Look before you leap

A series of collapses in the after the event (ATE) legal expenses insurance market have not helped improve its bad press. The failures of claims management companies like The Accident Group, Claims Direct and Invaro have been well publicised. These organisations were essentially marketeers and not insurance technicians. While there has been a significant growth in ATE over the last four years, a lack of basic raw materials such as funding and essential underwriting has led to a reduction in smaller players. However, during this period, there have been an increasing number of individuals seeking to bring personal injury claims against third parties - usually indemnified by an insurer.

Driving force

Capacity limits and threat of regulation should now slow growth rates.

The Government has now rightly threatened regulation for claims management companies if they cannot self regulate. While on the insurance side the Financial Services Authority (FSA) should afford consumers additional support. The tests in insurance policies, of there being reasonable prospects of success, will become even more important in stamping out poorly advertised expectations of reward from cold-canvassing; TV advertisements and roadside hoardings, leaving the genuine claims to be supported by legal expenses insurers. The plaintiff side of the legal profession will have their major role to play by discouraging poor quality cases.

The ATE sector of the significant legal expenses insurance market had grown quickly - in some instances it appears without regulation, in-depth knowledge or technical experience being utilised correctly. Certainly here, there was room for improvement. Legal expenses is a valuable segment of our insurance industry, capable of supporting the rights of individuals and small businesses. No insurance provider wishes to see it damaging the industry with unrealistic claims resulting in premium increases for mainstream insurance products.

Nevertheless our industry would be well advised not to overplay the costs of this culture against past mistakes such as: poor underwriting; poor reserving; poor service; poor investment strategy; and short-termism.

Before the event (BTE) has been available in the UK since 1974, some 26 years before 'Access to Justice'. BTE is accepted by traditional providers in the insurance market as, on balance, responsible, reasonable and capable of sensible negotiation. BTE insurance could still be the answer. However, sadly the British psyche, when it comes to insurance, is "it will never happen to me."

BTE is no different to any other class of insurance as far as the buyer is concerned. Most household policyholders don't even know there's a legal advice section to their policy and for reasons of vested interest no insurer is going to make a song and dance about it. However BTE, certainly in its early days, was prone to two major hazards: it was a haven for the litigious and it had a perception of being a a pot of gold by many lawyers who had little concern for underwriters and were quite happy to "kill the goose that laid the golden egg."

Even in the mid-seventies a number of lawyers' political societies were looking for BTE solutions to solve the problem all governments had of avoiding more cash going into state legal aid. Legal expenses insurers were painfully aware that there would be gaps created by limited operative clauses and made worse by exceptions and conditions. In other words, even if BTE had been in place across the whole population, there would still be a need for a controlled ATE insurance/funding facility.

The claims culture is primarily associated with matters of tort and, principally, injury. Prepaid (or BTE) personal and commercial covers also embrace other matters including contractual/consumer matters, contract of employment disputes, prosecutions, tax matters and neighbourhood or property disputes. Many of these covers provide defence.

It is highly unlikely the Government is going to turn back the clock and restrict access to legal services. Hence the reluctance of The Department for Constitutional Affairs to regulate claims management companies.

The only serious private sector resource is the insurance market, combined with funding from banks, but there is an understandable, if ill thought through, view that the compensation culture is contributing to premium increases.

The legal expenses insurance industry needs to provide prepaid solutions to as many individuals and businesses that are prepared to insure in a traditional way for tort and contractual matters, but we must accept the British mentality is often geared to taking risk to avoid paying premium.

BTE legal expenses insurance is not the only route. Of course, in traditional insurance you may have difficulty persuading an insurer to accept your fire risk after the fire. Legal expenses insurance is different and the principal condition in both prepaid BTE and ATE is the same: "Are there reasonable prospects of success?"

Good prospects

The prospect of paying a claim is more probable with ATE and it therefore follows the premium should be greater than the prepaid alternative where at inception, or policy renewal, the expectation of litigation would be fortuitous.

Adequate capacity must be provided by the insurance and banking markets with both sectors accepting things do go wrong, and learning from mistakes.

Co-ordination of the insurance and funding sectors must be masterminded by experienced legal expenses providers offering a fully funded service for solicitors with direct funding of premiums and disbursements throughout the duration of the litigation process.

If the insurance broking community can grasp the nettle of BTE sales this would be the preferred solution. Unfortunately, commercial and personal lines BTE tend to be the "tail-end Charlie" offering to clients, often being the first to suffer in a hard market. As mainstream covers suffer from rising premiums so peripheral covers go by the board. Mandatory and bulk-buy opportunities will, naturally, reduce the cost. It is ironic that if brokers were to grab the BTE nettle, they would be doing not only their client a major favour but also the state and providers of third-party cover.

The advantages of selling BTE are: regulation by FSA in respect of insurance cover; less provision of state legal aid and less cost to third party insurers; ability, through prepaid legal expenses to maintain individuals and businesses in litigation for the consideration of a premium; a known prepaid premium that is less expensive than ATE, and that covers the fortuitous legal event; an opportunity to widen your client base with clients who don't transact traditional insurance with you; and a significant new revenue stream.

If a client fails to heed your advice to take out BTE, then there is always ATE, unless the matter relates to a prosecution or a fixed cost dispute in the area of employment and tax disputes, but surely certainty is the best policy.

John Mullin, managing director, Composite Legal Expenses.