legal expenses insurance

As well as being provided on a stand-alone basis, legal expenses insurance is commonly included in motor policies – and – increasingly in household policies. When it is sold as part of another policy rather than as a stand-alone product, it is often presented as a free (or low cost) addition.

Typically, cover is provided for the legal expenses that the policyholder may incur in most personal injury, consumer, property and employment disputes, as well as for any award of the other party’s legal costs. Normally, there is a requirement that if a policyholder makes a claim for legal expenses, any legal action for which the expenses are incurred must have a reasonable prospect of success. The policyholder is also usually required to accept any reasonable offer of settlement.

When a policyholder puts in a claim under a policy of this type, most insurers will assess the dispute in-house (or perhaps with the assistance of one of their panel of solicitors), and will then determine whether there is an arguable case. If the insurer concludes that the case has little prospect of success, it may simply notify the policyholder that it is not prepared to accept the claim.

Where the case appears more complex, or seems to have a good chance of succeeding, insurers usually appoint one of their panel of solicitors to consider the matter. These panels are set up by insurers to deal with cases on commercial terms that are agreed in advance. The terms may be agreed on a ‘no fee’ basis (where the solicitors expect to cover their costs through the costs awarded against other parties, if their client is successful) or on the basis of a set fee per case. Only in exceptional circumstances will the insurer appoint a solicitor not on its panel.

Most cases handled under legal expenses insurance involve:

• car accidents;
• the recovery of uninsured losses from third parties;
• damages for minor injuries; and
• small consumer disputes.
  

However, legal expenses insurance covers a wide spectrum of other disputes, from medical negligence to property disputes.

Insurers’ arrangements for handling legal expenses claims have at times given rise to concerns in some quarters, and a number of these concerns were raised in a recent High Court case, Sarwar v Alam. Some interested parties have suggested that, in the light of this case and other developments, they would welcome a statement of our own position on this matter (first established by one of our predecessors, the Insurance Ombudsman Bureau). This article confirms our current thinking and summarises the factors we considered when reaching a decision on a recent legal expenses case.

The case in question was a complex one, where the policyholder made a claim for legal expenses and disputed the insurer’s insistence that the matter should be dealt with by one of its panel of solicitors, rather than by a solicitor chosen by the policyholder, Mrs G.

should ‘freedom of choice of solicitor’ be interpreted more widely?

First, we considered arguments that the policyholder’s ‘freedom of choice of solicitor’ (as provided for, at the point when proceedings commence, in the Insurance Companies (Legal Expenses Insurance) Regulations 1990 – ‘the Regulations’) should be interpreted more widely than is traditionally the case. Should it perhaps include any significant legal enquiry (for example at the time when the claimant’s solicitors embark on the ‘pre-action protocol’)?

We concluded that, in the absence of clear guidance from the courts in support of this alternative interpretation, we would not require an insurer to offer the policyholder a choice of solicitor at the start of the claim.

does the relationship between panel solicitors and the insurer disadvantage the policyholder?

We considered whether:

• the appointment by an insurer of panel solicitors, on a ‘no fee’ or a low ‘fixed fee’ basis; and
• the close relationship that panel solicitors have with insurers;

might distort the panel solicitor’s view of a case – to the policyholder’s disadvantage (for example, when the solicitor assesses whether the case has a reasonable prospect of success).

We noted that solicitors appointed by an insurer have a duty to their client – who is the policyholder. And if there is any dispute about whether a particular case has reasonable prospects of success, it can be raised with us. In the particular case under consideration, we found no evidence that Mrs G had been disadvantaged. And, more generally, we have seen no clear evidence of any systematic distortion of the advice given by panel solicitors. So we have no reason to conclude that insurers’ practice of using panel solicitors is inherently unreasonable or unfair to policyholders, as long as appropriate arrangements are made to handle cases that involve a potential conflict of interest.

is there a difference in quality between the work of ‘panel’ and ‘non-panel’ solicitors?

We noted that, in general, we have seen no evidence of any systematic difference in quality between the work of ‘panel’ and ‘non-panel’ solicitors. However, the insurer in the case in question accepted that in some (admittedly relatively infrequent and unusual) cases, its panel might not include solicitors with the relevant expertise or specialist knowledge.

Given these points, we concluded that in providing policyholders with legal services by selecting a solicitor for them, from a pre-arranged panel, insurers are not generally either in clear conflict with the Regulations or inherently likely to be providing an inappropriate service, or one that is less effective than the alternatives that are likely to be available.

So in our view, there is generally nothing objectionable, from the policyholder’s perspective, in insurers requiring policyholders (in most cases) to use the legal services of:

• the insurer’s own (appropriately-trained) staff; or
• a pre-selected panel of providers chosen by the insurer.

how clear is the policy document, and to what extent are policyholders prejudiced by any lack of clarity?

We had serious reservations about the way in which the details of the policy were described and set out in the policy document given to Mrs G. We thought that any policyholders, or prospective policyholders, given this document would have to refer and cross-refer to several different parts of the policy in order to find out what cover was offered.

And even if they overcame that difficulty, and successfully identified that, if they needed to make a claim, matters such as the choice of solicitor would have to be left to the insurer’s discretion, they would still have little idea of how, in practice, the insurer would exercise its discretion. More precisely, even after a careful reading of the policy, most policyholders would have little idea that the insurer would generally object to funding claims handled by an experienced solicitor selected by the policyholder (at least until the later stages of the case, when court papers are issued).

Overall, we concluded that the terms of the policy that related to choice of solicitor were not expressed in plain and intelligible language. In our view, if the policy does not include a clear and intelligible statement of what it does and does not provide, then:

• prospective policyholders cannot make a fair evaluation of the policy at the point of sale; and
• policyholders may be disadvantaged when making a claim.

For example, policyholders may go ahead and make arrangements with a solicitor of their choice, and incur costs, without knowing that the insurer is unlikely to fund the advice they get from that solicitor.

However, a poorly constructed policy will not always prejudice policyholders or give rise to unfairness. Indeed, in many ‘routine’ cases policyholders may well not be greatly disadvantaged or inconvenienced by any lack of clarity in the policy.

But in more complex cases, or in cases with other special features, it seems to us that the policyholder’s position is likely to have been prejudiced. In such instances, the fair resolution of the matter, reflecting good industry practice, will be for the insurer to fund the advice that the policyholder gets from his or her chosen solicitor.

when is it generally advisable for insurers to agree the appointment of the policyholder’s choice of solicitor?

Much depends on the circumstances of the individual case, but we consider that, in general, policyholders making claims in connection with motor accident disputes, minor personal injury claims and routine consumer disputes are unlikely to suffer any significant prejudice if the insurer simply appoints a solicitor for them from its own panel.

But we expect insurers to agree the appointment of the policyholder’s preferred solicitors in cases that involve large personal injury claims, or that are necessarily complex (such as those involving allegations of medical negligence). We consider that insurers should also agree the appointment of the policyholder’s preferred solicitors in cases that involve significant boundary or employment disputes (especially if there is a considerable history to investigate and assess).

More generally, there are other circumstances where it may be unreasonable, or out of line with good industry practice, if the insurer fails to agree to the appointment of the policyholder’s own choice of solicitor. This could be the case, for example, where the policyholder’s own solicitors have already had considerable involvement in (and knowledge of) the issue giving rise to the dispute, or related matters.

But where, for example, a particular solicitor has been involved in a matter at an earlier stage – and has then continued to act for the policyholder, simply because of the existing involvement, and regardless of any provisions in the policyholder’s legal expenses policy – we will not automatically conclude that the insurer should be forced to accept the policyholder’s choice of solicitor.

It may well be appropriate to use the policyholder’s own solicitor in any cases where there is a suggestion of conflict of interest. Doing this would, however, be subject to:

• the claim fulfilling the other policy conditions (on matters such as prospects of success);
• the solicitor and insurer agreeing appropriate fees and arrangements for monitoring the conduct of the claim; and
• the chosen solicitor having the necessary experience for handling the case in question.

In the specific dispute brought to us by Mrs G, we concluded that the case was sufficiently complex for the insurer to accept the policyholder’s choice of solicitor. The case involved a very serious injury to the policyholder’s son, who was likely to require continuing medical care for the foreseeable future. We felt the case appeared to raise serious issues on liability, and was likely to require more sensitive handling and involve more face-to-face contact between the policyholder and solicitor than in more straightforward cases.