Customers buy legal expenses insurance to cover legal costs they might incur while pursuing disputes about:
- personal injury
- contracts for goods or services
Although it’s possible to buy standalone legal expenses insurance, most policies are added to home or car insurance as an optional extra.
Policies bought ‘before the event’ protect policyholders in case legal action has to be fought or defended in the future.
Policies bought ‘after the event ’ insure the policyholder when they’ve already decided to take or defend a legal action and provide cover against paying the other side's costs. These are usually standalone policies.
Types of complaints we see
When we deal with complaints involving legal expenses insurance, our role is to decide whether the customer’s insurer handled their claim correctly, according to the policy’s terms and conditions.
We generally receive complaints about:
- insurers deciding not to meet the expenses of proposed legal action
- disagreements between legal professionals about the prospect of a successful outcome
- an insurer’s solicitor handling a claim badly
- insurers rejecting a claim because the policyholder didn’t notify them about an event that gave rise to legal proceedings
- policyholders choosing to use their own solicitors and the insurer refusing to cover the claim
We’ll consider whether you fulfilled you obligations reasonably as an insurer, and dealt fairly with the claim. This involves looking at the terms of the policy and whether you acted on the advice of appropriately qualified legal advisers.
We don’t consider the quality of legal advice. Customers in England and Wales that are unhappy with the quality of the legal services provided may be able to take their complaint to the Legal Ombudsman. There are equivalent bodies in other UK regions.
Handling a complaint like this
Although these are not the only disputes we look at (there are other scenarios which trigger complaints), we mainly investigate complaints about:
- The choice of solicitors
- ‘Reasonable prospects of success’
- Handling a claim poorly (‘maladministration’)
One of the most common complaints about legal expenses insurance is about who chooses the policyholder's legal representatives.
As an insurer, you’ll have a panel of solicitors with the relevant expertise to deal with legal proceedings. They control these solicitors' costs through agreed payment rates.
Legal expenses policies require a panel of solicitors before it’s decided that there’s a need for legal proceedings. You’re free to choose which solicitors to appoint at the start of the legal claim.
There are several factors to take into account when it comes to the choice of solicitor, including:
When a policyholder appoints their own solicitor
Many policyholders choose to remain with the panel solicitor after the issue of legal proceedings. But some policyholders take the view that only someone they’ve chosen will represent their interests vigorously and impartially. They may complain that the firm of solicitors that you’ve chosen is in an inconvenient location, for example.
We’re likely to decide that the policyholder should be able to appoint their own solicitor from the start of their insurance claim and before legal proceedings are necessary, only in exceptional circumstances.
However, a policyholder should be allowed to choose their own solicitor from the point that legal proceedings need to be started – ie when negotiations have failed and it has been decided, by the solicitors involved, that it will be necessary to issue proceedings to progress the legal case.
We’d usually expect the policyholder’s chosen solicitor to prepare the claim form and do any other work needed to start the proceedings.
The solicitor chosen by the policyholder isn’t bound by any terms of the insurance policy. The insurance policy is a contract made between you and the policyholder.
You need the policyholder's chosen solicitor to agree to your standard terms of appointment. This is a separate contract entered into between you and the solicitor.
Insurers don’t usually object to using a policyholder's own solicitor, although for commercial and quality-control reasons, they often prefer to use solicitors from their own panel.
Read a case study about a customer who chose to use their own solicitor.
Most policies we see don’t specify the hourly rate that you pay the solicitor. And the law doesn’t make any reference to these rates.
It’s reasonable that you have a say in the amount being charged by the policyholder's solicitor because you pay the legal costs under the policy. Your standard terms of appointment will often specify what you think this should be.
You and the policyholder's solicitor can try to come to an agreement on the hourly rate.
If the policy doesn’t clearly state what rate will be indemnified, the rate offered by you needs to be reasonable. This would be a matter of judgment in the circumstances of each particular case. Relevant factors to consider would include:
- the nature of the legal case
- the seniority of the solicitor or other lawyer
- the going rate for a solicitor in the area the solicitor is based or where the case is being dealt with
- court guideline hourly rates (for more on this see UK’s guide)
Our approach takes account of the Court of Appeal’s decision in the case Brown-Quinn & Anor v Equity Syndicate Management Ltd & Anor). The current legal position, decided by the Court of Appeal, is:
- Reference in the policy to your standard terms of appointment (a separate agreement between you and the solicitor) is enough to incorporate these terms of the appointment into the insurance contract.
- The policyholder is entitled to recover at least the non-panel fee rates under the policy.
- If you refused to pay any legal costs because the non-panel solicitor didn’t accept the fixed non-panel fee rate in your terms of appointment, that would be a breach of the law.
- You have the right to restrict what you’d pay to a non-panel solicitor, as long as the remuneration is not so low as to render the policyholder’s freedom of choice meaningless.
If you tried to limit the indemnity recoverable under the policy, we’ll consider whether the customer was made aware of any limitation.
We’ll check whether the information you provided was clear, fair, and not misleading, in line with the regulator’s requirements.
We’re unlikely to agree this requirement has been met if the limit hasn’t been made clear.
If the terms restrict the cover the policy provides, we’d expect you to make this clear at the outset, so the policyholder is fully aware of the cover they’re taking out. An example of restricting cover is offering a fixed hourly rate lower than the policyholder can instruct a non-panel solicitor for.
Sometimes, a policyholder is only made aware of the restriction much later, when they’ve made a claim and want to instruct their own solicitor. In these cases, we might decide it’s not fair for you to insist on standard terms which limit the remuneration payable.
If the insurer does specify a set hourly rate, the customer should be made aware of that when taking out the policy. If the policy terms aren’t clear about this, we may then decide what rate we think is fair.
We’d then need to consider whether the non-panel solicitor rate fees are ‘reasonable and necessary’.
We’ll decide whether the level of remuneration you offer is fair and reasonable and whether compensation should be offered to the customer.
Conflicts of interest
A policyholder can choose their own solicitor when there is a conflict of interest.
Policyholders sometimes claim that a disagreement with the appointed solicitor's legal advice is a conflict of interest. However, we don’t view these kinds of disputes as conflicts of interest.
A conflict of interest arises when a solicitor is in breach of their code of conduct, or would be ‘professionally embarrassed’ if they continued to act. Examples of how this could happen include:
- previously acting for the policyholder's opponent
- knowing the policyholder personally
- having access to confidential information about the opponent
- making a damaging mistake that would constitute professional negligence, like disclosing privileged material or missing a procedural deadline
Legal expenses policies usually say that any proposed legal action for which a policyholder makes a claim must have a ‘reasonable prospect of success’. We interpret this to mean a 51% or more chance of winning.
Sometimes complaints are referred to us when the case had a less than 51% chance of succeeding, but which then won in court.
This doesn’t necessarily mean that you were wrong to refuse funding. You can only rely on the advice and evidence available at the time.
If you consider that a claim should be pursued, the normal practice is for it to be passed to an external firm of solicitors on your panel. They should have knowledge of the relevant area of law.
Their opinion on the prospects of success is usually the basis for you to make a decision about whether to fund the legal costs.
If the policyholder disputes this opinion, we’ll usually ask them for independent evidence from a qualified, comparable lawyer to support their view.
If solicitors disagree on the prospects of success, you’ll usually need to get a legal opinion from a qualified barrister with relevant legal knowledge. We’d place greater weight on the barrister's opinion than on the solicitor's.
But sometimes we see proposed legal actions have no reasonable prospect of success because there’s:
- a lack of evidence
- legal obstacles, such as statutory time bars, immunities or decided case law
- no known cause of action
Legal claims can have different time limits within which the claim must be made. Courts are usually strict on how these apply and if a claim is made ‘out of time’ then usually it can’t be pursued. There are some exceptions to this. Where a claim has been made out of time, we’d usually expect the solicitors to address the timeliness issue.
If the panel solicitors say the claim doesn’t have a reasonable prospect of success, this is likely to mean you’ll refuse funding. You’ll need to notify the policyholder that you’re not prepared to accept the claim.
Consumers sometimes complain to us about insurers or solicitors who have handled a claim poorly. This is sometimes called ‘maladministration’.
When we make a decision about these cases, we take account of the fact that legal action can be a lengthy, complex process. There are also the restrictions of court timetables to consider.
We don’t usually hold you responsible for the way your panel solicitors carry out litigation on a day-to-day basis. And if the policyholder has instructed their own solicitor, you’ll have no responsibility, unless you tried to influence or control the course of proceedings.
However, if a solicitor handled a claim poorly, and you were aware of this but didn’t intervene, we may tell you to compensate the policyholder for distress and inconvenience, financial loss, or damage.
If the legal action is still running, we’ll think carefully before asking you to find alternative solicitors, as this could cause further delay.
Policies with a legal expenses ‘add-on’
Customers can buy legal expenses insurance as a standalone policy or as an optional ‘add-on’ to other policies.
When customers take out a motor insurance policy for example, they’re often offered the option of legal expenses insurance to fund the cost of taking legal action and recover the uninsured losses.
Most motor insurance policies only cover insured losses such as loss or damage to the vehicle the legal liability to third parties.
But legal expenses policies will usually provide cover for the policyholder to pursue recovery of uninsured losses against the party that caused the accident, such as –
- personal injury
- loss of income which legal expenses may help with recovering
- the policy excess
- loss of personal possessions in the vehicle
– as long as there are reasonable prospects of success.
Legal expenses policies may also be added to household buildings and contents policies as an optional extra.
A different insurer to the household insurer will usually underwrite the legal expenses section of the policy. This avoids a conflict of interest and spreads the risk.
For example, if a policyholder were to take their neighbour to court in a property dispute, it’s possible they could share the same household insurer. By having specialist insurers underwrite the legal expenses risk, the chance of a conflict of interest is reduced.
If the main insurer also underwrites the legal expenses cover, it will usually give the administration of this cover to a claims-handling agent, to spread the risk.
Other scenarios that can impact legal expenses claims
There are other scenarios we see complaints about within the area of legal expenses insurance, including:
‘After the event’ policies
‘After the event’ policies insure legal actions for events that have already happened. They’re usually taken out around the time that the legal action begins. These policies are used when there isn’t any ‘before the event’ cover or if it’s run out.
After the event policies are taken out to support a conditional fee agreement (also called ‘no win, no fee’) between a solicitor and their client. This means that the solicitor will charge a fee only if their client's action is successful.
But it doesn’t cover all costs. For example, it may not cover money paid to third-party experts in preparing the action, or the other side's legal costs. So an after the event insurance policy might be taken out to cover the risk that the client’s action is unsuccessful or results only in a partially favourable award of costs.
After the event policies can involve a large premium. Paying this premium can sometimes be deferred or paid with a loan. This isn’t a recoverable legal cost (the losing party can’t be ordered to pay it) but the client would have to pay it out of any damages they receive.
When selling an after the event policy, you’ll assess whether the legal action is a risk you’re prepared to take. This means that policies may contain conditions that can be specific and unusual.
There may be strict conditions for reporting to you and providing evidence such as expert or medical reports, or requiring that any barrister must also be instructed on a conditional fee agreement.
The customer should be made aware of any such conditions at the time that the policy was sold to them.
The policyholder or appointed solicitor must make the underwriter aware of any material or substantial changes to the risks involved in the legal action.
Cost of proceedings that exceed the amount won
Sometimes, the cost of proceedings is likely to cost more than the amount won in court (the ‘recovery’). For example, the amount in dispute is only £100, but bringing the case to court is likely to cost £1,000. In these cases, you can refuse funding.
We usually take the view that it’s unreasonable to expect you to fund a legal action that a prudent, uninsured person wouldn’t fund themselves.
However, some policies give you the right to pay the policyholder the sum of money at stake in these circumstances.
If the wording on the policy isn’t clear, we may ask you to pay the policyholder the amount that they were claiming.
Most policies include a clause that says the policyholder must inform you as soon as they become aware of an event that may give rise to legal proceedings.
A breach of this clause could result in you refusing cover.
In the cases we see, we usually decide that an insurer should not reject a genuine claim, as long as it has not been prejudiced by the late notification.
Late notification can be a significant issue, because failing to act as quickly as possible can adversely affect a legal case, for example, where issues involve:
- the preservation of evidence
- difficulties in tracing witnesses
- witnesses less able to recall information
- time bars (the time limits within which the claim must be made)
- the legal requirement to avoid ‘inordinate and inexcusable’ delay not being satisfied
- the build-up of interest and costs
In cases of late notification, we’ll look at the evidence and decide whether you were entitled to reject the claim or limit its liability to certain costs. In these cases, it’s your responsibility to show they have been prejudiced by the late notification.
Legal expenses insurance is meant to cover uncertain risks, not inevitable or existing events.
Most ‘before the event’ policies will only cover the cost of legal proceedings when the event or dispute giving rise to the legal action occurred, or came to light, after the policy began.
However, this is not always straightforward in the cases we deal with. When dealing with cases like this we need to:
- identify the event that gave rise to the legal action
- consider whether the policyholder was aware of the event when they took out the policy
We’ll consider the facts of each particular case when making decisions.
To prevent policyholders taking out insurance cover and claiming for a known imminent dispute, some policies contain a ‘moratorium’ period. This means that the policyholder can’t claim for events that arise during the first period of cover.
Accountant’s negligence comes to light years later: claim accepted or rejected?
An accountant completes a client's tax return negligently, but the client doesn’t discover this until several years later, when a demand for unpaid tax is made. The client thinks that legal action against their accountant will be covered by the legal expenses policy they’d taken out since the demand for unpaid tax. The ‘event’ is the negligent act which predates the insurance. Even in cases where the policyholder didn’t have legal expenses cover at the time of the negligent act, we may decide that the insurer should accept the claim. This is because in some cases we decide that time should run from the date the customer became aware of the problem, when the damage is not obvious at the same time as the cause of the damage.
Claims made and claims occurring policies
Before the event legal expenses policies can provide two types of cover:
- Claims made policies: customers can only make a claim while their policy is active.
For example, if a consumer is involved in a car accident, they will need to make a claim while their policy is active – not after the policy has ended.
- Claims occurring policies: customers can only claim if the event happens while their policy is active.
For example, if a consumer is involved in a car accident, they could claim after their legal expenses policy has ended if the accident happened while it was active.
This difference can cause confusion for consumers and businesses alike and can result in complaints.
We see problems when a consumer changes from a ‘claims made’ to a ‘claims occurring’ legal expenses policy with a different insurer and without a gap in their cover.
If a consumer switches to a ‘claims occurring’ policy and makes a claim for a problem that started while their ‘claims made’ policy was active, their old insurer may not deal with it because it should have been made while it was active.
Their new ‘claims occurring’ policy insurer also may not deal with it because the event started before the policy was taken out.
Where a consumer contacts us about a complaint like this, we do not consider it fair that a consumer is unable to claim under either policy despite having continuous cover.
We usually look at the circumstances of the claim to determine who should consider the claim. This could include:
- Should the insurer have known that the consumer might need to make a claim before their policy ran out? If so, has this disadvantaged the insurer?
- Does the policy exclude claims made before it started? If it does, we may not ask the insurer to pick up the claim.
- What’s the earliest the policyholder should’ve known they needed to make a claim? If we believe that a consumer’s earliest date of knowledge was after a policy started, we may ask the insurer to honour the claim.
- Claims made policies: customers can only make a claim while their policy is active.
Putting things right
If a customer is successful in their legal expenses insurance claim, they’ll be able to cover legal costs, which usually include:
- solicitors' fees
- court fees
- the fees of any expert witnesses
- any legal costs awarded to the other party in the dispute
The policyholder is usually required to accept any reasonable offer of settlement.
Sometimes we decide that a non-financial solution is more appropriate than a financial one to resolve a complaint. If a policyholder wants the court to grant an injunction to stop someone doing something, or to make someone do something – for example, to move a boundary fence – we’ll consider legal opinions.
But in some cases, it’s unlikely that non-financial remedies will be granted because they’d be:
- difficult to enforce
- contrary to public policy
In these cases, the court may decide to award damages instead. We’ll consider the evidence when we compare the cost of proceedings with the likely outcome.
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