Legal eagles

For years the legal expenses sector was tainted by association with a string of failures and high profile cases of bad publicity. A timeline showing the sector's recent history would start in 1999 when the Woolf reforms abolished legal aid, and would go on to highlight the entry into administration of Claims Direct in July 2002.

Soon after that, in May 2003, The Accident Group collapsed, going down in a blaze of bad publicity as its 2500 staff were sacked by text message. There were even more bad headlines in 2004 when a number of insurers exposed to their losses withdrew from the after-the-event market.

The reason for the trouble was that TAG and Claims Direct had embarked on thousands of 'no win, no fee' cases backed up by insurance policies to pay legal expenses if the cases were lost - as many were.

The Lloyd's operators Goshawk, Catlin and Atrium all pulled out, along with NIG and Europe Assistance in the Financial-Services-Authority-regulated sector, and who could blame them - an actuarial review by B&W Deloitte into TAG's claims statistics found that Catlin's loss ratio was an appalling 250% for the 2000 accident year.

TAG and Claims Direct may have had the highest profiles but they were not alone. All this controversy was fuelled by reports that the UK had developed a litigious compensation culture, a theme given vigorous exposure in the media.

Background of failures

While the Association for Personal Injury Lawyers argued that the compensation culture was a myth, by the time the government's Better Regulation Taskforce published an investigation in May 2004, it was clear that the damage had already been done to the legal expenses sector.

Against this background of corporate failures and bad publicity, it is hardly surprising that some brokers and insurers remain wary of the sector. The danger is that brokers who shy away from the sector are missing out on good business opportunities - and also the chance to add real value for their clients.

There is no reason why before-the-event cover ca not be sold on virtually every contract a broker deals with and many of those contracts may lead to an ATE policy - which is also a good source of income.

The most valuable opportunities for most brokers will be in the commercial arena, where there are a lot of opportunities that are not being followed up.

Typically, a broker will have a motor BTE source and possibly another for family legal protection. However, a lot of brokers do not have a source for a good commercial legal expenses policy.

Figures from the ABI show that 43% of UK general insurance business is commercial, and 84% of that is controlled by brokers. This is where the opportunities get really interesting as it is a valuable service to clients and a good source of income for brokers.

Also, there are millions of accidents a year in the UK. The Department for Trade and Industry says 2.8 million people per year go to hospital following an accident at home with roughly the same number of leisure accidents. Looking at road accidents, Department for Transport figures show that about 280,000 are involved, with 34,000 killed or seriously injured. Then there are over 5000 members of APIL - that is 5000 customers out there selling ATE cover.

So, not only is there opportunity to sell cover, it is also very worthwhile for the broker. With premiums averaging around £350 and a commission rate of probably 30% or 35%, that's £100 for the broker every time. There are risks, too, however.

The broker will probably be the first port of call for individuals who have suffered an accident or injury. It is a difficult time for them, so being able to offer a good ATE service can really add value to the relationship but obviously there is a reputational risk, too.

If brokers are first in line providing the claims service, then their reputations are also first in line to gain or lose. That is why it is important for them to know the subject and be able to choose the right policy and underwriting partner.

One of the factors making life a little more complicated for the broker is that some legal expenses players that write BTE do not want to do ATE. The fact that it has had such a bad name in the past does not help and BTE has been around much longer and is better understood - a safer bet to many.

As a result, underwriting has started to move offshore - Isle of Man Assurance, Templeton Insurance and Red Sands on the Isle of Man and Gibraltar respectively. There is nothing wrong with this but it stands to reason that having a regular dialogue with an insurer based overseas may be more difficult and brokers should also be aware of the regulatory differences.

Building a relationship

It is another reason why it stands the broker in good stead to build a connection with a good legal expenses insurer offering the comprehensive range of policies. If the broker needs to go to different insurers for a motor legal expenses product, a family legal expenses product and an ATE product, it starts to become hard work and time-consuming.

If, on the other hand, the broker can build a relationship with an insurer who specialises in all these fields, it is not only less work but the specialist service provided will reflect well with clients - so the risk becomes an opportunity.

Undoubtedly, it is commercial or ATE business where brokers can really add value and where expertise will be repaid. Going by ABI figures again, legal expenses generate gross written premiums of about £450m. Even if that were divided between every insurance broker in the country it would still be a share worth having and some brokers are missing a trick here.

Changes to current legislation could mean the legal services sector is about to get some high profile attention - Lord Falconer has predicted that big retailers, supermarkets and banks may enter the market following the introduction of the Legal Services Bill in 2007.

The main effect of this law will be that people other than solicitors can invest in solicitors, which does not actually affect the provision of the insurance that may go along with it. So, your local supermarket may set up a legal service offering to help deal with, for example, neighbours' disputes or motoring prosecutions.

However, the person providing the legal service does not actually matter as long as they are properly qualified. Of course, a client may decide that he is more likely to receive a specialist service if his cover is provided by a specialist insurer - for example, we make sure that our lawyers are specialists in the relevant field although a client can always use their own solicitor.

Other legislative moves could change the landscape for legal expenses insurance by helping to achieve insurers' desired result of more claims being handled in small claims courts.

Recovering costs

The insurance industry has lobbied for a rise in the small claims limit from its current position of £1000, which, if successful, could lead to cost savings for insurers estimated at up to £380m.

The Department for Constitutional Affairs is currently consulting on lifting the limit either to £2500 or £5000.

There is a risk here that, as solicitors cannot recover their costs in a small claims court they may start charging more for other work and this could push up BTE premiums. If the solicitor is not able to recover his costs, insurers will have to cover the costs and there is a danger that there will be less protection available through ATE as a result. This could mean the most vulnerable people - the old, the poor and those least able to defend themselves - being left on their own.

Other questions for a broker to ask when looking for a reliable partner in legal expenses involve premium funding for the solicitors.

For many solicitors, the availability of a good funding package is crucial because it can take years to recover the costs associated with a case, and carrying that debt is an expensive business in itself. The question here is not only if it can be done, but also if it can be done at a sensible rate.

Premium funding

There is premium funding available at credit card prices out there - sometimes offered at more than 25%. This is what prompted IGI to set up its own facility, with a rate of 10%, but there are not many out there right now. Obviously, the interest rate may be the deal breaking factor but coming a close second may be the amount of paperwork required or hidden charges.

Another funding option is to choose a deferred premium scheme, in which the solicitor does not have to pay the ATE premiums until the end of the case. This can be useful but how many brokers want to wait perhaps three years for a commission cheque?

So while the ATE market has had its problems, it is time brokers looked past the tarnished image - and providing they pick the right partners, there are rich pickings to be had.

- Keith Wardell is Chief executive officer, IGI Group

CASE STUDIES

Legal expenses insurance can provide a crucial service for brokers' commercial clients. Cases involving hairdressers facing VAT disputes illustrate how a legal question could quickly overwhelm a small business owner.

It is a widespread practice in hairdressing to rent out a chair in a salon. However, there is a complex question over whether supplying that space is service subject to VAT.

IGI is involved in such a case now where it has engaged a QC to take the hairdresser's fight to appeal - and has run up a legal bill of £50,000 in the process.

Wardell says: "Few hairdressers could possibly afford that but the hairdresser had commercial BTE protection."

Legal costs are such that any lost case with ATE cover illustrates its value to the insured. IGI has paid out claims for up to £40,000 where a case was lost and the client was ordered to pay the other side's costs.

For the vast majority of people, as Wardell points out, this could be financially devastating - "if an injured person went to court and had to pay costs of £40,000, for nearly all of us that means selling our house."