ATE insurance as security for costs – NSW Supreme Court accepts anti-avoidance endorsement

A recent Supreme Court of NSW decision has placed after-the-event (ATE) insurance squarely in the spotlight, confirming that, when carefully drafted, an ATE policy with an anti-avoidance endorsement can constitute adequate security for costs in litigation.

The judgment in i-Prosperity Pty Ltd (in liquidation) v Crown Melbourne Ltd [2025] NSWSC 1525 offers rare Australian guidance on a form of security more commonly litigated in the UK, and signals a pragmatic judicial willingness to accept innovative funding structures where the policy terms eliminate avoidance risk.

Background

The proceedings involved a dispute between the liquidators of the i-Prosperity group and Crown Melbourne (Crown) concerning alleged breaches of contractual and statutory obligations said to have caused substantial loss to the i-Prosperity group. The liquidator, backed by LCM Funding, accepted that Crown was entitled to security for costs totalling $2 million. The issue was not whether security should be provided, but how.

LCM Funding proposed to satisfy security through an anti-avoidance endorsement to its ATE policy underwritten by seven Lloyd's syndicates. Crown resisted, arguing that only a deed of indemnity from the insurers would provide adequate protection.

The anti-avoidance endorsement relevantly:

• conferred enforceable rights on Crown;
• prohibited the insurers from relying on privity or any defences under section 48(3) of the Insurance Contracts Act 1984 (Cth) (ICA) (which might otherwise defeat entitlement to payment by the liquidators' acts, omissions or policy breaches); and
• required the insurers to consent to judgment if they failed to pay.

Decision

The key issue to be determined was therefore an ATE policy with an anti-avoidance endorsement "adequate security"? Justice Peden found that it is.

In doing so, her Honour applied the well-established principles that:

• security must provide a readily enforceable fund or asset against which a successful defendant can recover costs
• the plaintiff bears a practical onus to show the form of security does not impose an unacceptable disadvantage on the defendant; and
• it is inappropriate to compare the proposed security with "conventional" forms such as cash or bank guarantees for the purpose of determining which form of security is superior.

The critical question as to whether the ATE policy provided adequate security, was whether it could be legitimately avoided, limited or resisted by the insurers.

Justice Peden found that Crown would be entitled to sue insurers directly, relying on the express terms of the endorsement (outlined above) and the High Court's reasoning in Trident v McNiece¹, which relaxed the doctrine of privity of contract with regard to insurance contracts. Alternatively, Crown qualified as a third-party beneficiary under the Policy and could sue under section 48 of the ICA.

The Court determined that the endorsement:

• made the policy non-voidable as against Crown
• prevented the insurers from relying on exclusions, breaches, or non-disclosure by LCM
• required payment within 14-30 business days of agreement or taxation
• prohibited termination or amendment without Crown's consent.

These features removed the avoidance risks associated with reliance on insurance policies as security that had troubled Australian Courts in earlier cases.

Although the insurers (Lloyd's syndicates) were overseas entities, the Court accepted:

• the existence of the Lloyd's Australian Trust Fund as a domestic asset pool
• an undertaking that the ATE policy would be treated as an "Australian Policy" for trust deed purposes
• proposed amendments to the Policy confirming Crown as a Third Party Policyholder; and
• the several liability of insurers under the Policy was not fatal to acceptability of the policy as security. Relevantly, the financial statements of each Lloyd's syndicate were provided, all of which demonstrated substantial net assets.

Her Honour ultimately held that there was no unacceptable risk and that the ATE policy, was adequate security for costs.

Change in attitude

Australian courts have historically been cautious about ATE policies (and insurance policies generally) as security. Prior rejections typically involved:

• no endorsement in favour of the defendant
• policies issued by unauthorised foreign insurers with no Australian presence
• termination rights or delayed payment triggers; and
• ambiguous definitions of "adverse costs".

By contrast, the England and Wales courts have long accepted ATE policies with anti-avoidance endorsements as adequate security, including in the recent decisions of Musst Holdings² and Saxon Woods³.

This decision aligns NSW with the more flexible UK approach, but only where the terms of the relevant policy are sufficiently robust

Implications

This decision confirms that, where an ATE policy is supported by a robust anti-avoidance endorsement, defendants facing funded litigation can be compelled to accept that policy as adequate security for costs. The Court was prepared to treat the defendant as having enforceable, direct rights against the ATE insurers, rights that could not be defeated by the plaintiff's policy breaches, non-disclosure or conduct.

Defendants can no longer assume that only "hard" security (such as cash, bank guarantees, deeds of indemnity) will be accepted. Instead, Courts may increasingly endorse ATE-based security including where the policy neutralises section 48(3) defences, removes avoidance risk, and ensures timely payment of adverse costs.

Footnotes:

¹ (1988) 165 CLR 107; [1988] HCA 44

² Musst Holdings Ltd v Astra Asset Management UK Ltd & Anor [2024] EWHC 2310 (Ch)

³ Saxon Woods Investments Ltd v Costa & Ors [2024] EWHC 1056 (Ch)

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