difficulty caused by the status quo in respect of the existing orders which warrants payment out of the sums already paid into Court, as opposed merely to entitlement to satisfy further payments yet to be made by way of ATE insurance”. This highlights further the importance of obtaining a well-drafted ATE policy with an AAE (or a Deed of Indemnity) as early in litigation as possible, as there are no guarantees the court will permit any sums already paid into court to be released.

 

What Can We Take Away?

  • Clarity is key: ATE policies must be meticulously drafted, especially when it comes to fraud exclusions, termination clauses and policy structure.
  • There is no universal solution: Courts will examine the factual matrix of each case. Similar policy wording can yield different outcomes depending on the context.
  • AAEs must be explicit: If an insurer intends to cover costs even in the event of fraud by the claimant, that must be explicit and unmistakable.
  • Defendants must act reasonably: A lack of early engagement on security concerns may backfire or result in wasted court time.
  • Courts are cautious about releasing security: Once paid into court, recovery of funds is not guaranteed without strong justification.

 

 

Emily Thomas is Director and Head of TheJudge Manchester Office.

Emily.Thomas@TheJudgeglobal.com