In defence of legal expense

Legal expense, in all its forms, can be used by brokers as a marketing tool to penetrate new connections in personal lines and commercial insurance.

In its thicker premium classes, LE insurance is viable to be marketed in its own right, even if the broker does not have control of the traditional segment of a new client's insurance portfolio.

LE insurance is a contract of maintenance, which insures solicitors' fees, barristers' fees, court costs and witness and attendance fees. Broadly, it does not cross with liability covers in that it attacks in tort, defends and attacks in contract and defends in prosecutions.

Estimates of market size at the beginning of the 1980s (including ancillary assistance covers - domestic emergency breakdown, roadside assistance following an accident) would be approximately £10m gross written premium.

Today, LE insurance generates around £250m to £300m in gross written premium.

History and market development

LE insurance can be offered in personal lines, commercial, specialist uninsured loss recovery and associated assistance services and after-the-event covers.

ATE has tended to be marketed via the legal profession. Affinity relationships are well established in the LE segment of the market and can be utilised in before-the-event covers, which may be personal or commercial.

Traditionally LE insurance has been perceived as an invention of our European neighbours. Until it became legal to underwrite this business in the UK under the Criminal Law Act of 1967, the majority of business written on the Continent was of a personal lines nature.

Personal LE business had a chequered start in the UK. In the mid 1970s, the UK was in the middle of a major economic depression and premium levels were more in line with the more direct markets on the Continent. The result was difficulty in selling a new expensive concept through the broker.

Also, commission levels, when compared with motor or household premiums, were quite small.

To add to the difficulties, solicitors tended to view claims opportunities in the same way as vehicle repairers once viewed 'insurance jobs' and had scant regard for the underwriter.

The commercial opportunities of the first Health & Safety at Work Act in 1977 ensured the survival of the then LE market. Uninsured loss recovery escaped from the packaged personal lines products as brokers realised the advantages of passing recoveries to specialist insurance providers, subsequently coming to appreciate there were significant revenue advantages, which would offset reducing motor commissions.

The now common LE add-on to the household policy emerged in theory to remove selection. Experience improved with the introduction of panel lawyers and 'sieving' of potential claims via legal advice helplines. Legal protection for landlords also developed in the mid 1970s.

Commercial LE, developed in the UK, is today probably the steadiest, with a track record of profitability. It is essentially a market for small to medium-sized enterprises. The first ideas for this extension, of what in the mid 1970s was seen as a personal market, came from the then national and Lloyd's brokers, which saw logical parallels between this market and traditional insurance covers (see boxes A and B).

Recent trends and changes

Inevitably, there was widespread uncertainty in the ATE LE insurance market following the high-profile collapses of The Accident Group and Claims Direct. But, it is essential there is not an overreaction. In every sector of the insurance market there have been failures and mistakes, but there still are active motor, commercial and life insurers.

The ATE sector of the LE insurance market has grown quickly - in some instances it appears without regulation, in-depth knowledge or technical experience being utilised correctly. Certainly, here, there is room for improvement.

BTE has been available in the UK since 1974, some 26 years before 'Access to Justice' and is perceived and accepted by the insurance market as being responsible, reasonable and capable of sensible negotiation.

Negotiation is fundamental - it is mooted that around 40% of defending insurers' outgoings are spent on legal costs. Indeed, insurers use BTE as a marketing tool to enhance traditional insurance products.

There is the understandable, but ill-thought-through view that the so-called compensation culture is contributing to premium increases in mainstream insurance. A more candid response might indict poor mainstream underwriting and weak investment strategy as a root cause.

The government wants to make conditional fee arrangements easier for the consumer to understand, easier for the solicitor to use and more difficult for third parties and third-party insurers to challenge mischievously.

It is a two-way process and the costs of conditional fee arrangements need to be more transparent, including premium breakdowns.

The LE 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. Brokers must also accept that the British mentality is frequently geared to taking risk to avoid paying premiums - the 'it will never happen to me' syndrome.

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

In order for the provision of private sector legal aid to move forward, adequate capacity needs to be provided by both insurance and banking markets.

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

There are some issues needing resolution but, meanwhile, the opportunity for brokers is greater than ever before

Statistics

The statistics spell opportunity (see box C). Never before has it been so relevant and essential for a prudent business to buy LE insurance.

As a result, there exists great opportunity for insurance brokers to sell the cover - to complete the insurance portfolio of a client and as an additional earnings stream. Arguably, failure to offer LE insurance could be a failure of best advice.

Prepaid or BTE is the preferred solution for brokers. With less provision of state legal aid, prepaid LE enables the individuals and businesses to remain in litigation for the consideration of a premium. Prepaid premiums, which cover the fortuitous legal event, is less expensive than ATE insurance.

BTE also offers the opportunity to widen a broker's client base and bring a significantly new revenue stream.

However, it may be the last chance for insurance brokers to market this still comparatively new product to affinity, commercial and personal lines connections.

Direct selling is just around the corner and the legal profession is now eyeing up the dual opportunity of client retention and acquisition using the LE insurance market.

Brokers are advised to grasp the opportunity while it still exists.

BOX A: RANGE OF COVERS AVAILABLE (PERSONAL)

- Motoring prosecutions

- Contractual/consumer disputes

- Pursuit of injuries

- Contractual/consumer disputes

- Non-motoring prosecutions

- Employment disputes

BOX B: RANGE OF COVERS AVAILABLE (COMMERCIAL)

- Defence of contract of employment disputes and associated discrimination and equal opportunity matters allowing a firm to defend a tribunal case brought against them.

- Awards when a tribunal does not rule in favour of a policyholder.

- Enforcement of restrictive covenants in respect to employment contracts.

- Defence of criminal prosecutions of the business, for example, defence of health and safety prosecutions.

- Defence of criminal prosecutions of employees of the business.

- Data protection and awards.

- Contractual disputes arising out of goods and services sold or supplied. For example, disputes over cancelled orders and cessation of business.

- Property legal protection disputes, mainly tortuous or strict liability.

- Disputes with landlords.

- Jury service and witness attendance costs while away from the business.

- Loss of licence - representation to enable the business to continue trading.

- Tax and VAT disputes.

- Business vehicle problems including motoring prosecutions, contractual disputes, injuries, uninsured loss recovery and motoring assistance.

- Personal legal expenses for principals, managers and employees - particularly beneficial for employees who have been able to claim damages for injuries sustained, not just while on company business.

- Intellectual property cover is now becoming desirable and includes matters such as copyright, passing off, trademarks and patents, etc.

BOX C: STATISTICS (2002/2003)

- Almost 100,000 applications to employment tribunals

- Over 40,000 Inland Revenue full enquiries

- Maximum award to date for race discrimination: £800,000 (no limit)

- Reportable workplace injuries: 400,000

- 22,000 HASAWA improvement and prohibition notices

- Average HASAWA fine: £8200

Source: Tribunal Service Annual Survey 2003, Department of Trade and Industry.