Funding options for legal services - Legal expenses insurance

Learning Outcomes

This article provides an overview of legal expenses insurance (LEI) as a method for funding legal services. It details the two main types of LEI: before-the-event (BTE) and after-the-event (ATE) insurance. For the SQE1 assessments, you will need to understand the characteristics of BTE and ATE policies, the solicitor's duties when a client has or considers LEI, and the client's right to choose their solicitor under such policies. Your understanding of these subjects will enable you to identify and apply the relevant legal rules and principles to SQE1-style single best answer MCQs.

SQE1 Syllabus

For SQE1, you are required to understand the practical implications of funding legal services through legal expenses insurance. You may be assessed on your ability to advise a client on the existence and suitability of LEI, the steps required when dealing with insurers, and the impact of LEI on case management and costs. An appreciation of LEI is essential for advising clients effectively on how to finance their legal matters, particularly litigation.

As you work through this article, remember to pay particular attention in your revision to:

• The distinction between Before-the-Event (BTE) and After-the-Event (ATE) insurance.
• The solicitor's duty to enquire about and advise on existing BTE policies.
• The client's statutory right to choose their own solicitor under LEI policies.
• The practical implications of policy limits, exclusions, and insurer requirements on case conduct.
• The role of ATE insurance, particularly in conjunction with Conditional Fee Agreements (CFAs) and Damages-Based Agreements (DBAs).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which type of legal expenses insurance is commonly found as part of household or motor insurance policies?
   1. After-the-Event (ATE) insurance
   2. Before-the-Event (BTE) insurance
   3. Third-party funding insurance
   4. Conditional Fee Agreement (CFA) insurance
2. Under the Insurance Companies (Legal Expenses Insurance) Regulations 1990, when does a client's right to choose their own solicitor typically arise in LEI-funded matters?
   1. Only if the insurer agrees.
   2. As soon as the claim is notified to the insurer.
   3. Once legal proceedings are initiated or where a conflict of interest arises.
   4. Never, the insurer always appoints the solicitor.
3. What is the primary purpose of After-the-Event (ATE) insurance in civil litigation?
   1. To cover the client's own solicitor's fees if they win.
   2. To cover the client's disbursements and the opponent's costs if the client loses.
   3. To fund the initial investigation of a claim.
   4. To provide cover for claims existing before the policy start date.

Introduction

When clients face potential legal action, a primary concern is how to fund the associated costs. Alongside options like private funding, CFAs, and DBAs, legal expenses insurance (LEI) provides a significant source of funding, particularly for individuals and small businesses. LEI policies are designed to cover legal costs incurred in pursuing or defending certain types of legal claims. Understanding the operation of LEI, including the solicitor's duties and the client's rights, is essential for providing comprehensive advice on funding options. This article explores the two main forms of LEI: Before-the-Event (BTE) and After-the-Event (ATE) insurance.

Before-the-Event (BTE) Insurance

Key Term: Before-the-Event insurance (BTE)
Insurance cover purchased before any specific legal dispute arises, typically as an add-on to other insurance policies like home or motor insurance, or sometimes as a standalone policy. It covers potential future legal costs for specified types of disputes.

Identifying BTE Cover

A key professional conduct point for solicitors is the duty to enquire at the outset of any contentious matter whether the client has any existing insurance policies that might include BTE cover. This principle was highlighted in Sarwar v Alam [2001] EWCA Civ 1401 (though specific case names are not usually required for SQE1, the principle is essential). Failure to check for BTE could leave a client unnecessarily paying costs that could have been covered by insurance, potentially leading to negligence claims against the solicitor.

Solicitors should advise clients to check documentation for policies such as:

• Home contents/buildings insurance
• Motor insurance
• Specialist standalone LEI policies
• Cover provided through trade union membership or employee benefits schemes.

Scope of BTE Cover

BTE policies vary significantly in their scope and limitations. Solicitors must carefully review the policy wording to advise the client accurately. Common features include:

• Types of Disputes Covered: Policies usually specify the types of legal disputes covered (e.g., personal injury, employment disputes, property disputes, consumer contract issues). Family law matters are often excluded.
• Indemnity Limits: There will be a maximum amount the insurer will pay towards legal costs (the limit of indemnity). This may be capped overall or per claim/stage.
• Prospects of Success: Insurers typically require the claim to have reasonable prospects of success (often defined as 51% or 60% chance or more) before agreeing to provide cover. They may withdraw cover if prospects diminish.
• Exclusions: Policies contain specific exclusions, such as claims arising before the policy inception date, small claims, or disputes with the insurer itself.
• Panel Solicitors: Insurers often maintain panels of preferred law firms. While clients generally have the right to choose their own solicitor (see below), using a panel firm may be more straightforward administratively.

Freedom to Choose a Solicitor

A fundamental right for policyholders under the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (implementing EU Directive 87/344/EEC) is the freedom to choose their own solicitor once legal proceedings have been initiated, or where a conflict of interest arises.

Insurers cannot compel a client to use a solicitor from their panel in these circumstances, although they can propose a panel solicitor. However, insurers can impose reasonable conditions on the chosen solicitor, such as requiring relevant experience or adherence to specified hourly rates or terms of appointment.

Worked Example 1.1

Fatima is dismissed from her job and believes it was unfair. She consults a solicitor, Aisha. Fatima mentions she has home insurance. Aisha asks to see the policy documents. Upon review, Aisha discovers a BTE legal expenses add-on covering employment disputes up to £50,000, provided prospects of success are assessed by the insurer as over 51%. The insurer has a panel of solicitors but Fatima wants Aisha to act. Proceedings have not yet been issued.

How should Aisha advise Fatima regarding solicitor choice?

Answer: Aisha should advise Fatima that while the insurer may prefer a panel solicitor, Fatima has the right to choose her own solicitor once proceedings are issued. Before proceedings, the insurer might legitimately require a panel firm to handle pre-action steps. Aisha should explain that if Fatima insists on using Aisha before proceedings, the insurer might refuse cover for that stage. Aisha should also clarify if her fees align with the insurer's approved rates, as Fatima might face a shortfall if Aisha charges more. They should first notify the insurer and seek confirmation of cover based on prospects.

After-the-Event (ATE) Insurance

Key Term: After-the-Event insurance (ATE)
Insurance cover purchased after a specific legal dispute has arisen. It primarily covers the risk of having to pay the opponent's legal costs and potentially the client's own disbursements if the claim is unsuccessful.

Purpose and Use of ATE

ATE insurance is most commonly used in civil litigation, particularly in personal injury and clinical negligence claims, often alongside Conditional Fee Agreements (CFAs) or Damages-Based Agreements (DBAs). Since CFAs and DBAs typically mean the client does not pay their own solicitor's fees if they lose, the main financial risks remaining are their own disbursements (e.g., court fees, expert report fees) and liability for the opponent's costs. ATE insurance is designed to cover these specific risks.

Obtaining ATE Cover

• Timing: ATE is taken out after the dispute has arisen but ideally as early as possible in the proceedings.
• Assessment: Insurers will assess the merits of the case before offering cover, usually requiring strong prospects of success (often 60% or higher).
• Premiums: ATE premiums can be substantial, reflecting the known risk of the existing dispute. Premiums may be structured in stages (increasing as the case progresses towards trial) or deferred until the conclusion of the case and self-insured (paid from damages if successful). Generally, ATE premiums are no longer recoverable from the losing opponent since LASPO 2012 reforms (except for certain elements in specific case types like clinical negligence expert reports).

Scope of Cover

ATE policies typically cover:

• The opponent's legal costs and disbursements if the client is ordered to pay them (i.e., if the client loses).
• The client's own disbursements incurred during the case.

Cover for the client's own solicitor's fees is less common under ATE, as these are often covered by a CFA or DBA, but bespoke policies exist. As with BTE, ATE policies will have indemnity limits and exclusions.

Worked Example 1.2

David is pursuing a professional negligence claim against his former architect under a Conditional Fee Agreement (CFA) with his solicitor. The CFA means David won't pay his solicitor's fees if he loses. However, David is concerned about having to pay the architect's legal costs (estimated at £40,000) and his own disbursements (expert reports costing £10,000) if his claim fails.

What funding option could mitigate these risks for David?

Answer: David's solicitor should advise him about obtaining After-the-Event (ATE) insurance. An ATE policy could cover his liability for the opponent's costs (£40,000) and his own disbursements (£10,000) should he lose the case. Obtaining the policy would depend on an insurer assessing the claim as having sufficient prospects of success. The premium would likely be significant and payable by David, potentially deferred and paid from damages if he wins.

Exam Warning

Be clear on the distinction between BTE and ATE insurance. BTE is 'before the event' cover for potential future disputes, often part of other policies. ATE is 'after the event' cover for an existing dispute, typically covering adverse costs and disbursements, and often used with CFAs/DBAs. Understand what each type typically covers and when they are relevant.

Solicitor Duties and Practicalities

Regardless of the type of LEI, solicitors have ongoing duties:

• Advising on Suitability: Discussing whether the LEI policy offers adequate cover for the likely costs and risks of the specific case.
• Transparency: Clearly explaining the policy terms, indemnity limits, deductibles (excess), conditions, and exclusions to the client.
• Insurer Relations: Liaising with the insurer, providing necessary updates, seeking authority for specific steps (if required by the policy), and managing costs within the policy limits.
• Client Choice: Advising the client on their right to choose a solicitor and the implications of selecting a non-panel firm.
• Costs Management: Ensuring work undertaken is reasonable and proportionate, especially given policy limits. Unreasonable costs may not be recoverable from the insurer, even if within the indemnity limit.

Revision Tip

When advising a client with potential LEI, always obtain a copy of the full policy schedule and wording. Do not rely solely on the client's recollection or summary documents. Check the indemnity limit, the excess, any specific conditions relating to reporting or solicitor choice, and key exclusions.

Key Point Checklist

This article has covered the following key knowledge points:

• Legal Expenses Insurance (LEI) helps clients fund legal costs.
• Before-the-Event (BTE) insurance is purchased before a dispute arises, often with home/motor policies. Solicitors must check for existing BTE cover at the outset of a contentious matter.
• After-the-Event (ATE) insurance is purchased after a dispute arises, primarily covering opponent's costs and own disbursements if the client loses. It's often used with CFAs/DBAs.
• Clients generally have the right to choose their own solicitor under LEI once proceedings commence or if a conflict arises, though insurers may set conditions (e.g., on fees).
• Solicitors must advise clients clearly on LEI policy terms, limits, exclusions, and the implications of solicitor choice.
• Case management under LEI requires careful attention to costs and policy limits.
• ATE premiums are generally not recoverable from the losing party.

Key Terms and Concepts

• Before-the-Event insurance (BTE)
• After-the-Event insurance (ATE)