Legal Expenses - Making inroads into uncertain territory

As the tenth anniversary of the Access to Justice Act approaches, personal legal expenses insurance in both before and after-the-event markets is said to be maturing well, with market penetration high in BTE and sensible underwriting prevailing in ATE. As a result, the sector is now turning towards commercial lines.

The Association of British Insurers provides no data on the LEI market and figures have generally to be gleaned from public statements, however, as one would expect, the product providers agree that demand is on the up, though not necessarily the reasons why.

Market penetration is agreed to be low, with anything between 25 to 50% of businesses holding commercial legal cover. Peter Smith, managing director at First Assist Legal Expenses, explains: "BTE commercial undoubtedly covers greater numbers of businesses and probably generates higher total premium. ATE is seeing increasing demand, particularly for large contract disputes; these cases produce large premiums."

Nick Garner, managing director at Manchester-based legal expenses insurer MSL, says that the recession, in all likelihood, will lead to an increase in commercial litigation, driving both BTE and ATE take-up: "As parties start defaulting on contractual obligations such as payment or service delivery times, that leads to increased contract claims, which is a key element of cover in most CLEI products."

Richard Finan, director at Arc Legal Assistance, believes that the vast majority of CLEI demand will be for BTE cover - driven by a rise in employment claims made against UK businesses - while the revised Employment Act (2008), which comes into force in April, could have a nasty sting in its tail. He comments: "The Act replaces the statutory process for disciplinary or dismissal, so you now have to follow Acas guidelines, which is a little better for employers. However, if you lose because the dismissal was deemed unfair then the tribunal can award an additional 25% for each employee than they would have done."

Hearsay

Information is largely anecdotal and official figures on how many people are making a claim against their employers are out of date. The Employment Tribunal Service's most recent data goes up to March 2007, however, it did reveal a 15% rise in admitted cases year on year.

Another underwriting agency, Composite Legal Expenses, sells 80% of its policies to commercial clients, with a CLEI scheme through the British Chambers of Commerce among its routes to market. The company's managing director, John Mullin, seems to agree with Garner at MSL and says that the demand for CLEI will go a little further than contract of employment disputes alone. "Debt recovery will have to be a fundamental part of the package. Smaller companies are going to have to learn to look after themselves and CLEI is one way to help them achieve the muscle that they need," he remarks.

However, David Vine, business development manager at Allianz Legal Protection, is a little less bullish and bemoans commercial BTE rates remaining under pressure. He says that there is an assumption in commercial BTE of the product's "having to be cheap" when sold in a package.

"If you are writing a standalone CLEI policy with a £250,000 limit of indemnity, you have a big exposure and you need a lot of £200-£300 policies to cover your potential losses," he explains. "It is difficult because there has been such a soft market and CLEI is competing in particular with directors' and officers' or excess-of-loss. It stands to reason, though, that you are more likely to have an employment tribunal claim than you are to have a fire."

ALP is in the relatively convenient position of also having its parent company to market CLEI alongside its commercial package business. Yet why, with so much personal lines BTE sold alongside motor and household, is the commercial market not thriving with competition and innovation? Mullin pulls no punches when he says that there is an established status quo: "The mainstream insurers should be talking to the whole market rather than keeping business going with their cozy little arrangements.

"I would expect a decent composite insurer to go to the market once every two years to tender its package and be transparent about what LEI cover they are asking for. I would expect them to be transparent and knowledgeable about the LEI cover that they are offering their customers and brokers. Frankly, I think what is being offered is very poor value for money: the policyholder hardly ever knows what they are buying or how much they are paying for it."

David Vine says that he has seen tenders increasing but adds: "A lot of it is just box ticking rather than actually going to market and finding the best deal. There's a major cost to moving providers because you have to change so much literature. I haven't seen one provider move yet."

Opening

In the ATE market, things seem to be happening and this is one area in which some are anxious to see increasing numbers of brokers become involved. Premiums are much higher, though there are few brokers and the majority of distribution is solicitor-led.

First Assist has nailed its flag to the mast already, signing a high-profile ATE deal with the well-known class-action law firm Cohen, Milstein, Hausfeld & Toll. First Assist's managing director, Peter Smith, adds: "The market is able and willing to insure substantial cases, sometimes with damages up to £100m. Surprisingly, there is little demand from small and medium-sized enterprises for ATE. An insurer is looking for a case that can reasonably be expected to win, run by a solicitor and barrister with a good track record in that field and where the opponent is solvent and likely to be able to meet damages and costs. Contract disputes are the commonest, though we also see many other types."

Doubt

Solicitors are well placed to vet a case's likelihood of success, yet could conventional brokers find a way in? Michael Armstrong, head of legal and insurance services at Mount Grace Insurance, thinks not: "They have access to customers but it's an arena that requires more knowledge than a generalist could have. For lower-value personal injury claims it might work, though for higher-value, more complex professional indemnity and general commercial cases, it would be very difficult for a generalist to be involved."

Andrew Kay, managing director at IGI Legal Assistance, is less pessimistic, pointing to the results of a recent survey of FTSE 350 companies by law firm Addleshaws: "It said one-third of those responsible for litigation budgets had never heard of ATE and 16% had heard of it but didn't know what it was. Our major distribution for ATE will always be the lawyers but it could be that, on commercial, we look to make inroads through brokers that handle commercial accounts. They have a duty to raise awareness among their clients and potential areas where ATE could be a solution rather than traditional methods of litigation funding."

MARKET LAUNCH - ALLIANZ LEGAL PROTECTION

Allianz Legal Protection is understood to be planning a launch into the commercial after-the-event legal expenses market in a dual push alongside its parent company.

According to sources close to the insurer, which currently turns over approximately £35m in BTE and ATE premiums, policy wordings and distribution arrangements are being developed for a commercial product designed to cover clients seeking to bring large contract claims on a no-win, no-fee basis.

The source explained that ALP will work alongside Allianz's traditional commercial arm to market and expand on its existing BTE policy range, which covers clients for commercial contract claims already.

ALP already provides personal injury ATE policies, covering fast-track road traffic accident cases typically, as well as more complex injury and disease claims. A soft launch of the commercial ATE product is expected in March.

A SELECTION OF LEGAL EXPENSES COVER PROVIDERSProvider Notes Premium incomeAbbey Legal Brands include: Abbey Protection,Protection Abbey Legal Protection >£30mAllianz Legal 50/50 commercial and personal LEI £35mProtectionArc Legal Expenses BTE specialist agency, capacity from Axa Assistance £8mBrit Insurance Underwritten through BIL and Syndicate 2987Composite Legal Capacity provided by GroupamaExpensesDAS Brands include Amicus Legal £109m (2007)Elite Insurance Gibraltar-based LEI insurer £15.7m - half yearCompany to September 2008Helphire Group Brands include Albany Assistance and Angel AssistanceIGI £17-£20m (estimated)Mount Grace Gibraltar-based insurance arm of claims management firm Freeclaim IDC £2mMSL Keystart and Key Track £5.3mTemple Legal Capacity provided by IGI £7-£8mProtection (estimated)