Legal expenses insurance

Legal expenses insurance (LEI), also known as legal protection insurance (LPI) or simply legal insurance, is a type of insurance which covers policyholders against the potential costs of legal action brought by or against the policyholder. The concept originated around 1911 as a result of a fatal crash at the famous Le Mans race during which some spectators lost their lives and others were severely injured. When the victims or their families claimed damages from the insurers of the organizers, their claims were repudiated. They then all contributed to a pool which was used to fund collective action against the insurers. They were successful. This gave rise to the first LEI policy being developed in France. Not long after that, a motoring club in Germany called the "Deutsche Automobil Sportiff" (DAS) increased membership contributions to create a similar pool to pay for the defence of its members charged with traffic related offences. Members of the general public then enquired about joining the scheme. That is when the idea of an insurance available to the general public became firmly established. At present, the DAS of Germany is still the largest legal expenses insurer in the world. It is estimated that they write approximately 50% of LEI business worldwide. Then follows ARAG, also a German insurer. It is estimated that they write approximately 30% of global business.

A conflict of interest presents itself if LEI is offered by an insurer that also offers other forms of insurance. As a result, most LEI providers are specialists offering LEI only. Internationally, LEI is represented by a non-profit association called The International Association of Legal Protection Insurers (RIAD)www.riad-online.net. It operates independently of the general insurance industry. A listing of its members can be found on their website.

There are two main forms of LEI, before-the-event and after-the-event ("the event" being that event which triggers legal action). "After-the-event" legal expenses insurance is a misnomer, since insurance technically, can only indemnify against future unforeseen events. Most legal insurance plans are before-the-event, and "after the event" is not common and found mainly in the United Kingdom, where it is an insignificant percentage of total LEI business. The majority of LEI business worldwide, is conducted in Europe (Germany and France in particular).In the United States, the general idea of financial assistance with litigation is most often called pre-paid legal services (PPL or PPLS). The reason for this is that many plans are not insurance based. Some are offered by trade unions as a free benefit of union membership. Others are non-profit clubs set up by groups with a common interest, like University students. Some forms of insurance such as professional liability insurance, medical malpractice insurance,Professional liability insurance, errors and omissions insurance for consultants, agents and brokers of various sorts, and directors and officers liability insurance for principals and supervisory officers of corporations and other organisations, are often marketed under the banner of LEI, but they are in fact liability insurances, a small component of which is to cover the legal expenses of a liability suit. In reality, the insurer is funding the defense of litigation against itself. If it were to fail in doing so, there is a risk that their insured might be held liable for damages that they would be liable to pay under the liability insurance. They are therefore merely protecting their own interests by funding the defence.

Purpose

Legal expenses insurance provides more affordable coverage for the legal fees charged (including expenses incurred) by a lawyer representing the policyholder in usually unforeseen legal matters. These can include employment disputes, litigation, disciplinary actions, human rights complaints and criminal charges. Coverage is generally not discretionary; if the claim is covered within the governing terms and conditions of the policy, the policy responds. In addition to liability insurance against certain kinds of legal liability, legal expenses insurance can also offer coverage for predictable events such as the drafting of a will or power of attorney, and simple legal advice.

In the UK

Before- and after-the-event insurance

Before-the-event (BTE) insurance, is taken out by those wishing to protect themselves against potential litigation costs that could be incurred following a usually hypothetical future event. These costs often include fees of solicitors, barristers and expert witnesses, court fines and fees, and any legal costs awarded to the other side. Before-the-event insurance is generally paid on an annual basis to an insurance company. It is often sold as part of a home or auto insurance package, and is also sometimes offered as a benefit to members of a trade union or association.^[1][2]

After-the-event (ATE) insurance is taken out after an event, such as an accident which has caused an injury, to insure the policyholder for disbursements, as well as any costs should they lose their case. After-the-event insurance is usually used by people who do not have before-the-event insurance. If the policyholder loses the case, then the insurance company will pay the opponent's legal costs and expenses, as well as the policyholder's own disbursements. Solicitors who take on, for example, personal injury cases on a "no win no fee" basis, may require their clients (whether defendants or plaintiffs) to take out after-the-event insurance so that costs will be covered if the case is lost. The premium payments, especially in a "no win no fee" arrangement, may be deferred until the conclusion of the case; thus in most cases the premium itself is self-insured. This insurance is often offered by solicitors and claims management companies . Where the ATE insurance policy was incepted before 1 April 2013, its cost will often be recoverable by the successful party from the losing side as part of an award of costs.^[1][2] Where the ATE insurance policy was incepted on or after 1 April 2013, its cost will not be recoverable by the successful party from the losing side.^[3] The cost of BTE insurance is never recoverable as part of an award of costs.

Worldwide, this is the only country where LEI is primarily marketed direct to the end user (no intermediaries). The focus is on preventive dispute resolution via in-house lawyers. 80% of issues are resolved in-house. There is only one specialist legal expenses insurer in the country and it has an 80% share of a market of 1,5 million main policyholders. It is also the only member of RIAD.

Lack of awareness

Research by the UK Ministry of Justice in October 2007^[4] found that despite 59% of the UK population actually having some form of legal expenses insurance (whether they knew it or not), fewer than one in four consumers had ever heard of before- or after-the-event insurance. The research estimated that 28 million British adults have before-the-event insurance in particular, most as an add-on to another insurance policy.

In their thematic review of the UK's Motor Legal Expenses Insurance industry, the Financial Conduct Authority highlighted further lack of awareness by consumers. Many consumers could not distinguish between the legal cover of car insurance (protection against being sued for damages) and Motor Legal Expenses Insurance (pursuit of legal rights in recovering uninsured losses and cases of prosecution).^[5] They cited the range of names used in the market to describe the product as a cause for confusion,^[6] with insurers using the terms Legal Assistance Plan, Motor Legal Protection,^[7] Drivers’ Legal Protection, Legal Assistance and Motor Legal Cover variably.

In Canada

In Québec, a program has been successful because it was both endorsed and promoted by Québec's law society (bar association), Le Barreau du Québec. Outside that province the concept is less well-known, although multiple legal insurance providers operate in the country (some native, some U.S.-based).

Special Bill C-45 coverage for municipal governments is also essentially a form of LEI.

References