What is legal expenses insurance? 

When we are asked what legal expenses insurance (LEI) is, the simplest explanation is that it is a policy that individuals and businesses can take out, that will help them to enforce their legal rights against another entity if litigation is needed. Equally, they can use it to defend their position if a third party threatens to take legal against them.

The policy will normally cover the insureds legal costs and those of the other party if, unfortunately, the insured loses the case.  With very few exceptions, the policy only covers the legal costs incurred.  It does not normally provide any sort of compensation that may be awarded either against or in favour of the insured.  This article will explore the insurance itself in more detail, but it is worth looking into the history and origins of LEI and why it is still a small (but growing) part of the UK market.

The origins of legal expenses insurance

The origins of LEI go back to the early 1900s in France.  Initially, it was offered as a service provided by the Automobile Club de l’Quest to provide support to members to pay fines or for representation when in front of a police court.  A similar service then came into being in 1917 but the catalyst for massive growth happened around 1928 in Germany when Deutsche Automobil Schutz created a legal expenses insurance that was available to the public.  This business has grown ever since and is known in the UK as DAS.

The European Market (including the UK) accounts for around 80% of the whole worldwide LEI market with Germany generating around 35-40% and France around 14%.

Legal expenses insurance in the UK

Legal expenses insurance in the UK is a different story.  The first obstacle in the UK’s LEI market was that prior to the passing of the Criminal Law Act in 1967, it was illegal to finance another party’s legal action.  Section 14 of the Act abolished the crimes and torts of maintenance and champerty.

The House of Lords decision in Giles v Thompson Lord Mustill says “The crimes of maintenance and champerty are so old that their origins can no longer be traced, but their importance in medieval times is quite clear.  The mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous men of power”.  In these times of lockdown if a reader has the time and the inclination to research maintenance and champerty reading this judgement is a good place to start!

In practical terms, the 1967 Act meant that the UK insurance market could commence offering legal expenses insurance to both individuals and businesses.  Compared with the rest of Europe, LEI in the UK is still very much at the bottom of the “must-have” policies for individuals.  The most common form of legal expenses insurance in terms of the number of policies issued is, unsurprisingly, cover for motorists who have been involved in an accident. Typically sold as an “add on” to a motor insurance policy for around £25-£30 a year motorists legal protection (MLP) pays a claimant’s solicitors fees to pursue claims for losses that are not covered by the motor policy such as recovery of a policy excess, personal injury, replacement vehicle, etc. subject always to the claimant not being at fault for the accident.  These policies first appeared in the mid-late 1980s and are still purchased in huge numbers.

Policies for individuals (including motoring cover) were launched in the 1980s and covered a wide range of legal issues and offered as stand-alone policies rather than an “add on”.  These policies were comprehensive but with premiums starting at around £75 they simply did not gain very much traction.  Since then, the non-motor personal LEI market has evolved to a much narrower policy providing for common issues such as consumer disputes, boundary disputes, employment disputes, injury claims (non-motor related), etc. and is almost exclusively sold as an optional part of household buildings and/or contents policy or as an “add on”.  Again, premiums tend to be around the £25-£30 level and many of these policies include 24-hour helplines for legal advice and other matters.

It is probably in the commercial world where LEI has seen greater acceptance and development.  The original policies offered were quite wide and offered cover for all kinds of business disputes (contract disputes, corporate criminal prosecutions, employment claims protection, defence of data protection claims, statutory license protection, etc.) and forward-looking businesses saw the benefit of taking contingency costs for legal disputes “off-balance sheet”.  A particularly popular cover is for employment disputes.  There are a few providers who offer a complete hybrid package to corporate entities that combine an advisory service that will draft contracts of employment, advice on dismissal and redundancy procedures, how to deal with employee grievances, drafting of staff handbooks, and other services.  This is then supported by an LEI policy which will, providing that the guidance has been followed, pay any legal costs and in some cases any awards made against an employer.  These can be combined with a similar service for all matters and claims that fail to be dealt with under the voluminous Health and Safety legislation although typically any fines levied are excluded as a matter of public policy.

Nonetheless, commercial policies are, in the main, offered as an add on or optional extra in business combined policies and tend to cover the most common disputes including contract disputes, criminal defence, employment disputes, tax and VAT investigations, health and safety investigations, property protection, debt recovery.  Invariably these products will include a 24-hour legal helpline.  The cost of this cover when purchased as an “add on” or a policy option is usually charged as a percentage of the business’s turnover or wage roll and is usually quite reasonable.

Whilst LEI was a late starter in the UK, the development of the product has not stood still.  From a traditional base where a policy was bought and renewed every year (referred to as before the event LEI or BTE) on the chance that a dispute may arise, we have seen the growth in popularity of after the event LEI (ATE) which is only taken out after a dispute or incident has happened.  There are advantages and disadvantages to both forms of these types of LEI.  ATE tends to cost more than BTE but ATE is only purchased when needed.  ATE is more flexible in the range of legal matters it will cover but may be harder to obtain than BTE simply because when it is required the dispute has started and more facts of the case, possibly including negative ones, are known.

Regardless of the type of LEI, there is no doubt that as people have become more aware of their legal rights (and obligations) and as society becomes more litigious, the LEI sector of the insurance market will continue to grow and evolve.

Contact us

If you are a solicitor or law firm and would like to find out further information or to arrange a face-to-face meeting or a video or telephone call to discuss your firms ATE insurance requirements, then please contact our Business Development team via any of the following channels; 0800 524 4235, email info@prosperityinsurance.co.uk or complete the enquiry form on our contact page.

This is not legal advice; it is intended to provide information of general interest about current legal and ATE insurance issues.