UK Trends and Developments Contributed by: Jamela Collins, Sukhbir Kaur, Tadgh Kelly and Oliver White, Temple Legal Protection
Because compliance with host‑state insurance regu - lation is mandatory and cannot be displaced by gov- erning law, jurisdiction or party intention, an applicant need only demonstrate a real, non‑fanciful risk that the policy may, as a matter of law, be incapable of responding as assumed at the point of loss. In circumstances where payment into court presents a zero‑risk alternative, the existence of such regulatory uncertainty may properly lead the court to conclude that the policy does not provide “sufficient protection” for the purposes of Part 25 of the Civil Procedure Rules, and that security should instead be provided by pay- ment into court or other conventional means. Where the claimant lacks the liquidity to do so, the practical consequence may be that the claim cannot proceed. Third-party litigation funders’ exposure Where an ATE policy is intended to operate not merely as claimant protection but as a central component of the funder’s downside risk management, any failure of that policy to respond at the point of loss materially alters the funder’s exposure. In such circumstances, the funder may be exposed to adverse-costs liability under the court’s non‑party costs jurisdiction, poten - tially up to the amount of its investment in the litiga- tion. The so‑called Arkin Cap ( Arkin v Borchard Lines Ltd [2005] EWCA Civ 655) is not a rule of law, but a discretionary approach. Where adverse-costs protection proves ineffective, the court may be less inclined to limit a funder’s lia- bility by reference to the quantum of funding alone. That position was confirmed in ChapelGate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246, where the court declined to apply the Arkin approach in circumstances where the claimant had failed to obtain effective ATE insurance to protect against adverse costs, leaving the defendants mate - rially exposed. The funder was accordingly left sub - ject to a non‑party costs order unconstrained by the amount of its funding. The implications of this jurisprudence are particularly acute where a UK law firm assists an EEA‑resident entity in procuring a UK‑issued ATE policy as part of the litigation-funding structure. If that policy fails to respond because it was not structurally sound at
inception owing to the incorrect choice/identification of risk-location or non‑compliance with mandatory host‑state insurance regulation, the funder’s principal mechanism for adverse-costs risk mitigation may fail to operate as intended. Failure to identify and address risk location and professional negligence From a law firm’s professional risk perspective, the failure to identify and address risk location issues at the outset may give rise to allegations of negligent structuring of the litigation funding and insurance arrangements. Parties may find themselves having done everything “right” in procedural terms only to discover that the insurance intended to support the litigation was never capable of responding as assumed. Where an ATE or litigation insurance policy: • was issued from the United Kingdom; • insures a risk that is, as a matter of law, located in the EEA by reference to the habitual residence or establishment of the policyholder; and • was written by an insurer or intermediary lacking the requisite authorisation to insure that EEA-locat- ed risk, the policy may, as a matter of law, be incapable of responding as assumed at the point of loss. This is so even where the insurer was not on notice at the proposal stage that the insured risk was EEA‑located: the insurer’s knowledge is legally irrel- evant, since compliance with insurance risk‑location and authorisation rules is mandatory and cannot be displaced by actual knowledge, mistake, assumption, or the parties’ shared understanding at inception. This principle was articulated authoritatively by the Court of Justice in Kvaerner plc , where the Court held that, for the purposes of EU non‑life insurance law, the location of the insured risk must be deter - mined by objective criteria laid down in legislation, and cannot be altered or displaced by the parties’ internal arrangements, invoicing practices, payment structures, or assumptions as to where the risk lies.
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