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Legal Expenses Cover

The European Court of Justice has confirmed that an insurer cannot insist that the customer's solicitor's costs will only be covered if the insurer considers that an external lawyer should be instructed.

Insurers which offer legal expenses cover have long refused to pay their customers’ legal bills if the customer instructed their own lawyers.  Usually, they would insist on dealing with the dispute in house, or by passing it to a solicitors firm on their panel, with which they had often negotiated discounted rates in return for bulk instructions.  Sometimes, they would consent to paying a proportion of lawyers’ fees if those lawyers were not on their panel.

The practical result of this was that clients were constrained in their choice of lawyer.  If they claimed for legal expenses under an insurance arrangement then they could not choose their representative.  If they chose their representative then they might not be allowed to recover their legal expenses in full, or possibly at all.  

Legal expenses cover is usually included in other insurance policies.  For example, when choosing home insurance the customer will regularly be asked whether they want to take out additional legal expenses insurance.  Insurance to cover, for example, employment claims in the case of dismissal is commonly included with these policies.  

Such insurance is known as “Before the Event” insurance.  It is anticipated that these policies will become more popular since the recent Jackson Reforms to the Civil Procedure Rules which have removed a winning party’s right to reclaim “After the Event” insurance premiums from a loosing opponent.  The consequences therefore are potentially far reaching.

So it was with Mr Sneller, who took out legal expenses insurance with Reaal Schadeverzekeringen NV. The insurance contract provided that DAS Nederlandse Rechtsbijstand Verzekeringsmaatschappij NV (DAS) was the insurance company responsible for providing legal assistance cover.

Mr Sneller wished to bring a claim for damages against his former employer for unfair dismissal.  He intended to instruct his own lawyers, but DAS refused to pay the associated costs.  The contract between Mr Sneller and DAS provided that the customer was only free to choose their own lawyer if DAS considered that the matter required referral to external lawyers.  In this case, DAS considered that one of its own employees, who was not a lawyer, would be capable of handling the claim Mr Sneller intended to bring.

Mr Sneller sought an order from the Netherlands courts ordering DAS to bear his legal costs.  He was refused at first instance, and on appeal.  On his second appeal, a referral was made to the European Court of Justice for guidance on the proper interpretation of the relevant EU legislation.  

The ECJ was asked to decide whether EU law (specifically, Article 4(1) of Directive 87/344), allowed a legal expenses insurer to stipulate that the costs of legal assistance provided by a lawyer or legal representative freely chosen by the insured person will be covered only if the insurer takes the view that the handling of the case must be subcontracted to an external lawyer in circumstances where its usual policies were that legal assistance will in principle be provided by employees of the insurer.

The ECJ rejected DAS’s arguments and held that insurers were not permitted to limit their obligation to pay the legal fees of freely chosen lawyers to circumstances where the insurer took the view that the matter needed to be referred to external counsel.

This decision will obviously be welcomed by insurance customers who wish to bring a claim for legal expenses cover but wish to choose their own lawyers.  However, the decision does not clarify at what point a customer is free to choose their own lawyer.  For example, will pre-action stage fees be met, or will an insurer be free to cover only those fees incurred when proceedings actually commence?

It remains to be seen whether insurance premiums will rise as a result of this decision.

For more information, please contact Nick Rowe at Maitland Walker.