This year’s International Bar Association’s annual conference kicked off in Seoul with the release of their latest piece of research; “Legal Expenses Insurance and Access to Justice”. The report focuses on legal expenses insurance and explores how it can assist greater access to civil justice for those that the report terms “the forgotten middle” – individuals that lack the disposable income to pay legal fees but also do not qualify for financial assistance.
For more thorough details of the report, click here to read Ben Rigby’s excellent write up in CDR Magazine (currently free to read).
Legal expenses insurance can, should and often does play a significant role in facilitating access to justice for individuals and small businesses that cannot afford to pay their legal fees and do not qualify for state aid or pro bono schemes.
Indeed, it also plays a significant role in mitigating the risk of larger companies that have the funds to pay legal fees but want the comfort and certainty that such insurance policies provide.
Whilst it is easy to form the view that legal expenses is the solution to the current issues surrounding access to justice in the wake of the cut backs to legal aid, its use, as pointed out by the IBA, is hampered by a few key factors, mainly,
- A general lack of knowledge of its existence – even amongst those policyholders that have clearly purchased it or received the benefit as part of a broader insurance arrangement
- An unwillingness to pay much, if at all, for the cover
Knowledge is the key
Strong consumer awareness is vital and any steps that can be taken to increase the general population’s (both individuals and businesses) understanding of the types of legal expenses insurance available should have a positive impact on their ability to access justice.
For BTE products, the onus must be, for the most part, on legal expenses insurance providers and brokers prior to and at the time the policy commences so that the policyholder knows they have insurance in place if and when a dispute arises. However, lawyers in England and Wales are also under a duty, found within the SRA Handbook, to discuss the existence and availability of BTE and ATE legal expenses insurance when advising their clients with regard to the management of their legal fees, so it shouldn’t be the case that individuals lack the requisite knowledge once their dispute is moving towards legal proceedings with qualified representation.
It is surprising, however, just how many lawyers are not aware of the insurance options available with many turning to litigation funding products as their first port of call when advising clients who cannot or do not wish to pay their legal fees. This is obviously bad advice if the client has a BTE policy that they could be using, at least in the first instance. However, it could also be poor advice if there are alternative ways to overcome any cash flow needs (i.e. if the firm is willing to offer a conditional or damages based fee agreement or if there is the possibility of the claimant obtaining a more traditional loan using insurance as security so that the money itself is not at risk).
You pay for what you get
The education point is crucial for the increased use of both BTE and ATE but, ultimately, an increase in take up relies on the individual or business wanting to pay the cost of the insurance in the first place. A careful balance needs to be found between pricing the premium at a level that is attractive whilst being profitable for the insurer. This creates a catch 22 position because those that are aware of the product often only want it if it is free or incredibly cheap to buy (or, if ATE, they want the premium to be deferred and contingent upon success). Yet there is a base cost the insurer has to charge in order to cover anticipated claims and this base cost depends significantly on the number of policies they sell and the number of claims they can expect to have to pay. The inherent cost uncertainty in bringing legal proceedings adds to the pricing challenge for legal expenses insurers. It is, however, important to note that the legal expenses insurers in the market today are not inflating the cost and reaping huge profits. If they were, more providers would be offering the product.
Oftentimes, when those that the report terms the “forgotten middle” understand what the product is and how they can use it, they simply aren’t willing to pay for it. Legal fees relating to a dispute are a distress purchase and Joe Bloggs either just doesn’t see himself landing in that situation or makes the decision to worry about it if and when it happens. It’s low priority for them in the grand scope of their other financial commitments.
An additional word on ATE insurance as referenced in the report
Our experience of the availability of ATE insurance and the typical terms and conditions offered varies from the findings of the IBA research, which classified the legal expenses market in England and Wales as “limited”. From our position as the leading broker of ATE insurance, and with our international footprint, it is clear that England and Wales is home to one of, if not, the largest ATE market in the world and is certainly at the forefront of developments in the arena.
The report notes that it is uncommon for an ATE policy to be sold after proceedings have commenced and that, where available, such policies do not cover legal expenses that have already been incurred. In our experience, ATE insurance is no longer an off the shelf product with such clear limitations. The majority of policies may well carry similar terms and conditions, however, ATE providers in England and Wales are very willing to be flexible and more often than not we work with them to tailor the policy to suit the client’s specific needs. This often includes commencing the policy after proceedings have been issued, incorporating retrospective cover to limit or remove the policyholder’s exposure to costs incurred prior to the inception of the policy and tailoring the payment mechanisms to account for wholly or partially deferred premiums (often contingent upon success) that increase at agreed milestones within the case to reflect the increase in the insured’s exposure.
Improving knowledge levels would most likely increase the take up, and ultimate use of, BTE and ATE legal expenses insurance but only provided the policyholder is willing to pay the requisite premium. This in turn should increase access to justice for the “forgotten middle”. However, there is something else that could be done that we believe would have a far more significant impact on access to justice for this class of claimant.
The Government could hold the key
In removing the recoverability of CFA success fees and ATE insurance premiums, the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) brought into play reforms that have had a disproportionately negative effect on individual and SME claimants in England and Wales, particularly those with modest non-injury claims. The recoverability of CFA success fees and ATE premiums was critical to this category of claimant and bridged the gap between those that could pay their fees and those that qualified for financial assistance. As an ATE broker, we often have to advise claimants that there simply isn’t enough headroom in their anticipated damages to pay an ATE premium. The result is that the individual either discontinues their claim or proceeds exposed. One solution that would assist with the ATE insurance market’s ability to increase access to justice would be to reinstate recoverable premiums for individuals and small businesses with cases fitting an agreed criterion.