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    Financial Ombudsman Service : online resourcelegal expenses insurance

    This section of our website describes how we approach complaints involving legal expenses insurance. This is a complex area combining legal and insurance issues – so it is often necessary for the language used in this section to reflect these complexities.overview

    Legal expenses insurance is purchased to fund the costs of legal advice and/or the costs of bringing or defending a court case. Legal expenses insurance can be bought:

    • “before the event” – in case a future legal action has to be fought or defended; or
    • “after the event” – where the policyholder has already decided to take or defend a legal action and wants to insure against the risk of losing and having to pay the other side’s costs.Legal expenses insurance is not designed to pay the policyholder the actual damages that they are trying to recover through the court action. Nor does it cover someone’s liability to pay damages to others. There is separate insurance for that.
      typical complaintsThe legal expenses complaints that we see usually – though not always – involve disputes about one or more of three issues:

      • whether the proposed action has reasonable prospects of success;
      • the choice of solicitors; and
      • allegations of maladministration in relation to the policy and/or the claim.
        non-motor legal expenses insuranceAlthough it is possible to buy “stand alone” legal expenses insurance, most policies are added to household buildings and contents policies as an optional (sometimes free) extra.

        Importantly, a different insurer to the household insurer will usually underwrite the legal expenses section of the policy. This is to try to avoid a conflict of interest and to spread the risk.

        For example, if a policyholder were to take their neighbour to court in a property dispute, it is 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 – though not completely removed.

        If the main insurer also underwrites the legal expenses cover, it will usually delegate the actual administration of this cover to a claims-handling agent, so as to be able to continue to spread the risk.

        motor legal expenses / uninsured loss recovery insuranceMost motor insurance policies cover only insured losses – in other words, the loss or damage to the vehicle and the legal liability to third parties. There may also be uninsured losses, such as the policy excess, loss of personal possessions in the vehicle, personal injuries and loss of use of the vehicle. 

        Consumers are often offered the option of legal expenses / uninsured loss recovery insurance, when taking out a motor insurance policy. This insurance is designed to fund the cost of taking legal action, to recover the uninsured losses, against the party that caused the accident.

        Like legal expenses insurance added to household policies, an insurer other than the motor insurer will usually underwrite or administer the uninsured loss-recovery insurance.

        “after the event” policies“After the event” policies insure legal actions relating to events that have already happened. These policies are generally appropriate if there is no “before the event” cover – or if any “before the event” policy has been exhausted. 

        “After the event” policies are taken out to support a “conditional fee agreement” (a “no win, no fee” agreement) between a solicitor and their client. This means that the solicitor will charge a fee –  generally higher than usual – only if their client’s action is successful (when costs are generally awarded in court to the successful party).  

        As the conditional fee agreement may not 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 – an “after the event” insurance policy might be taken out to insure the client, if their action is either unsuccessful or results only in a partially favourable award of costs.

        “After the event” policies are usually taken out around the time that the legal action begins. They can involve a large premium. But paying this premium can sometimes be deferred – or paid with a loan. The premium is a recoverable legal cost. So if it is a reasonable amount, it can be claimed from the other side if they lose.

        When selling an “after the event” policy, the insurer will assess whether the legal action is a risk it is prepared to take. This means that policies may contain conditions that can be specific and unusual – and so the consumer should be made aware of them at the time of the sale.

        There are also normally strict reporting requirements that require the policyholder or the appointed solicitor to make the underwriter aware of any material or substantial changes to the risks involved in the legal action.

        does legal expenses insurance cover all legal actions and defences?Insurers are usually prepared to cover only certain causes of action and defence. There is, for example, generally no cover available for:

        • bringing/defending defamation proceedings; or
        • funding actions where state funding is more widely available (via the Legal Services Commission) – for example, in relation to child care proceedings, criminal trials, immigration appeals and applications for judicial review.Of course, for a price, it may be possible to purchase legal expenses cover for most known causes of legal action or defence. Generally, however, most household-related policies will cover the pursuit or defence of legal proceedings arising from the policyholder’s:
          • ownership of the insured home;
          • employment;
          • death or personal injury;
          • having entered into contracts for the sale and supply of goods and services.Motor-related legal expenses policies cover only causes of action that arise from the use or ownership of the insured vehicle – in other words, bringing (or defending) negligence actions against (or by) third parties.
            assessing a claimWhen we deal with complaints involving legal expenses insurance, our role is to assess the insurer’s handling of the claim in the light of the policy terms. We will not consider the quality of the legal advice.

            The Legal Ombudsman – a completely separate organisation from the Financial Ombudsman Service, with its own rules and procedures – may, however, be able to look at complaints about the quality of legal advice given to consumers.

            When we look at complaints about legal expenses insurance, we consider whether the insurer fulfilled its obligations reasonably – and dealt fairly with the claim. This involves looking at whether the insurer acted on the advice of appropriately qualified advisers.

            prospects of successLegal expenses policies invariably contain a clause that allows the insurer to withhold or withdraw funding for a legal action or defence, if there are no “reasonable prospects of success”. If the insurer has rejected a claim on this basis in a complaint referred to us, we usually expect it to have acted on expert advice – not to have made an arbitrary, uninformed decision.

            If the insurer considers that a claim should be pursued, the normal practice is for it to be passed to an external firm of solicitors on the insurer’s panel. This firm should have knowledge of the relevant area of law – and their opinion as to the prospects of success is usually a sufficient basis for the insurer to agree (or refuse) to fund the legal claim/defence.

            In cases we see where the policyholder disputes this opinion, we will usually ask the policyholder for independent evidence from a suitably qualified, and comparable, lawyer – to support their view on the prospects of success of the legal action.

            Sometimes there may be conflicting legal opinions from two different solicitors on the prospects of success of the action. This may happen when the insurer’s panel solicitor has advised that the case does not have prospects of success but the policyholder has a legal opinion from a solicitor to the contrary.

            If this happens in cases we deal with, we generally expect the insurer rather than the policyholder – unless the policy states otherwise – to obtain a legal opinion from a qualified barrister who has knowledge of the relevant area of law. In this situation, we normally place greater weight on the barrister’s opinion than that of the solicitor’s – as the barrister will be the expert in the particular area of law and in court advocacy and litigation generally.

            Some proposed legal actions may have no reasonable prospects of success because there is, for example:

            • a lack of evidence;
            • legal obstacles, such as statutory time-bars, immunities or decided case law;
            • no known cause of action.In the cases we deal with, we interpret “reasonable prospects of success” to mean a 51% or more chance of winning. If the legal experts advise that there is an even (50–50) chance of success, we will not usually regard this as sufficient.

              Complaints referred to us after the result of court proceedings is already known may involve a case that had a less than 51% chance of succeeding – but which then won in court.

              This does not necessarily mean that the insurer was wrong to refuse funding. The insurer can rely only on the advice and evidence available at the time. It does not have the benefit of hindsight that the policyholder and we may have when later reviewing its decision.

              cost of proceedings compared to the possible recoveryMany legal expenses policies allow the insurer to refuse funding, if the cost of proceedings is likely to be disproportionate compared to the amount of any “recovery” (the amount “won” in court) – for example, if the amount in dispute is only £100, but bringing the case to court is likely to cost £1,000.

              In the cases we see, we take the view that it is unreasonable to expect an insurer to fund a legal action that a prudentuninsured person would probably not fund themselves.

              Some policies give the insurer the right in these circumstances to pay the policyholder the sum of money at stake. However, other policies do not contain this specific provision, in which case the insurer cannot reasonably be expected to pay the policyholder.

              If the policy wording is not clear on this issue, we may ask the insurer to pay the policyholder the amount that they were claiming if we think this would be fair and reasonable.

              Policyholders in some cases we see are not seeking money (or only money) – but instead want the court to grant an injunction to stop someone doing something, or to make someone do something (for example, to stop using a driveway or to move a boundary fence). In these cases, we will consider legal opinions as to the likelihood of a court granting an injunction, making a declaration etc. 

              Sometimes we may take the view that it will be unlikely that non-financial remedies will be granted – for example, because they would be difficult to enforce or contrary to public policy. The court may instead decide to award damages. We will consider this evidence when we compare the cost of the proceedings with the likely outcome as predicted by the lawyers.

              choice of solicitorsLegal expenses policies often give the insurer the freedom to choose which solicitors to appoint for advice and assistance up to the time where legal proceedings start – unless there is a conflict of interest.

              However, once proceedings start (when the legal “claim form” is issued) – or if there is a conflict of interest – the law (regulation 6 of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 [SI 1159]) allows policyholders to choose their own solicitors.

              These regulations are wide enough to include legal proceedings pursued and defended in tribunals – for example, employment tribunals – as well as proceedings in courts.  

              Insurers usually have panel solicitors whom they regularly instruct. We sometimes see disputes where a policyholder wants to appoint their own solicitor from the start (or have already instructed their own solicitor prior to making the claim).

              Insurers sometimes have no objection to using a policyholder’s own solicitor. But for legitimate commercial and quality-control reasons, insurers often prefer to use their solicitors from their own panel. 

              We look at each case on its own individual merits. However, we are likely to decide that the policyholder should be able to appoint their own solicitors from the start only in exceptional circumstances.

              Whether we decide the individual circumstances are exceptional is a question of fact and degree in each particular case. We have published some case studies in ombudsman news (issue 26 – March 2003) showing our approach in this area.

              In the cases we see, the terms of a legal expenses policy do not generally guarantee any particular firm of solicitors, any specific location or any minimum size of firm. All they promise is a panel firm of solicitors prior to legal proceedings being issued. After legal proceedings have been issued – and to comply with statutory regulations – the policyholder can choose their own solicitor.

              With modern communications, the location of a panel solicitor should not affect the way the case is actually handled. If a face-to-face meeting is required, lawyers can travel to meet the clients (or vice versa depending on individual preferences).

              In the cases we see, most policies expressly exclude legal costs that a policyholder incurs before the claim was notified – or before the insurer authorised these costs. We usually decide that the insurer should be able to exclude these costs, as long as we are satisfied that the insurer has actually been prejudiced by them.

              This is why it is important that policyholders should notify their insurer about a potential claim as soon as reasonably possible. The courts have clarified that solicitors should advise their clients to check whether they have “before the event” legal expenses insurance, before entering into costly private-fee arrangements.

              We have seen cases where policyholders claim that they have a right to choose their own solicitors before proceedings – because the regulations allow freedom of choice where there is a conflict of interest. Policyholders sometimes claim that their disagreement with the appointed solicitor’s legal advice is a conflict of interest.

              We do not view these kinds of disputes as conflicts of interest. A conflict of interest arises only if the solicitor would be in breach of their code of conduct, or would be “professionally embarrassed” if they continued to act – for example, if the solicitor:

              • previously acted for the policyholder’s opponent;
              • knew the policyholder personally;
              • was privy to confidential information about the opponent; or
              • made a damaging mistake that would constitute professional negligence, such as inadvertently disclosing privileged material or missing a procedural deadline. how Eschig v UNIQA Sachversicherung might affect our workThe European Court of Justice (ECJ) case – Eschig v UNIQA Sachversicherung AG (C-199/08) – was a case about class actions which cited the separation of business requirements under Article 3(2)(c) of the legal expenses insuranceDirective 87/344/EEC.

                Article 3 requires insurers to ensure that legal expenses are separated from other classes of insurance they underwrite – so as to spread the risk and avoid internal conflicts of interest.

                Article 3(2) stipulates three alternative ways that an insurer can achieve this separation. These are by giving undertakings:

                a) that no legal expenses staff will carry on a similar activity for another class of insurance; or

                b) to entrust the management of claims to a separate legal entity; or

                c) to afford complete freedom of choice from the date of the insurance claim.

                As far as we are aware, the Article 3(2)(c) option was not taken up by any UK insurers. UK insurers chose to separatelegal expenses from other classes of insurance business by means of separate underwriters and/or claims-handlers – in other words, option (a) or (b) under Article 3(2) – and not by granting freedom of choice from the point of claim, as in option (c).

                The ECJ concluded that the discrete right to freedom of choice under Article 4(1) could not be circumvented by insurers – just because the assured was involved in a class action. We do not believe that it goes any further than that – or provides “that freedom of choice arises before the commencement of any inquiry or proceedings.”

                In our opinion, that sort of unfettered freedom would apply only where an insurer had not otherwise given undertakings to separate legal expenses from other classes of insurance business – under options (a) or (b) of Article 3(2).

                We note that it states (at paragraph 50) that: “The solution provided for in Article 3(2)(c) of Directive 87/344 grants more extensive rights to insured persons than Article 4(1)(a) of that directive. Thus, the latter provision provides for the right to freely choose a representative only where an inquiry or proceedings are initiated. By contrast, according to the solution provided for in Article 3(2)(c) of that Directive, the insured person has the right to entrust the defence of his interests to a representative from the moment that he has the right to claim from his insurer under the insurance policy, therefore prior to any legal or administrative procedure.”

                We are required to take the law into account when reaching a decision that is fair and reasonable in all the circumstances. Although we are not bound by the law, we do not take the view that the Eschig case affects the right of UK insurers to limit a policyholder’s freedom of choice to the start of proceedings or in cases of conflict of interest. However, each case should be considered individually.

                once legal proceedings have startedIn the cases we see, many policyholders choose to remain with the panel solicitor after the issue of legal proceedings – either for practical reasons or because they are happy with the service already being provided.

                Once legal proceedings are issued – or if there is a conflict of interest – the policyholder will be entitled to choose theirown solicitor. The policyholder’s own choice of solicitor is not bound by any terms of the insurance policy, as this is a contract made between the policyholder and the insurer.

                As a result, the insurer will require the policyholder’s solicitor to agree to the insurer’s standard terms of appointment. This is a separate contract entered into between the insurer and the solicitor.

                In the cases we see, the insurer is not frustrating the policyholder’s choice by imposing its own terms – provided that these terms can reasonably be accepted by another firm of solicitors. The insurer is usually entitled to decline to cover the policyholder’s own solicitor’s costs until the solicitor has signed the terms of appointment.  

                Most policies we see do not specify the hourly rate that the insurer pays the solicitor. As it is the insurer who is paying the legal costs under the policy, it is only reasonable that the insurer has a say in the amount being charged by the policyholder’s solicitor.

                In these circumstances, the insurer is not preventing the policyholder from choosing their own solicitor – but is ensuring that the costs that are being incurred are reasonable. So it is for the insurer and the policyholder’s solicitor to come to an amicable agreement on the hourly rate.

                late notificationMost legal expenses policies contain a clause requiring the policyholder to inform the insurer as soon as they become aware of an event that may give rise to legal proceedings. A breach of this clause could result in the insurer 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 with legal expenses policies, 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 coming into effect;
                • the legal requirement to avoid “inordinate and inexcusable” delay not being satisfied;
                • interest and costs building up.In cases we deal with where late notification is an issue, we look carefully at the evidence, to decide whether the insurer was entitled to reject the claim or limit its liability to certain costs. We take the view in these cases that the onus is on the insurer to show they have been prejudiced.
                  pre-existing eventsMost “before the event” policies will cover the cost of legal proceedings only where the event or dispute giving rise to the legal action occurred – or came to light – after the start of the policy. 

                  However, this is not always straightforward in the cases we deal with. First, the “event” that gave rise to the legal action needs to be clearly identified. And secondly, we need to consider whether the policyholder was aware of the “event” at the time they took out the policy.

                  For example – an accountant completes a client’s tax return negligently, but the client does not 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 had subsequently taken out.

                  Strictly speaking, in this example, the “event” is the negligent act which pre-dates the insurance. But even in cases where the policyholder did not 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 may decide that time should run from the “date of knowledge” – where the damage is not obvious at the same time as the act or omission that caused it. This is something we will consider on the individual facts of each particular case.

                  To prevent policyholders taking out insurance cover with a view to claiming for a known imminent dispute, some policies contain a “moratorium” period. This means that the policyholder is unable to claim for events or disputes that arise during, for example, the first 90 days of cover. The fundamental principle is that the insurance is to cover uncertain risks – not inevitable or existing events.

                  maladministrationConsumers sometimes complain to us about maladministration and delays by their insurer and/or its solicitors – in relation to legal expenses insurance. When we decide these cases, we take account of the fact that legal action can be a lengthy, complex process – and that the parties are restricted, to a large extent, by the timetables dictated by the courts.

                  All solicitors – including panel solicitors – have to work to strict codes of conduct. They owe their main duty to their client (the policyholder) and the court – not to the insurer who is funding the action. This can mean that the degree of control that insurers have over them is limited. 

                  For this reason, in the cases we see, we do not usually hold insurers responsible for the way their panel solicitors carry out litigation on a day-to-day basis. And if the policyholder has instructed their own solicitor, the insurer will have no responsibility – unless it has actively tried to influence or control the course of proceedings.

                  If consumers are unhappy with the quality of the legal services provided, they may be able to take their complaint to the Legal Ombudsman. The Legal Ombudsman is a completely separate organisation from the Financial Ombudsman Service, with its own rules and procedures.

                  However, if a solicitor is responsible for gross maladministration in relation to a claim – and the insurer was aware of this but failed to intervene – we may consider telling the insurer to compensate the policyholder for distress and inconvenience. If the legal action is still running, we may consider asking the insurer to appoint alternative solicitors – although this could cause further delay.

                  If we decide that an insurer has handled a claim poorly, we may tell them to compensate the policyholder for any financial loss, distress and inconvenience or for damage that was caused by the poor handling.

                  Financial Ombudsman Service – Online Resource as at 10.6.11