Security for costs orders can be made against corporate plaintiffs and against many categories of class actions.
They are to ensure there are funds available to meet any costs order made in a defendant’s favour against a claimant with limited means. Courts also consider factors to weigh against a claimant’s impecuniosity including the merits of the plaintiff’s case, the nature and complexity of the claim being made and the resources required to bring the claim to a conclusion.
If an order is to be made, the court also considers the sufficiency of the security being offered including sophisticated funding arrangements. Insurance structures known as After-the-Event (ATE) insurance, are increasingly featuring in modern funded litigation.
In a recent case in the NSW Supreme Court, the collapsed i-Prosperity group—wanted to pursue litigation against Crown Melbourne but lacked the cash to provide conventional security.
The claims were backed by litigation funder LCM Funding which had arranged an ATE insurance policy with seven Lloyd’s of London syndicates to cover potential adverse costs.
Before the litigation could proceed, Crown sought security for costs. The parties had already agreed on the amount—$2 million, payable in tranches as the litigation progressed. The dispute concerned the form of the security.
Ordinarily security might be provided as cash paid into court or a bank guarantee. Instead, the plaintiffs proposed that the ATE policy itself could serve as security, strengthened by an anti-avoidance endorsement in Crown’s favour.
Crown resisted the proposal and raised three principal concerns.
First, it argued it was not a party to the insurance contract, which was issued to LCM Funding. Without contractual privity, Crown feared it would have no direct right to sue the insurers if they refused to pay.
Second, the policy was written by multiple Lloyd’s syndicates, each liable only for its share. Crown suggested that if one syndicate disputed liability, enforcing payment might become complicated.
Third, Crown argued there was insufficient evidence of accessible assets in Australia, meaning enforcement might require proceedings overseas.
On that basis, Crown argued the only satisfactory form of security was a deed of indemnity from the insurers or another conventional instrument such as a bank guarantee.
The plaintiffs responded that the policy had been specifically drafted to eliminate those risks. The endorsement gave Crown the status of a “Third Party Policyholder” and expressly confirmed that Crown was indemnified for adverse costs up to the agreed limits.
Crucially, the insurers promised that claims by Crown would be honoured even if the policyholder breached the policy or if exclusions might otherwise apply. The endorsement also required insurers to consent to judgment against them in Australia if they failed to pay a valid claim.
Justice Patricia Peden approached the issue by applying established principles governing security for costs. The central question was whether the proposed security adequately protected the defendant by providing a fund or asset against which a successful costs order could be enforced.
Her Honour rejected Crown’s argument that Crown lacked enforceable rights. She held that insurance contracts may allow third parties to enforce benefits intended for them. The wording of the endorsement showed a clear intention that Crown could claim directly against the insurers.
In addition, Crown could rely on section 48 of the Insurance Contracts Act 1984 (Cth), which allows a third-party beneficiary to recover from an insurer even though it is not formally a party to the contract.
Justice Peden also rejected concerns about enforcement against overseas insurers. The Lloyd’s insurance market operates an Australian trust fund, providing a pool of assets in Australia that may be accessed to meet claims against syndicates.
Equally important were the detailed protections built into the endorsement. The policy could not be cancelled or varied without Crown’s consent, payment deadlines were specified, and the insurers agreed not to rely on common insurance defences to avoid liability. These features significantly reduced the risk that the insurers could legitimately refuse payment.
Justice Peden did require two minor amendments before accepting the policy as security. The endorsement needed to confirm that enforcement could occur in Australian or English courts, and the insurers were required to ensure the policy would be recognised as an “Australian Policy” under the Lloyd’s trust structure. Once those adjustments were made, the court was satisfied the ATE policy provided adequate protection.
The ruling confirms that ATE insurance can function as valid security for costs where the policy is carefully drafted to ensure the defendant has enforceable rights and the insurer cannot readily avoid liability.
