Insurance against legal costs can be purchased by individuals and businesses.
Understanding Legal Expense Insurance-– The Telegraph
There are two types of insurance- Financial Ombudsman Service:
- “before the event” – in case a future legal action has to be fought or defended; or
- “after the event” – where the policyholder has already decided to take or defend a legal action and wants to insure against the risk of losing and having to pay the other side’s costs.
Legal expenses insurance is not designed to pay the policyholder the actual damages that they are trying to recover through the court action. Nor does it cover someone’s liability to pay damages to others. There is separate insurance for that.
Although it is possible to buy “stand alone” legal expenses insurance, most policies are added to household buildings and contents policies as an optional (sometimes free) extra.
Importantly, a different insurer to the household insurer will usually underwrite the legal expenses section of the policy. This is to try to avoid a conflict of interest and to spread the risk.
For example, if a policyholder were to take their neighbour to court in a property dispute, it is possible they could share the same household insurer. By having specialist insurers underwrite the legal expenses risk, the chance of a conflict of interest is reduced – though not completely removed.
If the main insurer also underwrites the legal expenses cover, it will usually delegate the actual administration of this cover to a claims-handling agent, so as to be able to continue to spread the risk.
Most motor insurance policies cover only insured losses – in other words, the loss or damage to the vehicle and the legal liability to third parties. There may also be uninsured losses, such as the policy excess, loss of personal possessions in the vehicle, personal injuries and loss of use of the vehicle.
Consumers are often offered the option of legal expenses / uninsured loss recovery insurance, when taking out a motor insurance policy. This insurance is designed to fund the cost of taking legal action, to recover the uninsured losses, against the party that caused the accident.
Like legal expenses insurance added to household policies, an insurer other than the motor insurer will usually underwrite or administer the uninsured loss-recovery insurance.
“After the event” policies insure legal actions relating to events that have already happened. These policies are generally appropriate if there is no “before the event” cover – or if any “before the event” policy has been exhausted.
“After the event” policies are taken out to support a “conditional fee agreement” (a “no win, no fee” agreement) between a solicitor and their client. This means that the solicitor will charge a fee – generally higher than usual – only if their client’s action is successful (when costs are generally awarded in court to the successful party).
As the conditional fee agreement may not cover all costs – for example, it may not cover money paid to third-party experts in preparing the action or the other side’s legal costs – an “after the event” insurance policy might be taken out to insure the client, if their action is either unsuccessful or results only in a partially favourable award of costs.
“After the event” policies are usually taken out around the time that the legal action begins. They can involve a large premium. But paying this premium can sometimes be deferred – or paid with a loan. The premium used to be a recoverable legal cost (i.e. the losing party could be ordered to pay it), but since the Legal Aid, Sentencing and Punishment of Offenders Act 2012 came into force on 1 April 2013, that is no longer the case and the client would have to pay it out of any damages they receive.
When selling an “after the event” policy, the insurer will assess whether the legal action is a risk it is prepared to take. This means that policies may contain conditions that can be specific and unusual – and so the consumer should be made aware of them at the time of the sale.
There are also normally strict reporting requirements that require the policyholder or the appointed solicitor to make the underwriter aware of any material or substantial changes to the risks involved in the legal action.
Insurers are usually prepared to cover only certain causes of action and defence. There is, for example, generally no cover available for:
- bringing/defending defamation proceedings; or
- funding actions where state funding is more widely available (via the Legal Services Commission in England and Wales – or the equivalent in any other UK jurisdiction) – for example, in relation to child care proceedings, criminal trials, immigration appeals and applications for judicial review.
Of course, for a price, it may be possible to purchase legal expenses cover for most known causes of legal action or defence. Generally, however, most household-related policies will cover the pursuit or defence of legal proceedings arising from the policyholder’s:
- ownership of the insured home;
- death or personal injury;
- having entered into contracts for the sale and supply of goods and services.
Motor-related legal expenses policies cover only causes of action that arise from the use or ownership of the insured vehicle – in other words, bringing (or defending) negligence actions against (or by) third parties.