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The Market for BTE Legal Expenses Insurance

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					The Market for ‘BTE’ Legal
Expenses Insurance

Prepared on behalf of the Ministry of Justice
July 2007




                                                1
TABLE OF CONTENTS
1. INTRODUCTION                                              4

2. METHODOLOGY                                               5

3. EXECUTIVE SUMMARY                                         6

4. MAIN FINDINGS                                             8
      SECTION A: EXPERT INTERVIEWS

      I. The background to Legal Expenses Insurance          8
      II. The nature of the UK market                        9
     III. The current state of the market                    11
     IV. Factors influencing the development of the market   12
     V. Promoting BTE legal expenses insurance               17
     VI. Effects on the courts                               18

      SECTION B: CONSUMER FOCUS GROUP RESEARCH (Qualitative)

      I. Awareness of LEI                                    23
      II. Motivations for buying LEI                         24
     III. Possibilities of making a claim                    26
     IV. Sceptical about making a claim                      27
     V. Access to legal advice                               28
     VI. Increasing sources of risk                          29
    VII. Fragmented cover                                    31
    VIII. The respective merits of ATE and BTE               32
     IX. Extensions of existing cover                        33
     X. Suppliers of legal expenses insurance                33
     XI. Personal liability insurance                        34
    XII. Promoting legal expenses insurance                  35
    XIII. Reasons for the alleged increase in litigation     35




                                               2
     SECTION C : ICM OMNIBUS RESEARCH (Quantitative)

      I. Awareness of the two types of LEI                         37
     II. Ownership of LEI                                          38
     III. Risk drivers                                             43

     SECTION D: THE REGULATION OF LEGAL EXPENSES INSURANCE

      I. Regulatory Requirements                                   48
     II. Complaints to the Ombudsman                               49


     SECTION E : CONCLUSIONS AND RECOMMENDATIONS
     0. Summary                                                    51
     I.   Stand-alone v. add-ons                                   51
     II. Promoting LEI/BTE                                         53
     III. Extending LEI/BTE coverage                               53
     IV. Future issues in the UK legal expenses insurance market   56


5. APPENDICES
      I. References                                                58

     II. Organisations comprising expert interviews                59

     III. Discussion guide for focus groups                        60

    IV. ICM omnibus consumer research data                         63




                                              3
1. INTRODUCTION

1.1       The Ministry of Justice has requested independent expert advice on developing the role of
BTE (Before the Event) legal expenses insurance and in May 2007 commissioned FWD Research
to carry out the assignment. To this end, an understanding of the economic drivers behind the
take-up of BTE amongst personal lines customers; or, indeed whether the main drivers have been
economic, perhaps in terms of customer demand or if the main drivers lie elsewhere.


1.2       The main objectives of this report are to research and report on four key areas:
      •   the background of BTE;
      •   the current market situation;
      •   the means of promoting BTE from the point of view of the main players, and
      •   further development of the industry.


1.3       This report looks at the latter objectives from the point of view of the industry and the ways
in which they think the BTE market could be developed, as well as the attitudes and levels of
awareness of consumers of the existence of legal expenses insurance (LEI). We have taken into
account the possible impact of further legislative developments as well as the ways in which the
industry considers that they could work together with the government. Various proposals have
been outlined. Consumer input into the development of the market has also been taken into
account. The focus groups illustrate in depth the levels of awareness of legal expenses insurance
and the attitudes to taking out such policies. Some felt they were already duplicating LEI cover
without ever using it while others were prepared to buy a stand-alone policy. The results of the
focus group discussions show the nature of the task which lies ahead.




                                                    4
2. METHODOLOGY


2.1     In order to achieve the project objectives and cover the wide range of issues, we have
drawn upon a variety of methodologies rather than any single one solution. The hybrid approach
fused desk/ secondary research sources to provide market background, perspective and trends,
together with primary research among consumers of both a qualitative and quantitative nature;
qualitative research among industry ‘gurus’ was undertaken to support the general trends obtained
and obtain expert opinion on the direction of the market.


2.2     The following diagram illustrates how the methodology has been structured, together with
the number and type of interviews achieved. On-line and secondary research sources are listed as
Appendix 1. The list of organisations interviewed in the 12 `expert’ interviews is given at Appendix
2. The discussion guide used for the 3 focus groups is Appendix 3 and full transcripts of each
group have been provided separately for the interested reader. Lastly, full data tables of findings
from the ICM omnibus research are given at Appendix 4, though the key aspects have been
charted in the body of Section C.




                                                 5
3. EXECUTIVE SUMMARY

3.1     This report is designed to explore the current state of the legal expenses insurance (LEI)
market and future trends with a view to promoting ‘before-the-event’ legal expenses insurance to
ensure that as high a proportion of the population as possible have access to legal advice and
assistance.




3.2     In order to gain an understanding of the way in which the market has developed since
2000 (when the Access to Justice Act, 1999 was implemented) to its current state, `expert’
interviews were conducted with most of the main players in the provision of LEI. This was with a
view to understanding the main drivers in the development of the market, which turn out to be
legislative changes, of which one of the key factors is the Compensation Act 2006 and the
introduction of regulation of claims management companies, whose advertising has (in the view of
BTE/LEI providers) had a deleterious effect on the market. The structure of this rather complex
market is also set out in the first section, showing that it is dominated by relatively few players.


3.3     The industry consensus is that there has been little movement in the market which has
remained relatively static with the sale of a standard product as an add-on to household and motor
insurance. Some new products have been introduced to reflect a changing market, such as
landlords’ buy-to-let cover. However the consumer research published with this report shows a
statistically significant increase in the penetration of BTE over the last ten months from 50% to
59%. The product itself has possibly become more extensive, at least for the ‘plus’ covers. It is
not always sold as an add-on: some insurers incorporate it in the household policy so that it is not
an option with a separate charge.


3.4     The implications of promoting BTE and the possible effects on the courts are also
considered. Some have expressed fears that increasing the sales of the policy would increase the
number of claims going to court and this would further burden an already overloaded system.
However, there is little evidence that this would happen and since access to justice does not




                                                    6
necessarily mean a court case, but the desire for a claim to be properly settled, which can be met
in other ways, such as mediation and alternative dispute resolution mechanisms.


3.5      The report also contains in-depth focus group discussions as well as the expert interviews.
These interviews shed light on the levels of awareness of legal expenses insurance, understanding
of the differences between BTE and ATE, the willingness to use LEI and the experiences of those
who have used LEI. The discussions also illuminated attitudes towards what is seen as
increasingly litigious behaviour on the part of some and a resistance to its use, but that varied a
great deal from one member of the groups to another. The sources of perceived increases in risk,
such as road traffic accidents, also emerged and it is interesting to note that the perceptions were
not entirely in line with the reality, since road traffic accident figures are relatively static. The focus
group discussions also show the level of cynicism about insurance companies and provide useful
insights into the channels through which LEI may or not be purchased.


3.6      Reference is also made to the level of complaints about LEI with the assistance of the
Financial Ombudsman Service and the regulation of the sale of household insurance policies and
the BTE add-on. The policies are clearly described in the accompanying literature but both the
FSA and the industry agree that, unfortunately, not many read it.


3.7      Finally the report considers various proposals from the industry and the consumer groups
regarding the ways in which legal expenses insurance might be promoted either by the industry or
by the industry in conjunction with the Ministry of Justice. There is a willingness on the part of the
industry to co-operate with the government in order to ensure that the individual can go to court, if
necessary. These will require the Ministry of Justice to consider which approach is the most
appropriate and to work with the industry, bearing in mind that the implications of the Legal
Services Bill should be taken into account in the development of its approach.




                                                     7
4. MAIN FINDINGS

SECTION A: EXPERT INTERVIEWS


I. The background to legal expenses insurance


4A.I.1   This kind of insurance is not new. Indeed, legal expenses insurance has a long history,
which can be traced back to the Le Mans car races. Accidents on the track gave rise to long and
complicated legal disputes against racing drivers and their liability insurers. In 1917, the principle
of ‘contre assurance’ or ‘insurance against insurance companies’ came into being. The first
company was D.A.S. (Defense Automobile et Sportive) was then founded in Le Mans as a mutual,
which still exists today.


4A.I.2   The idea of legal expenses insurance spread rapidly and in 1926 another D.A.S. (not
connected with the French company) was established in Geneva, followed by Belgium and
Germany. Legal insurance expenses developed initially as part of car insurance, necessary as
people travelling throughout Europe needed protection against the risks of accidents in a foreign
country with different languages and legal systems.


4A.I.3   Nothing much has changed since its introduction. BTE legal expenses insurance is still
most often purchased as an add-on to motor insurance. It continues to play a large part in motor
insurance as the Commission discovered when it conducted research into the availability of
voluntary legal expenses insurance which could be accessed by any potential victim of a road
accident. The European Parliament had proposed to include legal expenses in MTPL as part of the
Fifth Motor Insurance Directive (11 May, 2005, No 2005/14/EC) but the Commission’s consultation
with member states indicated that in the majority of member states voluntary legal expenses
insurance is provided by specialized insurers or insurance companies. The UK, Germany, Belgium
and Sweden held that a relatively large proportion of their population have access to such
insurance. The latest Motor Insurance Directive, therefore, has done little either to alter the nature
of the BTE market nor has it provided any impetus for growth.




                                                   8
II. The nature of the UK market


4A.II.1   The structure of the UK market is complex. It is sold in a variety of ways, either directly to
the public with LEI as an add-on to motor or household insurance by companies such as Direct
Line (part of the Royal Bank of Scotland Group), or through banks and building societies. It is also
attached to travel insurance, which may reduplicate contract or personal injury elements of
household and motor insurance, but since this is often, (though not always) a one-off purchase, the
focus here will be on motor and household insurance. Affinity groups also play a part, which will
be discussed later. A substantial proportion is sold through intermediaries, consisting of national
brokers (such as Marsh UK and Aon); broker chains and networks and smaller regional brokers.
Consolidation in the general insurance broking sector through mergers and acquisitions is
proceeding apace, especially in the regional broking sector. This process may well create problems
for insurers, who have seen greater power being consolidated in the hands of fewer intermediaries.
As these consolidations have continued, the brokers have tried to increase their commissions
through their agreements with their insurers.


4A.II.2   Some insurers have reconsidered how they deal with major regional brokers and, as a
result, they have created vertically integrated business models, such as Equity & Highway, Axa
and Groupama. An important element in such acquisitions is an independent assessment of the
underwriting profitability of the book of business. One advisory firm (Deloitte) uses brokers
business plans, an assessment of historical and future insurer loss, expense ratios and their cost of
capital to build underwriting profitability models on a cross underwriting cycle basis. This has then
been used to assess the net present value of the underwriting opportunity from acquiring the
brokers’ underwriting book of business. This process could lead to other changes in the method of
distribution of LEI/BTE.


4A.II.3   Personal and motor covers are issued under delegated authority scheme arrangements.
The LEI provider enters into a binding authority agreement authorising an intermediary to accept
cover and bind risks. The agent will then market the cover, charging clients a gross premium.
Details of the risks are then declared to the insurer on a bordereau, which is returned with the net



                                                    9
premium and insurance premium tax. The pricing of products is geared towards volume sales but
the major source of profitability of such insurance is in fact the referral fees from law firms or
medico-legal reporting agencies (providing expert medical reports, where appropriate). The
breakdown of the costs and profits of a typical BTE motor insurance policy in a typical premium
breakdown, provided by one respondent, are as follows:


           Cost of policy to the customer:                            £20.00
               §   Insurance Premium Tax:                               £0.95
               §   Underwriting:                                        £1.00
               §   Administration:                                    £11.00
               §   Marketing & Literature:                              £1.00
               §   Profit:                                              £6.00


4A.II.4    The cost of the policy to the insurer is subsidized by the referral fees, as can be seen from
this illustration. This issue should be discussed with legal expenses insurance providers, since one
of the unintended consequences of the Legal Services Bill could be to add to the costs of provision,
if many solicitors’ firms are absorbed into banks and building societies, then that subsidy will go
and the price of the policies may increase, according to some respondents. That may well not be
inevitable (and, indeed, some respondents considered that it would be unlikely) but should be
considered before the Legal Services Bill becomes law.


4A.II.5    Others took the view that this could reduce costs if the legal services were taken in-house
by large well-capitalised institutions. There are clear indications that this is what will happen. Post
Magazine reported that Axa has become the first of the top five general insurers to confirm how it
will take advantage of the Legal Services Bill in a move which follows a deal with Arc Legal
Assistance and Axa Assistance to administer and underwrite its personal legal expenses account.1
Axa aims to provide a one-stop legal shop for their legal needs, including conveyancing, will-
making and even divorce. Axa will also consider the possibility of legal advice on insurance claims.
The AA, DAS and the Co-operative Group have also indicated their intention to offer legal services



1
    Post Magazine, June 29, 2006


                                                    10
to their customers, and by May this year, DAS was reported as being about to set up its own law
firm in advance of the legislation.


III. The current state of the market


4A.III.1   BTE insurance has been available in the UK since 1974. It has become more important
over the years because people now buy it as an add on to household and motor insurance policies.
In some cases they have access to legal expenses insurance relating to employment matters
through membership of a trade union or other affinity groups. The latest figures for household
insurance (2005) shows that 93% of all households have home buildings insurance in place,
though this falls to 85% of the poorest households owning their own home and 75% of all
households have home contents insurance in place, though once again, this falls to 10% for the
very poorest. The ONS figures from 2002-2003 (Expenditure and Food Survey) shows 78% with
home contents insurance, so an increase appears possible. Legal expenses insurance, as a
matter of fact, has to be a separate policy, requiring as it does to be managed separately from all
other classes of general insurance offered to the public. The insurance regulations, which flow from
a European Directive, require freedom of choice of a consumer’s own legal representative if
proceedings are issued, but not before (with some exceptions for legal expenses insurance
connected with motor insurance).2 It is possible that such regulations encouraged the sale of BTE
as an add-on to other policies.


4A.III.2   It is very difficult to estimate the present size of the market. The only independent survey
of the market, Legal Expenses Insurance, Finance Intelligence, was published by Mintel
International Group in December, 2006 and no other company has produced a survey until now3.
(See section on ICM Omnibus findings). The Association of British Insurers has temporarily
suspended publication of statistics about the market penetration of legal expenses insurance and
figures for the gross written premium on an annual basis. This is because the Legal Expenses
Group and the ABI have worked to produce a proper basis for the collection of statistics. The
problem with the previous method is that it only referred to the gross written premium and not to


2
    Insurance Companies (Legal Expenses Insurance) Regulations, 1990.
3
    Legal Expenses Insurance, Finance Intelligence Mintel Report, December 2006


                                                    11
the claims record, so that it only gives a snapshot and not the full picture and certainly does not
indicate trends. These are designed to give a better view of the claims by collecting a rolling three
or four year flow of data, so that this will give an accurate view of the market and its profitability. It
will also provide information about the size of the average premium, claims frequency, and the
claims rates to commission ratio; in other words, the statistics will be based on the underwriting
year. The ABI is currently collecting data and expects to publish the revised figures by the end of
the year and it is only then that the proportion of claims in relation to the number of policies will be
clear.


4A.III.3   However, most of the expert respondents in the legal expenses insurance sector regarded
the Mintel figures as being broadly correct; that is, given that the adult population is estimated to be
around 47.4 million in 2006, it appears that LEI is held by about 23.7 million people with a higher
proportion being held through motor insurance policies. Mintel estimated that 18.5 million
consumers held LEI as part of their car insurance, 14.2 million people purchased LEI as an add-on
to their household insurance and 4.7 million purchased LEI with their travel insurance, although this
will almost certainly be a short-term purchase unless purchased as part of an annual travel
insurance policy. This does not take into account the LEI/BTE policies held through membership of
affinity groups, such as trade unions.


4A.III.4   All agree that the take-up of LEI/BTE is higher for motor insurance than it is for household
insurance, though the latter add-on provides more extensive coverage than the standard add-on to
a motor policy. Whereas the overall estimates for policy holders is regarded as being broadly
accurate, the market shares ascribed to the leading companies were often not considered to reflect
the proportion of the market achieved by each company. Most respondents agreed that the
products available for the retail customer as an add-on the household and motor insurance policies
are fairly standard, but as the following paragraphs indicate, some insurers are beginning to look at
ways of improving the package by offering legal services and help-lines, which may be included. It
is often difficult to see who is providing LEI as ‘it is not unusual for add-ons of various kinds to be
provided by a third party’.




                                                    12
IV. Factors influencing the development of the market


4A.IV.1   External factors have influenced the development of the market, the most important of
these being the changes in the legal framework since 1995, when conditional fee arrangements
(no win, no fee) were introduced, followed by the Access to Justice Act 1999 which removed legal
aid for personal injuries for most people, introducing restrictions on eligibility for legal aid for
criminal and civil cases. The current eligibility rules, which came into force in April 2007stand at
£2,435 per month for the gross income cap with dependant’s allowances standing at £146.62 per
month for a partner and £206.75 for dependent children under 16 and a higher limit for families with
more than four children.


4A.IV.2   The eligibility limits are much more complex than this summary implies so a legal aid
calculator is provided for the legal services provider and the potential claimant. Legal aid covers
disputes with an individual person, a company, government or agency or divorce, but does not
apply to personal injury (unless you are disabled); negligently caused damage to property;
conveyancing; boundary disputes; making a will; trust law; defamation; company or partnership law
or matters arising out of carrying on a business or attending an interview or an asylum claim.


4A.IV.3   Other changes include the introduction of collective conditional fee arrangements, the
recoverability of ATE premiums, fast track claims and fixed fees, and the Rogers v Merthyr Tydfil
case, July, 2006, the Compensation Act and better regulation of claims management companies.
In the Rogers versus Merthyr Tydfil case, the Court of Appeal ruled that a party with ATE insurance
with staged premiums should have informed the other side of the existence of the policy and when
the stages would be reached. The judgement also allowed for the full ATE premium to be
recovered.


4A.IV.4   The Compensation Act 2006 provides the statutory framework for the regulation of claims
management services. A senior civil servant was appointed as head of regulation, supported by a
trading standards unit, which provides the monitoring and compliance function, investigating any
suspected evasions without the requisite authorisation and monitoring compliance with the
regulatory rules. Those providing claims management service have to give advice about the validity



                                                    13
of their claim, options for the funding the costs and to provide a complaints mechanism if things go
wrong. This legislation was passed in part as a result of the collapse of two claims management
companies (e.g. TAG) and the excessive encouragement through advertising campaigns to claim
damages for personal injuries. This part of the Act became law in July 2006 and regulation fully
began in April 2007. A baseline report4 was published then which shows the size of the market for
personal injury, in particular. Personal injury claims cost about £6bn per year with motor accidents
accounting for nearly 70%, employer’s liability for 20% and general liability for 10%. Claims are
ultimately handled by solicitors, who may use their own marketing or use joint marketing
companies. But much more business is referred by intermediaries numbering about 1000. These
are mainly specialists in claims management but including over 200 accident management
companies. Their annual turnover is about £190m. The industry as a whole welcomes the
introduction of regulation, but, as will be seen from the focus groups, the claims management
companies have done considerable damage to the public perception of legal expenses insurance.
This was further reinforced by the Claims Management Services Regulation, Baseline Study.


4A.IV.5   The introduction of conditional fee agreements and after the event legal expenses
insurance enable the court to order a losing party to pay any uplift on the successful party’s
lawyers’ normal fees and any premium paid by the successful party for insurance against being
ordered to pay the other side’s costs. The aim is to:-
     §    Ensure that the compensation awarded to a successful party is not eroded by any uplift or
          premium- the party that is in the wrong will bear the full burden of the costs;
     §    Make conditional fees more attractive, especially to those plaintiffs and defendants seeking
          non-monetary redress. These litigants could not use conditional fees in the past, because
          they could not rely on the prospect of recovering damages to meet the uplift costs and
          premium;
     §    Discourage weak cases and encourage settlements;
     §    Provide a mechanism for regulating the uplifts that solicitors charge.




4
 Claims Management Services Regulation, Baseline Study, 23 April 2007, Departmental for Constitutional
Affairs


                                                   14
4A.IV.6   That is why some insurers claim that the real drive in the market was the creation of the
ATE market rather than the BTE market.


4A.IV.7   However, the restrictions on legal aid might have been expected to assist in the expansion
of the market. It is possible that the general public are simply unaware of the implications of these
restrictions on eligibility for legal aid for civil cases, coupled with the view that the necessity of such
action is probably rated as a low probability by the majority. The rules, though more transparent,
have led to the introduction of financial eligibility calculators for legal aid, used by various advisory
bodies and law firms. These and the help lines provided by insurance companies alert the
consumer to the limitations of legal aid, but that occurs when the consumer realises that he may
need to go to court over a particular incident. It appears that the media have played a limited role
in raising public awareness. An article in the Daily Telegraph, dated October 6, 2006 seems to be
an exception in that it details the way in which the means test, which came into effect then,
restricting legal aid to those earning less than £20,740 p.a., below the level of national average
earnings of £22,422 p.a. and warns its readership that they might well need legal expenses
insurance.


4A.IV.8   The article then lists some of the major companies offering legal expenses as an add-on to
motor and household insurance policies, sometimes without an additional cost at least for the first
three years. The companies which did charge for legal expenses, charged between £13.40 and
£22.05 for motor policies and between £15.50 and £18.90 for household insurance. The maximum
legal expenses cover was £50,000 for all household policies and was generally £50,000 for motor
policies, though four companies set the maximum at £100,000 whether or not there was an
additional charge. That has changed since autumn 2006 as more companies offer maximum cover
of £100,000.


4A.IV.9   Most respondents took the view that awareness of the value of LEI/BTE amongst the
general public remains low. One respondent took a different approach, arguing that at some levels
of society, awareness of legal rights has been increased, partly as a result of the development of
‘no win, no fee’ approaches to obtaining one’s rights both for businesses and individuals. The ‘no
win, no fee’ development also impacted on the insurance market itself. Liability insurers began to



                                                    15
see that there was a need to protect themselves from the ATE / no win/no fee markets which can
and has added considerably to the costs of claims for insurers with an exposure to liability risks.
The case of Sarwar v Alarm caused insurers to recognise that if they provide some sort of BTE
cover then this would not allow claimants to use ATE/no win/no fee arrangements with their added
costs. One LEI provider stressed (and probably echoed the views of many), ‘claims management
companies added an unnecessary element to the costs’.


4A.IV.10   Apart from the extension of BTE/LEI, there has been little development in the terms of the
product and its sale as an add-on to other policies. One provider said, ‘There have been no major
changes in LEI/BTE, because it is attached to a core product and it’s not going to change’. In
some cases, however, what has changed is the level of cover offered, especially for those
providers who provide bespoke policies through brokers and directly to the public. Here the level of
cover can be considerably higher than the general run of the market, up to £500,000, where the
average is £75,000. More insurers and brokers are offering additional services such as help lines
as well. This is especially true of commercial insurance, which has provided more up-front advice
in the form of health and safety audits, including directors & officers and employment liability
insurance sitting alongside BTE insurance. Household (family BTE insurance) is beginning to
change with services such as will writing being offered (an example of this is More Than legal
services: www.wedomore.co.uk/Legal_Services).


4A.IV.11   The overall view, however, is that the market has remained static in terms of the size of the
market and market penetration. There has been some improvement in terms of the take-up of
commercial BTE but that is all in terms of take-up. It is interesting to note that there is a contrast
between what the experts think and reality because the ICM findings show a statistically significant
increase in penetration in 10 months from 50 to 59%. The products on offer have remained as
standard products with little innovation apart from additional help-line services, which may be much
broader in scope in terms of the advice offered and not just related to eligibility of the claim and
likelihood of success. However, it appears that at least one insurer is planning to widen the scope
of the legal expenses insurance by extending the cover not only to all members of the household
but also to provide them with cover wherever they are. The policy would be underwritten abroad




                                                   16
and part of the purpose of the new type of policy is to reclaim claims from the claims management
companies.


4A.IV.12   It should also be noted that, as legal expenses insurance is sold as an add-on to other
policies, the coverage is often fragmented or sometimes duplicated. For example, an individual
may be covered for employer disputes through BTE as part of his household insurance but also as
part of his benefits from trade union membership. Personal injury claims may also be covered by
two different sets of policies. The range of policies available does not cover every aspect of the
potential legal requirements of an individual especially if an add-on to household insurance policy
is not available.


4A.IV.13   Typically a motor insurance policy includes any excess the insured person may be
required to pay as part of claim; travelling expenses; loss of earnings and claims handlers enable
the individual to recover from the third party any uninsured losses or compensation for personal
injury following a motoring accident. A BTE policy accompanying household insurance generally
covers employment disputes; contract disputes; personal injury; property protection; tax protection;
jury service and certain aspects of legal defence, such as a civil action being taken by the insured
person under legislation for unlawful discrimination or the Data Protection Act, section 13 or some
motor offences (excluding parking, for example).


4A.IV.14   A relatively new product is legal expenses insurance for buy-to-let landlords to enable the
landlord not only to deal with disputes with tenants (e.g. for failure to pay the rent), eviction cover
and prosecution defence for the landlord. The legal expenses cover varies considerably from one
policy to another and may depend on the type of tenant involved (e.g. students). Since buy-to-let is
a relatively new investment for many individuals, legal expenses insurance in this context is
increasingly important. Finally, trade unions provide access to legal services for disputes with the
employer, personal injury and accidents at work and these may be extended to other members of
the family.




V. Promoting BTE legal expenses insurance



                                                   17
4A.V.1    The legal insurance providers responded in a variety of ways to the question of promoting
LEI/BTE, but all expressed a willingness to co-operate with the government in seeking to extend
this kind of protection. Some expressed concerns that, in view of the many changes in the legal
framework, which have already taken place and the further possible changes and uncertainties,
which may well result from the Ministry of Justice Consultation on ‘Case Track Limits and the
Claims Process for Personal Injury Claims’ (CP 8/07) that they will experience further difficulties in
providing legal expenses insurance. As the closing date for responses was 13 July 2007, the
Ministry of Justice is in a position to consider all the responses.


4A.V.2    The responses in interviews were twofold: anxieties over further changes, which were not
simply an unwillingness to embrace change, but reflected a desire for a stable framework for
business planning and also doubts about the advantages for less well-off claimants. One
respondent stated:
          ‘We rely on the government to get the environment right for us in terms of access to
          justice in the future and personal injury claims. They keep playing around with the
          environment. They need to consult early enough to give time to talk to the industry more
          fully and to pick their way through the various self-interested responses’.


4A.V.3    While on the other hand, for example, another pointed out that
          ‘many claims don’t come to us on BTE insurance, because solicitors who are not on the
          BTE panel do not like it, because they think they’re losing business, so they try to entice
          people away’.




VI. Effects on the courts


4A.VI.1   During the interviews, some respondents feared that increasing access to insurance might
have the effect of increasing claims and therefore overloading the already over-burdened court
system as well as increasing costs to insurers. The current model, in general, involves a cross
subsidy from those premiums which do not result in a claim and referral fees. However, it is



                                                   18
possible to avoid these outcomes and it is worth noting that before the Compensation Act, doubts
were expressed about the real extent of the ‘compensation culture’. In 2003, the Institute of
Actuaries estimated that the total cost of compensation in the UK amounted to over £10bn, about
1% of GDP, arguing that the cost has been increasing at 15% per year and is set to rise at over
10% per year, and claimed that the insurance industry could not sustain the consequent losses.
However, it appears that the Institute of Actuaries may have over-emphasized the rising costs. At
the time, some insurance companies found that the number of claims actually fell between 1997
and 2000, although the costs have been rising. It is expected that the Compensation Act will help
to reduce costs with a better regulated sector.


4A.VI.2    The Datamonitor report on UK Personal Injury Litigation 2005, published in 2006, shows
that the number of personal injury claims declined in 2004-5 due to a drop in employers’ liability
cases (partly due to the closure of the British Coal Scheme) and also because personal injury costs
are beginning to stabilize and the numbers of claims are largely static. Public liability claims fell
during 2004-5. Datamonitor found that the number of motor personal injury claims increased by
7.5% in 2004-5 but overall the numbers have not changed significantly in the last five years. The
costs are stabilising but they still pose a significant challenge to insurers since the relative costs
are high; for example, they formed 34.6% of total motor GWP in 2004.

     (i)       Estimating the risks of an increased number of court cases


4A.VI.3    The risk of an increase in court cases arising out of the promotion of LEI/BTE was not one
which appeared to cause much concern to the product providers, partly because they are in a
position to estimate the risk of claims (based on a six year period of experience of a particular book
of household or motor insurance). Claims under this type of insurance are rarely more than
£25,000 even though the cover offered amounts to £50,000; £75,000 or £100,000 in a move which
is designed to make the product more attractive. But as one legal expenses provider pointed out,
many more have a BTE policy but are not aware that they have it. This is partly because they did
not have to make a positive decision to purchase it as an add-on. It is there as part of the
household insurance package, but as so many people do not read their policy documents (of which
more later), they are not aware of it. Obviously if insurance companies consider that there is an
increased risk of claims from greater access to legal expenses insurance together with awareness


                                                   19
of owning it, then that increased risk will affect the prices of premiums. The claims are still more
likely to be concerned with personal injury of which traffic accidents form the largest proportion.


4A.VI.4    One of the major changes in funding legal expenses claims was the introduction of no
win/no fee in 1995 and subsequently, collective conditional funding arrangements. The Dept for
Constitutional Affairs commissioned a study of the operation of funding arrangements in personal
injury claims, which was published in February, 2006.5 The purpose of the report was to examine
the effects of different types of funding on the outcome and duration of the claim (which latter
element would have an effect on the courts). The introduction of CFAs does not seem to have led
to an increase in doubtful or even frivolous cases. For all newly opened cases between October
2002 and September 2003, the researchers found that, in 78% of the cases, there was no
significant dispute over liability, but that BTE funding was associated with cases where the
defendant’s liability was clearer and that they were settled more quickly than cases funded by CFA
and CCFA (even after allowing for complexity). Although this research was not concerned with the
extension of BTE, it does show that encouraging more people to have BTE may in fact be
beneficial all round (i.e. to the claimant, the insurer, the provider and the courts themselves in
terms of more rapid conclusion of cases).


    (ii)      Dispute Resolution


4A.VI.5    As a means of cutting costs and of settling disputes more quickly and with less stress than
court cases, many recommend the use of mediation or dispute resolution services. The Woolf
Report 1996 gave impetus to providing other means of finding fair, speedy and proportionate
resolution of disputes. The Civil Procedure Rules, which came into force in 1999, included
references to ADR in rules of court and introduced pre-action protocols with their emphasis on
settlement, even before court proceedings are issued. For the Ministry of Justice proportionate
dispute resolution is more than ADR and is designed to ensure that people have access to the
information and the range of services they need to understand their rights and responsibilities,
avoid legal problems where possible, and, if not, where to resolve their disputes effectively and


5
 The Funding of Personal Injury Litigation: comparisons over time and across jurisdictions, DCA Research
Series 2/06. P Fenn, Alistair Gray, Neil Rickman, Yasmeen Mansur.


                                                   20
proportionally. This is, of course, a means of avoiding any kind of court proceedings or even the
use of an ADR.


4A.VI.6   The Community Legal Services website provides a leaflet explaining the role of ADR and
listing some of the organisations and ombudsmen services, such as the Housing Ombudsman
Service (for complaints about housing provided by all registered social landlords and some private
landlords). Many other providers exist, including law firms. It is here that the insurance companies
could play a much greater role, given that many already offer legal help-lines to their policy holders.


4A.VI.7   A study carried out for the Central London Courts by Professor Hazel Genn in 1998 after
the scheme had been running for two years is still one of the very few analyses of commercial
mediation in the UK. It provides a very useful guide to improving the use of ADR. The most
important finding was that the take-up was very low, only 5% of the cases coming to court, where
the court recommends ADR first. Once proceedings have been issued and a defence entered,
where the claim is over £5000, an invitation to mediate is sent to both parties with an allocation
questionnaire. Apart from that, the outcome of mediation has much to recommend to insurance
companies; for example, the whole process is quicker and monetary settlements were considerably
lower than those achieved in non-mediated cases, whether they were settled or went to trial.
Further the costs of mediation are much lower than legal costs as well.


4A.VI.8   The conclusion from this study is that the offer of mediation as an alternative court
proceedings comes too late in the day. Once both sides have decided to have their day in court it
can be difficult to dissuade them. The insurers could offer mediation at the stage of the initial
contact from a policyholder and assist the customer in preparing for mediation. Advice on selecting
the appropriate mediation channel would also be given. Even if the case ultimately went to court,
both parties involved (according to Professor Genn’s study) appreciated the opportunity to focus on
the issues and realities of the case and to discuss it in front of an objective, independent person.
That in itself could speed up the court process, even if the case was not settled through mediation.


4A.VI.9   There are many lists of alternative dispute resolution bodies and commercial mediation
services; some consumer contracts contain private ADR arrangements, ADR’s offered by trade



                                                   21
bodies and the Tribunal Service. Even before the customer realises that he has legal expenses
insurance and contacts the insurer, he could be helped by easier contact with such services, at
least where they are public bodies or quasi-public bodies. Access to justice in this form has always
been fragmented in the UK in terms of the number of organisations and differing procedural rules.
However, it would not be sensible at this stage to establish one single organisation (such as the all-
embracing Swedish ombudsman service).


4A.VI.10     As far as insurance companies are concerned, they may wish to use one of the private
mediation services or services provided by a panel of solicitors. The immediate advice offered by
the helpline could well be to refer the customer to such a specialist service, depending on the
nature of the complaint. The ADR should be able to assess the complaint and ascertain whether or
not the customer has a real complaint as well as offering their services in settling it without going to
court. However, it should be noted that one company involved in the provision of legal expenses
considered that the charges for mediation or ADR would be more expensive, especially in low cost
cases, than use of lawyers and the courts.


4A.VI.11     Many companies also offer extensive legal advice to their customers, staffed by qualified
solicitors, barristers and trainee solicitors as the first stage. Others use their panel of solicitors for
mediation; negotiation and dispute resolution. The provision of access to justice need not be solely
about how the different means by which the public can afford to pay for lawyers and some
expansion of these alternatives could be a cost effective part of the solution. 6


     (iii)    Reducing the number of claims


4A.VI.12     Fears of clogging up the courts by increasing access to legal expenses insurance may well
be over-emphasized and should not be a reason for limiting access to legal expenses insurance.
But even if there were more cases, it should be born in mind that the purpose of encouraging more
people to have legal expenses insurance is to ensure that, in the absence of legal aid, that the
individual does have access to justice.



6
    Some of these suggestions derive from the Lead Ombudsman for Insurance, FOS.


                                                     22
SECTION B: CONSUMER FOCUS GROUP RESEARCH (Qualitative)


   4B.I.1       In order to better understand consumer attitudes towards each other in society today, their
   awareness of LEI and attitudes towards it and where they held the cover, what were their main
   drivers for taking it out, FWD Research recruited and moderated 3 focus groups which took place
   on 12th July 2007. The following group profiles were researched using the Mintel report as a steer
   for the demographic profile of those most likely to hold/ be interested in LEI as the 35-54 age
   group:


            •     Group 1: C2D, 35-54, Mixed gender, York
            •     Group 2: ABC1, 35-54, Mixed gender, Cheam
            •     Group 3: Housing Association tenants, DE, 35-54, mixed gender, Cheam.


   Full transcripts have been provided separately and the following is a summary of the views
   expressed.


I. Awareness of LEI


4B.I.2          The majority of, if not all members of focus groups 1 and 2 were aware of the existence of
LEI, even though they were sometimes vague about what the insurance actually covered. One
focus group member said that …
                ‘a lot of people think it’s just for your house, but it isn’t…You can use it for a number of
                different things, as long as people actually ring up and check’ (C2D, 35-54 North).


4B.I.3          This awareness was confirmed by the second group (ABC1, 35-54 South), who were all
aware of legal expenses insurance and all in this group had LEI in some form or another, whether
with motor, household and travel insurance. Most people seem to be more aware of LEI as part of
their motor insurance policy and more aware of the purpose of it. One member of the group said
that its advantage is that …
                ‘if you have to make a claim, hopefully you can leave it to another person, a third party to
                handle the correspondence and the cost of correspondence for you. Someone takes a



                                                          23
          court case against you for any reason, you know something at your house or work, you
          know you would have to find those legal expenses’ (ABC1 35-54 South).


4B.I.4    There was clearly confusion about what counts as legal expenses insurance in the second
group. It does not include payment protection insurance, which is designed to protect the
borrower’s ability to maintain repayments and to avoid getting into debt should they be unable to
keep up their repayments due to illness, accident or unemployment. A cover is most likely to have
been made when taking out a mortgage. Even though the members of the group had used LEI at
some time, they were still vague regarding its coverage, but felt it was something they ought to
have.
          “(If you did not have it), you would be feeling sick as a parrot for the sake of £2 a month,
          it’s just common sense to me, it’s cheap and it’s common sense. In today’s age of
          everybody being so litigation conscious’. (ABC1 35-54 South).


4B.I.5    Only a minority of members of the third group (Housing Association tenants, 35-54, DE)
were aware of LEI and some had already bought it as an add-on to the motor insurance and
household insurance. One member of the group belonged to a civil service organisation and was
provided with LEI for the company car as well. Two were members of a clay pigeon shooting club
and LEI was compulsory in case of an accidental shooting. That apart, awareness of LEI was very
low in this group, which meant a lot of the conversation around LEI was necessarily hypothetical.


II. Motivations for buying LEI


4B.II.1   The members of group 1 (C2D, 35-54, North) were fully aware of the fact that they had
purchased LEI and most had held the policies for at least ten years. They all stated that they
retained the policy and always ticked the box because they ‘were afraid not to’ or that they had
paid it in the past and ‘it only costs x amount so I might as well keep it’ or, as one of the more
superstitious members of the group said,
          ‘The day you stop it, something will happen’. (C2D, 35-54 North).


The group all agreed that they bought it for reassurance and peace of mind.



                                                   24
4B.II.2   The motivation for buying legal expenses insurance in group 2 seemed to be less strong,
but the reasons for purchase were similar, as one summed it up as a ‘security thing’ and added,
          ‘If you don’t have it and you then fall into a situation where you’re going to need it and
          you’re probably talking about losing your house at the end of it’. (ABC1, 35-54 South).


Another in the same group mentioned fear of facing a large bill…
          ‘Looking at the papers you see London legal firms charging four figures an hour and you
          think, if someone is going to sue me and they’re employing a barrister a, b, c on a grand
          an hour, I need some cover’. (ABC1, 35-54 South).


4B.II.3   Members of group 3 or members of their families had been beset with various personal
disasters which one might have thought would have heightened their awareness of LEI. They had
suffered horrendous car accidents; a disabled mother who should have been taken to hospital but
was not taken there immediately after her fall; and iodine poisoning whilst on holiday in Greece.
The main motivation among the couple that had it for buying LEI as an add-on was that they really
saw the need for legal protection. One said,
          ‘If I have a crash and I’m liable, and I need a brief, rather than take all my savings. I’ve got
          that because I work so they’re going to demand that I pay until I’m skint and then they’re
          going to pay’. (HA tenants, DE, 35-54 South).


4B.II.4   Another member of the group, who had been offered LEI, refused to buy it, but then having
heard part of the discussion decided he would buy it in the future. He had, however, used the
services of the Citizen’s Advice Bureau and would happily do it again. Another member was
apparently eligible for legal aid. The majority certainly did not access legal justice via LEI.




                                                    25
III. Possibilities of making a claim


4B.III.1   One element in the increasing awareness of legal expenses insurance is the extensive
advertising associated with claims management companies, which is not perhaps the ideal source
as far as insurance companies or indeed the government is concerned. It is a generalised
awareness of the possibility of making a claim. As one of the members of group 1 put it,
           ‘There’s that many people on the television now advertising oh, I’ve fallen over a stone, oh
           I’ve fallen over this; you can claim you know’. (C2D, 35-45 North)


Others find out about the possibility of making a claim from friends or colleagues or from others
who have made a claim.


4B.III.2   What is also interesting is that there seems to be a certain degree of guilt about making a
claim, even though it is justified by the circumstances and is a legitimate claim. One woman taking
part in the focus group explained that someone ran into the back of her car and she got £400 for it,
but had acted on the advice of her husband’s boss.
           ‘I feel a bit like I’ve sold my soul in a little bit of a way, but then if I can get a holiday out of
           it, and it ruined the holiday I was having, why not?’ (C2D, 35-54 North)


4B.III.3   That sense of guilt in making claims is linked to changes in the society and in patterns of
work.
           ‘I think people are a bit more out for themselves these days. You know not such a
           community feel you know, just I suppose because we work long hours as well as
           everybody’s at work so that sort of tradition of maybe one partner being at home and
           knowing more people around them has changed. And loyalties to your neighbours are
           maybe not there like they would have been years ago’. (C2D, 35-54 North)


4B.III.4   Fear of intruders and how they might be tackled is not linked with personal liability
insurance, which indicates limited knowledge of the purpose of legal expenses insurance. The
second group (ABC1 South) contained one or two members who had made a claim on their legal
expenses insurance, but in connection with a car accident of some kind. Their major concern was



                                                       26
not with making a claim themselves, but with their view that many claimants will make false or
fraudulent claims.


4B.III.5   In the case of members of the HA tenants 35-54 DE group, those who had suffered
accidents at work in the past failed to make a claim and were not aware that they had the right to
do so. They were not members of a trade union and since the accidents were prior to 1999, they
were probably eligible for legal aid. Once again, members of this group pointed out that employers
were much more careful about health and safety rules now and ensured that their employees were
better trained and signed off on a weekly basis that they understood all the risks. Group 1 also felt
this was a positive spin off of H&S legislation.


IV. Sceptical about making a claim


4B.IV.1    Members of the group seemed to think that legal expenses insurance was simply included
on household cover and not priced separately, but with motor insurance, it appears that they
believe that it is an addition to many motor insurance policies and that the customer must tick the
box and pay extra if he wants that kind of insurance. Even though they all had legal expenses
insurance, they were deeply sceptical about the insurance company actually meeting the claim,
and one or two members of the group had experienced refusal of claims even where these were
expensive accidents for the families concerned. One said,
           ‘We had a sewage pipe break across our land and …we were not covered by insurance on
           it.’ They had to call in the drainage company, the builders and plumbers, the gas board
           and the electricity and pay for the repairs. The breach was due to wear and tear.’ (CD2,
           35-54, North)


4B.IV.2    Another then cited an occasion on which his parents-in-law found that they were not
insured for a leak in their oil tank, which was also costly to repair as were the subsequent
damages.
           ‘I’m just very sceptical really because it just seems to be that you can be insured to the hilt
           and whatever you need is like oh sorry’ (C2D 35-54 North)




                                                     27
4B.IV.3   Others did not express similar scepticism about being able to make a claim but it
transpired that one lady had bizarrely not actually used her legal expenses insurance when she
would arguably have been able to use it. Instead she had used lawyers on a no win, no fee basis
and found the solicitors they engaged were satisfactory. The additional advantages in her view
were that she did not need to inform her insurance company nor did she lose her own no claim
bonus.


4B.IV.4   The second group were much more sceptical about the value of making a claim, regarding
legal expenses insurance as being at best only moderately helpful (apart from one member). One
said,
          ‘I’d say you know that they’re trying to make money out of it but at least you know, it’s not
          money grabbing to the same extent as… someone trying to make money out of your bad
          fortune. Because you know they are trying to make more money, you know you don’t know
          how much money they’re going to make out of it because you know you get all the
          settlement but they’ve got to make money somehow’. (ABC1, 35-54 South).


However, two members of this group had made successful claims on the legal expenses add-on to
their motor insurance policy.


4B.IV.5   The third group had mixed experiences of insurance companies. One or two members of
the group had very good experiences of the insurance company’s willingness to help, but others
expressed scepticism about the actions of insurance companies.
          ‘If they were as good at paying out the money as they are at taking the money, they’d be
          fine’ and another, ‘Really they’re there for them, not for us’. (HA tenants, DE, 35-54
          South).


V. Access to legal advice


4B.V.1    With regard to sources of legal advice, none of the members of the first focus group had
ever used the services offered by insurance companies. One had tried the Citizen’s Advice Bureau
but had found the wait too long; others had contacted solicitors for the standard 30 minutes of free



                                                   28
advice, selecting them from Yellow Pages. Others who were members of trade unions would turn
to their union officials, even for issues not connected with employment. One pointed out that….
          ‘…we always think in boxes, don’t we? Put people in boxes like union, that’s for work,
          house insurance, that’s for house, car insurance…you know sometimes thinking more
          broadly’. (C2D, 35-54 North).


4B.V.2    They were aware that they could contact the policy provider (Norwich Union, Direct Line,
Marks & Spencer’s) but did not know who the underwriters were.


4B.V.3    One member of the HA tenants 35-54 DE group was much more likely to telephone either
the insurer’s help line (Norwich Union) in that case, while the others mentioned various sources
including the union representative or in the case of the civil service employee, to the Civil Service
Association for legal advice. The Citizen’s Advice Bureau would also be the first port of call for
some members of this group.


VI. Increasing sources of risk


4B.VI.1   One group (C2D, 35-54 North) were undecided about the road traffic accidents with some
members of the group taking the view that since the number of cars on the road had increased and
people were under pressure to get to work on time, accidents had increased. They were prepared
to accept that road traffic accidents had decreased since cars had become safer. On medical
negligence and malpractice, the Northern group all agreed that this was on the increase, partly due
to MRSA and league tables, as well as ‘living in a blame culture’ and that
          ‘people don’t always want to accept that unfortunately sometimes people go into hospital
          and sometimes they die’. (C2D, 35-54 North).


The propensity to make a claim, all agreed, was due to greed.


4B.VI.2   With regard to personal injury at work, they agreed, that health and safety rules were much
stricter and had had a real impact on the number of accidents at work which was a positive to
emerge from the more litigious society we find ourselves in. Others pointed out that the employee



                                                  29
has to sign a paper to show that he understands the nature of the risk and the way in which the
health and safety rules apply to the tasks he has to carry out. The net effect of signing such
agreements may well be to remove responsibility for an accident or injury from the employer and to
transfer it to the employee, depending on the circumstance of the case. All agreed that disputes
with employers were increasing and that they would not hesitate to take action against employers
over conditions of work. As one person put it,
          ‘I don’t go to work for the hell of it…we all go to work because we need the money and…if
          you lose that job and you don’t feel that’s fair, one it’s very difficult to find other
          employment, but you would have to pursue it because that’s your livelihood and you need
          that income’ (C2D, 35-54 North).


4B.VI.3   Other sources of dispute, such as consumer disputes were felt to be on the decrease,
since larger companies were prepared to protect their reputations and were in a position to replace
faulty goods without too much argument as they could afford to do so.
          “You can even take a half eaten steak back to Asda and they’ll replace it!” (C2D, 35-54
          North).


4B.VI.4   Tax disputes were definitely on the increase, but the C2D, 35-54 North did not assign any
particular reason for that. On the other hand, it was assumed that disputes with landlords were
increasing or likely to increase because more people lived in rented property. The Northern focus
group considered that neighbour disputes were decreasing because people’s investment in their
homes was too great to put the value of the property at risk by a dispute with a neighbour.


4B.VI.5   Others seemed more concerned with personal liability generally related to the home, such
as a wall or a fence falling down on someone, or tripping up on your path, or failing to sweep up
snow so that someone slips on the path. They were concerned to protect themselves against
unpredictable claims of that kind. They could see the need for legal expenses insurance as a
‘safeguard’, especially for personal injury claims. Even then, they were critical of the outcomes:
          ‘I mean 20 years ago (if you knocked someone off his bike), if he had broken his leg and
          was off work, you would expect some comeuppance for it, but if you bump into somebody
          and they think actually I might have a bad neck now, I’ll go to a solicitor…because



                                                      30
           solicitors are saying, yes, come to me, we’ll see what we can do for you. So they’re
           generating this business that otherwise would not be there.’ (C2D, 35-54 North).


           ‘But then it’s the personal injuries, two lads in a fight in Sutton and they’ll try and claim off
           each other, I mean I know someone who was in a fight and he was off work for a long time
           and he’s loaded now. He doesn’t need to work and he’s all right’. (ABC1, 35-54 South).


VII. Fragmented cover


4B.VII.1   The C2D (35-54 North) group recognised that LEI is fragmented and that as it is an add-on
to other policies, cover may be reduplicated and that with motor, travel and household policies, it is
possible to have three LEI policies. They were not clear about what the policies actually covered
and that the benefits of the policies are not fully explained but would be willing to pay for a stand-
alone policy, provided that the costs of other premiums were reduced.
           `Yeah, we sort of established that we were already like over dosing on the legal cover that
           we’re not using anyway so I don’t know that I would buy another policy’ (C2D, 35-54
           North).


4B.VII.2   One member of this group wanted:
           ‘insurance companies to explain what the cover was actually for, why do you need this
           legal insurance, is it so that you can make a claim on someone else, or for protection
           against someone making a claim against you? What else does it cover for you? I’ve
           always assumed that if you’ve got legal cover for your bike, that’s one thing and then you
           need legal cover for your car and then legal cover for your house, that’s what I have
           assumed’. (C2D, 35-54 North).


4B.VII.3   Another sceptic stated that insurance companies ‘don’t really want you to know. They want
you to pay your premiums’. They were attracted to the notion of a stand-alone policy with the
proviso that what it covered was plainly set out.




                                                      31
VIII. The respective merits of ATE and BTE


4B.VIII.1   Group 1, C2D 35-54 North were unaware of the differences between BTE and ATE and
had never heard of the latter form of insurance. They did not seem to be impressed by the
possibility of using ATE.


4B.VIII.2   Group 2, ABC1 35-54 South were vaguely aware of ATE insurance but ‘did not know too
much about it’ and another said (which was rather puzzling),
            ‘I think you’ve got a case to sue someone, willing to offer you insurance but if you’re being
            sued, I don’t want to know’. (ABC1, 35-54 South).


4B.VIII.3   ATE was also confused with ‘no win, no fee’, whereas ATE can be purchased when you
are already in a dispute and you need to cover your disbursements and the risk of having to pay
the other side’s legal bill if you lose your case. Your solicitor will have to send regular reports on
the progress of your case to the insurance company providing the policy, especially any offers by
the other side to settle your claim. Under a ‘no win, no fee’ arrangement, your solicitor will take on
your case on the understanding that if you lose your case, they will not get paid. But if you lose
your case, you may still have to pay your opponent’s legal costs and your own and your opponent’s
disbursements. These are the payments which are covered by ATE insurance, which is arranged
by the solicitor. The solicitor may also claim a ‘success’ fee if he wins the case.


4B.VIII.4   Members of HA 35-54 DE had all seen and remembered the extensive advertising from
claims management companies, some of whom still advertise extensively on other digital channels.
Almost all members of the group expressed a great reluctance to engage in ‘no win, no fee’, but
one member had used ‘no win, no fee’ when his wife was involved in a car accident, which was not
her fault and their son suffered from whiplash. All expenses were paid and compensation was paid.
They had acted on a relative’s advice, who worked in insurance.




                                                     32
IX. Extensions of existing cover


4B.IX.1   All members of group 1 were very keen on extending cover to animals, but it quickly
transpired that they did not mean pet insurance but insurance against personal injuries from other
people’s animals (especially dogs) and personal liability for injuries to another caused by their own
pets. Personal liability insurance was considered in one group as an additional stand-alone policy
but the issues raised by the focus groups are in fact covered by owners or occupiers liability, a
standard cover in the majority of household policies, rather than forming part of a legal expenses
policy, although the level of cover may be much more limited than the cash limits for LEI.


4B.IX.2   The C2D 34-54 North group also spontaneously considered that liability arising from
identity theft could be added to legal expenses insurance (but it should be noted that some credit
cards and banks offer insurance for identity theft).


X. Suppliers of legal expenses insurance


4B.X.1    The sharpest divide between the C2D North and ABC1 South groups emerged when the
question was raised concerning the purchase of LEI. The first group rejected the notion of
purchasing legal expenses cover from retailers such as Tesco’s or Sainsbury’s, although they
realise that insurance companies actually provide the insurance which is then distributed by the
retailer. One member of the group said that
          ‘I would not trust Tesco’s anyway because their insurance is Direct Line insurance
          anyway… you might get it cheaper from Tesco but it’s still Direct Line insurance’. (C2D,
          35-54 North).


One member of the group was very happy with the insurance policy obtained from Marks &
Spencer’s. They firmly rejected banks and building societies and the possibility of obtaining
information from newspapers, but were generally favourably disposed towards the Internet.


4B.X.2    The ABC1 South group were very clear that they would purchase policies from their bank
for a variety of reasons ranging from the fact that they had purchased insurance from the bank



                                                  33
before and the review they had showed that the insurance the bank offered was a good price and
was more comprehensive. Another said,
          ‘I would have said the bank but more recently I have been ripped off by them as well’ and
          yet another said, ‘Banks because I wouldn’t know any differently’. (ABC1, 35-54 South).


4B.X.3    Most members of this group would purchase legal expenses insurance from Tesco’s or
other retailers as well as the AA (although this is now part of the Saga Group). One person,
however, would not buy from Tesco’s or any other supermarkets,
          …‘because I think they’re taking over the world’. (ABC1, 35-54 South).


4B.X.4    The context of these responses was the possible purchase of a stand-alone legal
expenses product, which would bring together the various elements attached to household, motor
or travel insurance. The price they were prepared to pay for this product ranged from £12 a year in
the ABC1 South group, whereas the other group recognised that such cover may well cost more -
perhaps £40-£50 per annum (C2D 34-54 North) and were comfortable with that, but it is well short
of the reality of £250 p.a. which is the cost of such a policy offered by the one company supplying
it.


XI. Personal liability insurance


4B.XI.1   Members of group 3, HA tenants 34-54 DE were asked if they would consider taking out
personal liability insurance if this was offered by a well-known and reputable provider at a price of
£18 or so. They were receptive to the idea as long as it was provided by a reputable firm, such as
Norwich Union, the Prudential, banks and building societies. They would also purchase it from a
large retailer such as Tesco’s. They recognised that the insurance policies were underwritten by
someone else.


4B.XI.2   This type of insurance is mandatory for nearly all employers who must insure for at least
£5m. It is not usually required for individuals but may be part of most travel insurance policies and
includes some personal liability cover in case of involvement in an accident abroad. They were
cautious about it, though, as one remarked,



                                                  34
            ‘You would need to know exactly what you’re covered for.’ (HA tenants, DE, 35-54
            South).


XII. Promoting legal expenses insurance


4B.XII.1    In response to the proposal that legal expenses insurance should be promoted, since
many people have it as an add-on to other policies, but are not aware that they have it or when to
use it, it was generally seen as good thing. The immediate response is that the government should
conduct a media campaign, encouraging people to buy LEI. Another suggestion was that the
government should send out an information leaflet with the self-assessment tax form (although it
should be noted that not everyone receives such a form every year). It would be easier to
encourage people to buy it if it were a single stand-alone policy, but, on the other hand, the LEI
add-ons to motor and household insurance policies are now very comprehensive. Employment
issues and personal injury insurance are standard elements of LEI add-ons.


XIII. Reasons for the alleged increase in litigation


4B.XIII.1   It is interesting to note that all immediately blamed America for the introduction of these
changes, which they seemed to resent, notwithstanding that private funding of legal expenses
originated in Europe. They summed up these changes as being due to a series of changes
affecting everyone’s lives, such as the lack of community spirit as people were out at work all day
so they do not know each other and do not look out for each other as they did in the past. It is
another example of a more selfish and greedy society. This can be illustrated from the following
contributions from members of the focus groups:


            ‘It’s how society is today. People are being made that way. Their honesty and that doesn’t
            rule anymore but if you all need this, and I can get something out of this, …..normally I
            think years ago it would be an accident, that was it, and accidents do happen and
            everyone seems to be oh what can I get out of it? It was a genuine accident but I want to
            screw something out of it and that’s how it is and then you’re thinking well I’ve got some
            insurance now to cover me for all this and I don’t think you always want to get on the



                                                     35
            bandwagon but you do. You do because I think we’re all that way where you just want to
            be covered just in case. I think that’s how it’s made it and really we’re buying something
            we never really needed it in the first place but we’re all, it makes you feel as though you
            really do want it and you do need it to get through life and how society is and it’s a bloody
            shame really’ (C2D 35-54 North).


            ‘And if everybody has it we all have to do it. It’s like athletes taking steroids, they’re all
            going to do it. It’s you just have to keep up with everybody else because you’ll be the
            victim through no fault of your own’. (ABC1 35-54, South).


4B.XIII.2   Others had a cynical view of why the government might want people to have their own LEI
cover:
            ‘Is it because of the London bombings, because the government have had to pay out
            compensation to the victims of the bombings? Do they feel they would have got away a bit
            more lightly had these people…’ (ABC1 35-54 South).


4B.XIII.3   They were extra costs for the individual and they were obviously uneasy about possible
claims against them without understanding that with any such claims, a solicitor would have to
consider whether or not there was any kind of case under law for them to answer. All but one (in
ABC1 group) did not make the connection that the importance of LEI has increased because so
few people are eligible for legal aid for personal injury cases. Other changes, such as the
introduction of ‘no win, no fee’ arose out of the Government’s concerns over the increasing costs of
legal aid. Changes allowing conditional fee arrangements were introduced in the UK in 1995 for a
limited range of cases. This was extended in 1998 to include all civil cases with the exception of
family cases, and then the 1999 Act extended the remit to include the success element of
conditional fee arrangements.




                                                       36
SECTION C: ICM OMNIBUS RESEARCH (Quantitative)


4C.I.1     In order to independently verify the penetration levels of LEI and the drivers for taking it out
that were reported in the 2006 Mintel report, FWD commissioned ICM, a recognised polling
organisation to place 3 questions on its general public omnibus study. The questions covered
awareness of LEI, ownership of LEI and the risks causing most concern to the public today.


4C.I.2     ICM interviewed a random sample of 1022 adults aged 18+ from its online panel between
13th -15th July 2007. Surveys were conducted across the country and the results have been
weighted to the profile of all adults. ICM is a member of the British Polling Council and abides by
its rules.


I. Awareness of the two types of LEI


4C.I.3     Three in five respondents are not aware of either “Before the Event” or “After the Event”
LEI. Just less than one in four (24%) have heard of either BTE or ATE. Such awareness levels
show clearly these are not terms which are widely in use by the public and as evidenced in the
focus groups, the terms are not readily understood. Changing the name of Legal Expenses
Insurance, possibly to Legal Protection, would result in less consumer confusion around the
product.

         Awareness of the Two Types of LEI
         Q: Which of the following have you heard of ….?


                            After the event LEI   Before the event LEI      None of these




                                                                                     24%




               61%
                                                                                            24%



                                                        37
                                                                         Base: 1022 GB adults aged 18+
4C.I.4    The demographic split shows that BTE is most likely to be a familiar term to men more so
than women and those aged 35-64 (the group most likely to hold LEI anyway); the most marked
difference in awareness is by social class with ABC1s in particular significantly more aware than
their C2D counterparts; by education, there is a marked difference in awareness with those
university or higher education appreciably more familiar with BTE than those with secondary
education only.


                                          Profile of Heard of `BTE’
     Q: Which of the following have you heard of….?

                                                            Gender       Age    Class    Education

    50%



    40%
                                                                                                                                                 35%
                                                                                             32%                                        31%
                                                                30%      29%
    30%                                                27%                                              28%
                  26%
           24%
                           21%                                                  22%
                                                                                                                   19%           20%
    20%                                       18%
                                                                                                                          13%
                                     10%
    10%



      0%
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                                                                                                        Base: 1022 GB adults aged 18+

II. Ownership of LEI


4C.II.1   In the 10 months between the Mintel research via Gfk’s Omnibus of 2,093 adults
conducted in September 2006 and our own ICM poll of 1,022 adults conducted in July 2007,
penetration has increased from 50% to 59%. This represents a statistically significant increase at
the 99% confidence level, and it is therefore very difficult to argue against its accuracy. In 2007,
acquisition of LEI as an add-on to Motor remains the most common means of ownership (48%),



                                                                          38
from add-on to household (35%) and travel (17%); a tiny minority have stand alone LEI (2%);
while over a quarter (27%) are adamant they definitely do not have LEI cover, some one in seven
(17%) don’t know.

                                                                   Ownership of LEI
  Q: Do you own any of the following insurance policies, either yourself or jointly with a partner….?

 70%

            59%
 60%


 50%                       48%


 40%
                                              35%

 30%                                                                                                              27%


 20%                                                          17%
                                                                                                                                   14%

 10%
                                                                                 2%              3%
   0%
            Any LEI     I
                      LE as part of car      I
                                           LE as part of     I
                                                           LE as part of      Separate LEI/   Separate ULR   None - definitely   Don't know
                          insurance          e
                                          hom insurance        travel          ily
                                                                            fam protection                   do not have any
                                                                                                               formof LE   I




                                                                                               Base: 1022 GB adults aged 18+


4C.II.2   The 3 year trend (again using Mintel figures for 2004/2006) illustrates how there has been
significant growth in penetration of LEI, certainly within the add-on (BTE) market. Those holding
any form of LEI is up 22% over 3 years, while those holding LEI as an add-on to motor (+19%),
to household (+20%) and to travel (+12%) are all individually significantly up. The market for
separate LEI/ Family Protection/ ULR has remained static over the 3 years since 2004.




                                                                           39
3 Year Trend in Ownership of LEI
     Q: Do you own any of the following insurance policies, either yourself or jointly with a partner….?

                                 July 2007 (1022)                    Sept 2006 (2093)                  Sept 2004 (2005)
    70%

           59%
    60%
                 50%
    50%                      48%

                                   39%                                                                                                               39%
    40%                37%
                                                 35%                                                                                           34%
                                         29%           30%
    30%                                                                                                              27%
                                                                                                                                 25%

    20%                                                            17%                                                     17%
                                                             15%                                                                         14%
                                                                         10%
    10%                                                                        5%        4%
                                                                                    2%         2% 3% 3% 2%
      0%
              Any LEI          I
                             LE as part of car      I
                                                  LE as part of       I
                                                                    LE as part of     Separate LEI/   Separate ULR   None - definitely    Don't know
                                 insurance          e
                                                 hom insurance          travel         ily
                                                                                    fam protection                   do not have any
                                                                                                                       formof LE   I




                                                                                                       Base: 1022 GB adults aged 18+




4C.II.3   Using 2006’s population estimate of 47.4m adults, we estimate that almost 28m adults
hold LEI in one form or another, an increase of c4.3m over a 10 month period since last
September. Approximately 23m now have LEI as a motor add-on and 16.5m as part of their
household insurance.




                                                                             40
                            Population Equivalent Trend in
                                         Ownership of LEI
     Q: Do you own any of the following insurance policies, either yourself or jointly with a partner….?

   Population (m)
                                                            July 2007 (1022)                 Sept 2006 (2093)
     50


     40


     30        27.96
                       23.7   22.75
                                        18.5
     20                                           16.59                                                                                        15.8
                                                          14.2                                                      12.8
                                                                   8.06                                                         8
     10                                                                                                                                 6.64
                                                                            4.7
                                                                                   0.95     1.9      1.42   1.4
          0
                  Any LEI       I
                              LE as part of car      I
                                                   LE as part of     I
                                                                   LE as part of     Separate LEI/   Separate ULR   None - definitely    Don't know
                                  insurance          e
                                                  hom insurance        travel          ily
                                                                                   fam protection                   do not have any
                                                                                                                      formof LE   I




                                                                                                       Base: 1022 GB adults aged 18+;
                                                                                                       Estimated adult population 47.4m




4C.II.4       Irrespective of whether we analyse motor or home insurance, ownership of LEI has
increased among men and women equally, but by age, ownership is significantly higher among
18-24 year olds and 65+ year olds, so at both extremes of the age continuum penetration levels
have almost doubled. By social class, penetration is fairly constant among ABC1s but has
increased markedly among C2Des as an add-on to both motor and home cover.




                                                                            41
Trend in Ownership Profile of LEI as
              part of car insurance
Q: Do you own any of the following insurance policies, either yourself or jointly with a partner….?

                                          July 2007 (1022)                Sept 2006 (2093)
80%

70%
                                                                                    61%
60%                                                                        57%                                       55%
              54%                                                                               53%53%
                                                              52%52%                                     51%
      48%                                              46%              48%
50%                   45%                                                         45%                                      44%
                         43%                                                                                   43%
            39%                                     40%
40%                                           36%
                               33%                                                                                               33%
                                  29%
30%                                                                                           27%
                                                                                                                                       23%
20%                                      16%

10%

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                                                                                              Base: 1022 GB adults aged 18+



Trend in Ownership Profile of LEI as
            part of home insurance
Q: Do you own any of the following insurance policies, either yourself or jointly with a partner….?

                                          July 2007 (1022)                Sept 2006 (2093)
80%

70%

60%

                                                                           47%      48%
50%
                                                                                                   43%
              39%                                             39%41% 40%                        40%    40%
40% 35%
                      33%32%                           33%                                                     33%34% 35%
            30%                                     30%                           30%
30%                            28%                                                            27%                                27%
                                              20%
20%                               16%                                                                                                  16%

10%                                      7%

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                                                                42                            Base: 1022 GB adults aged 18+
III. Risk drivers


4C.III.1   RTAs whether as a driver or pedestrian (including hit and run) remain by some margin the
area of risk causing most concern to the public, mentioned by 42% (up 3% on 10 months earlier).
Personal injury/ accident in a public place (e.g. shop, sports facility) or on council property is now
the second most widely mentioned concern by one in four (25%), followed by death or injury as a
result of medical negligence (24%) which completes the top 3.



           Risk Drivers for Taking Out LEI
     Q: Which, if any of the following, are you worried about happening to you….?

                                              July 2007 (1022)
     50%
             42%
     40%
                                                                                     33%

     30%
                   25%   24%
                               22%
     20%
                                     13%   12%   12%   11%   11%
     10%                                                            8%
                                                                          6%                    6%
                                                                                4%

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                                                                   Base: 1022 GB adults aged 18+




                                                  43
4C.III.2   Personal injury in a public place is in fact, significantly higher than 10 months ago, +7%.
Concerns over Consumer disputes (e.g. holiday, faulty goods) have more than doubled to 22%
(+12%) and jumped into 4th place. Other worries causing rapid growth in concern, in fact almost
doubling over a 10 month period include disputes with neighbours (e.g. Relating to boundaries/
overhanging trees) up 6% to 12% and contract disputes (e.g. Relating to non-payment for goods)
up 5% to 11%; tax disputes, as identified in a focus group are also on the increase, up 3% to
11% probably linked with queries over self-assessment.



           10 Month Trend in Risk Drivers
     Q: Which, if any of the following, are you worried about happening to you….?

                                     July 2007 (1022)         Sept 2006 (2093)
     60%


     50%
            42%
               39%
     40%                                                                                                 35%
                                                                                                      33%
     30%          25%      26%
                        24%
                              22%
                     18%
     20%                                16%
                                     13%   12%   12%
                                  10%         10%           11%        11%
                                                                             8% 8%
     10%                                               6%         6%                 6% 6% 5%                  6%
                                                                                              4% 4%                   3%
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4C.III.3   Broadly, as one would intuitively expect, LEI holders are more likely to be worried about
almost all the risks shown compared with those who do not hold the cover. However, the one risk
where non-holders of LEI perceive as a greater worry than LEI holders is property related
disputes such as between landlords and tenants where 9% of non-holders versus 5% of LEI
holders cite it as a concern. Also a significant proportion of (30%) of those with no LEI are
concerned about RTAs, so both of these could be angles when promoting take-up among new
customers to the cover.



                                                    44
 Risks causing most concern among
         LEI holders vs. Non-holders
   Q: Which, if any of the following, are you worried about happening to you….?

                          Hold LEI July 2007 (505)                            NOT Hold LEI July 2007 (275)
   60%
           53%
   50%


   40%

             30%     29%
   30%                       27%
                       24%
                                         22%
                                19%
   20%                                     17%
                                                       15%            14%             15%
                                                         13%                                        13%
                                                                        11%                                 11%
                                                                                                              10%
                                                                                                       9%             9%
   10%                                                                                       7%                              6%
                                                                                                                    5%         4%

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Medical malpractice has reduced significantly in salience for non-holders of LEI, from 28% to
19% over a 10 month period.

Trends in Risks causing most concern
   among LEI holders vs. Non-holders
     Q: Which, if any of the following, are you worried about happening to you….?

                         Hold LEI July 2007 (505)                                     Hold LEI Sept 2006 (999)
                         NOT Hold LEI July 2007 (275)                                 NOT Hold LEI Sept 2006 (351)
     60%
                   53%
     50%

     40%

     30%           30%    29%      27%
                          24%
     20%                                     22%
                                   19%
                                             17%               15%                            15%
                                                               13%              14%                   13%
     10%                                                                        11%                   9%      11%
                                                                                                              10%    9%
                                                                                              7%                              6%
                                                                                                                     5%       4%
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                                                                      45
                                                                                                    Base: 1022 GB adults aged 18+
4C.III.4     Men have become appreciably more concerned about RTAs, as have those aged 55-64
and 65+ and social class AB. The younger age groups and the older age groups have swapped
positions with the 18-24 year olds becoming significantly less worried about medical malpractice
than those aged 55-64 and 65+ who are markedly more concerned. Concern over personal injury
in a public place has, in contrast, increased across the board.


                              Trend in Profile of Risks which
                                        cause most concern
           Q: Which, if any of the following, are you worried about happening to you….?

                                 RTA-July 2007 (1022)                             RTA-Sept 2006 (2093)
                                 MedMalpractice-July 2007 (1022)                  MedMalpractice-Sept 2006 (2093)
                                 Injury Public place-July 2007 (1022)             Injury Public place-Sept 2006 (2093)
           60%


           50%
                                                                                                48%     47%
                                 44%                                                    45%
                        42%                         42%                                                               43%
           40%                             40%               40%                                               41%
                                                                      39%      38%
                                                                                                                              36%
                                                                                        32%
           30%                                                                          29%     30%                           29%
                                           27%      28%                                         28%     28%    27%            27%
                        25%      25%       26%                        26%
                        24%                         23%      23%                                        23%           23%
                                 21%                         21%               21%                                    22%
           20%                                                        20%                                      19%
                                                                               16%
           10%


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                                                                                                Base: 1022 GB adults aged 18+




                                                                       46
4C.III.5   It is interesting to contrast consumers’ main concerns today with the reality of what a major
UK FSA authorized insurer who is a main provider of LEI has reported to us in terms of their actual
claims experience. In terms of a breakdown by way of a percentage split in the type of claims that
occur under a typical personal BTE LEI policy:


   Personal injury 50%
   Consumer disputes 16%
   Employment disputes 20%
   Property disputes 8%
   Medical negligence 6%.


4C.III.6   Clearly, Personal injury will cover both RTAs and injury in a public place which are the
number one and two concerns of the general public today. It is interesting that medical negligence,
though 3rd in concern for the public is the lowest area for actual claims. The above mentioned
heightened concern over consumer disputes by the public appears to be borne out in that
significant claims experience does cover this area (third most likely) in actuality.




                                                    47
SECTION D: THE REGULATION OF LEGAL EXPENSES INSURANCE


I. Regulatory Requirements


4D.I.1   The current regulatory requirements do not contain any specific provisions dealing with
legal expenses insurance, but product disclosure falls under the Insurance Conduct of Business
Handbook 5, which sets out the information responsibilities of insurers and intermediaries. These
require amongst other things a policy summary, which must contain information about the type of
insurance and cover, significant features and benefits and significant or unusual features or
limitations. There are also detailed rules about how optional extras are presented.


4D.I.2   However, this does not show the real achievement for both the General Insurance
Standards Council and the FSA through their work on key features of the documents, explaining
the contents of the policy to the consumer. Policy summaries are now expressed in clear and
simple English, set out in such a way that they can be easily read. Where it is necessary to use
legal or technical vocabulary, that is also explained in clear English. The complaints about ‘small
print’ and ‘jargon’ expressed by members of the HA 34-55 DE focus group are simply out-of-date
(and reveals, sadly, that in common with many people, they have not read the policy anyway - or at
least, not until they thought they needed to make a claim).


4D.I.3   The new proposals for Conduct of Business are contained in ‘Insurance Selling and
Administration’, CP07/11, June 2007, Chapters 5 & 6. This applies to all protection products and
puts the emphasis on oral disclosure of all the details of the policy, including levels of cover, cost
and relevant exclusions and conditions of the proposed policy, since, it is claimed customers can
understand an oral explanation more readily. These rules are designed for brokers selling a
particular policy to a client. That may well be true at the time, but they may well not remember such
explanations for very long. There will be no requirement to provide a policy summary, but that will
be replaced by a high level rule:
         ‘A firm must take all reasonable steps to ensure a customer is given appropriate
         information about a policy in good time and in a comprehensible form so that the customer
         can make an informed decision about the arrangements proposed.’



                                                   48
4D.I.4       There is no detailed guidance on what has to be disclosed (albeit that the FSA says that
the level of information will vary according to the knowledge and experience of the customer, the
policy terms and so on). The relevant parts of the new text are ICOB (Insurance Conduct of
Business) 6.1.5R and 6.1.7G.


4D.I.5       Discussions with insurers as part of the expert interviews provided an assurance that the
policy statements conforming to the key facts rules had become almost a habit and that they were
unlikely to change even without specific rules. Assuming that the FSA brings about the change to
principles-based regulations at the end of the year, it may well be necessary to keep a watchful eye
on the clarity and comprehensiveness of policy statements. It is quite true that most people do not
read them on receipt, but at least they (usually) have them to hand as a clear point of reference
when they consider that they may need to make a claim.


II. Complaints to the Ombudsman


4D.II.1      The Financial Ombudsman Service (which handles complaints about life and general
insurance) receives comparatively few complaints about legal expenses insurance, only about 600
per year and of those only a 100 or so are referred to the Ombudsman. The lead ombudsman on
insurance provided a general breakdown of the complaints brought by consumers about these
policies. They fall into four main categories:-
         1) The legal claim that the consumer wishes to pursue is not covered by the policy;
         2) The insurer says that the claim has no reasonable chance of success;
         3) Timescales. The insurer rejects the claim because the policy holder knew or should have
             known about the claim at the start of the policy or has waited too long to tell the insurer
             about the claim;
         4) Quality of legal work or insurers’ management of lawyers or fees charged by the lawyers;
         5) Whereas choice of lawyers and the right to choose the lawyer is NOT one of the most
             common causes of disputes.




                                                       49
These issues have been a consistent feature of the work of the FOS for many years. The FOS
upholds the position of the firm more often than that of the consumer and whilst that does reflect
the fact that a certain proportion of the cases simply have no merit, it is a cause of concern and
reflects a certain unease about the utility of these policies as a mass market solution for access to
lawyers. Mr Hinchcliffe, Lead Ombudsman, did suggest some alternative approaches, which are
set out in the last section of the report.




                                                 50
SECTION E: CONCLUSIONS AND RECOMMENDATIONS


0. Summary
4E.0.1     The following key conclusions and recommendations have been highlighted for action by
the industry and consumer groups with support, in some circumstances, from the Ministry of
Justice.


     1) Currently there is unlikely to be sufficient demand from the consumer side to warrant
           promoting a separate stand alone LEI product. Additionally, it is unlikely there would be the
           ability from the supply side to provide it at a premium level which consumers would feel
           comfortable (the gap between customer expectation and reality is too large to bridge for
           the majority).
     2) Industry and consumer groups, such as the Association of British Insurers (ABI) and FSA,
           should take the lead on agreeing ways of promoting LEI. This should involve providing
           more information about the product to new as well as existing consumers. The Ministry of
           Justice should assist in this process where necessary.
     3) The ABI should look into ways of encouraging suppliers to increase the chances of
           policyholders reading documentation so as to increase consumer understanding of LEI.
     4) The name ‘LEI’ should be altered to something that consumers are more likely to
           understand. A possible solution would be to rename it ‘legal protection’.
     5) There needs to be much better communication of the benefits of LEI. This is work that both
           consumer and industry groups can take forward.
     6) Employers should consider providing LEI to employees and Affinity groups.
     7) Housing associations should consider providing LEI for tenants




                                                   51
I. Stand-alone v. add-ons


4E.I.1     It is tempting to regard the distribution of LEI/BTE as add-ons to motor insurance and
household insurance as having certain disadvantages in that it is fragmented and may be
duplicated if the policyholder is also a member of a trade union or another affinity group.


4E.I.2     However, on closer examination, the legal expenses element is not duplicated in the case
of motor and household insurance, since LEI in the case of motor insurance is strictly limited to
connections with road traffic accidents. However, one supplier commented that a stand-alone
policy would not be economic, since
           …‘at relatively low premiums, the costs of administration would make it uneconomic and
           the minimum FSA documentation costs £1-£2 per policy’.


4E.I.3     Meanwhile the LEI/BTE insurance policy attached to household policies may well be very
comprehensive, including employment disputes, contract disputes, property protection, jury
services, motor prosecution defence, employees’ legal defence, international cover, tax protection,
and legal defence (criminal prosecutions and actions for unlawful discrimination or breaches of the
Data Protection Act arising from an insured person’s work as an employee). 7 Saga’s home
insurance policy includes legal expenses insurance, which covers employment disputes, contract
disputes, personal injury, property protection, tax protection and legal defence on the same
grounds as DAS’s offering. It appears that only one firm offers a stand-alone policy for legal
expenses insurance. It costs £250 and there are only 1000 policy holders.


4E.I.4     DAS was asked to estimate what a stand-alone policy would cost and what it would cover.
Germany is the most developed stand-alone market and DAS Germany is the market leader there.
A full legal expenses policy, which is essentially a combination of a typical UK motor and
household add-on policy, the premium for the standard package is E265.50 p.a. (reductions are
available for voluntary excess) through to a premium of E373.80 p.a. for the widest possible cover.
It is also possible to arrange motor cover only with a standard premium of E116.40 or non-motor
cover only with a standard premium of E216.90 with reductions for voluntary excess. In Germany,

7
    Family Plus Legal Protection & Assistance, offered by DAS.


                                                    52
it is sold through agents, but if such a policy was introduced in the UK, it would probably be sold
directly and principally through internet fulfilment.


4E.I.5     Although Mintel points out that the advertising spend on legal expenses insurance is a very
small proportion of the total advertising spend on household and motor policies, this may not be a
relevant point when seeking to extend LEI/BTE. The distribution costs for these policies would be
relatively high and would require a much larger and separate budget, which it is doubtful that many
insurers would contemplate, especially when the trend is to sell LEI/BTE as an add-on with a
separate charge. It is included in the cost of household insurance (buildings and contents) and is
simply part of the package. Unless policy holders read the policy documents the insurer provides
for them, they may well fail to realise that they have this insurance, since they were not offered a
choice in purchasing it (ticking a box and paying an extra charge).


II. Promoting LEI/BTE


4E.II.1    There are two different strands in promoting this insurance:
               §   increasing awareness, and
               §   encouraging purchase of the policy.


4E.II.2    The former is important since so many people own the policy without realising it and are
unaware of the extent of its coverage. Any promotion should encourage people to look at their
policies and see what it covers. Such advertising could well be part of the industry’s own promotion
of the insurance policies and the advantages of the LEI policies. Another company suggested that
this could be covered by government and industry advertising more extensively on television and
government websites, including changing the name-perhaps to ‘legal protection’ and with
anecdotes to get the message across.


III. Extending LEI/BTE coverage


4E.III.1   Industry interviewees came forward with a variety of proposals for extending the coverage
of legal expenses insurance, including a proposal that the purchase of some basic coverage



                                                    53
(perhaps covering personal injuries, although the LEI provider did not specify this) should be made
compulsory. One major distributor of LEI argued:
           ‘Price sensitivity over motor insurance is high. Making legal expenses insurance a
           compulsory add-on would increase the price, since motor insurance is priced net of this
           add-on, and they would lose money. They actually underwrite their own motor insurance’.

4E.III.2   Another suggestion is to make LEI part of household insurance, not as an add-on as some
insurers already do. . Another provider proposed that a small addition to council tax might well
provide the majority with basic LEI cover. But they were in the minority and few had any
constructive proposals to make concerning extending the cover.


4E.III.3   More positive and effective proposals would encourage the purchase of legal expenses
cover on behalf of others; for example, employers could provide this as an additional benefit for
employees, perhaps encouraged by tax relief. This was another suggestion put forward by an LEI
provider and again, there may be some discussion about the contents of such policies, which
would cover personal injury at work as well as outside work, and also all employment-related
disputes (such as unfair dismissal and discrimination). It is ‘an untapped distribution channel’.
Employers, of course, take out employer liability insurance, to cover themselves against claims
made by members of staff. Insurers offering this cover take considerable trouble to keep their
employer policy holders up-to-date on all employment-related issues (health and safety, for
example), offer highly qualified help lines and advice on management in order to avoid claims.
Given that this background, the provision of legal expenses insurance by employers for their own
employees is a more reasonable approach for employers to adopt. Such an approach would
enable employers to purchase the cover as a bulk purchase and hence at a lower cost.


4E.III.4   Small to medium-sized businesses would be in a position to purchase such insurance on a
business to business basis through affinity groups. As an example of the purchase of cover on
behalf of others, this company cited London bus companies whose insurance allows a passenger
to claim, if injured as a result of the actions or negligence of the driver. However, some companies
find the whole process of setting up the distribution of affinity groups too difficult; for others, it is
their speciality.



                                                     54
4E.III.5   Given the willingness of some legal expenses insurance providers to offer this insurance to
affinity groups, this is an important method of extending access to this insurance. Trade unions
offer LEI to their members, but the membership of trade unions has fallen to some 7.4 million or
some 25% of all workers. Many business affinity groups offer LEI to their members as part of their
membership, and other means of extending the market are also possible, as well as public bodies
such as cover to schools and school teachers taken out by the local authority. Concern was
expressed about housing association tenants have access to such legal cover, but some landlords
of social housing do offer their tenants this cover as part rent and similarly tenants’ associations
would be in a position to obtain an affinity deal. In this case, the Housing Corporation could
negotiate a bulk deal with insurers to provide LEI for tenants of social housing and as far as
facilitating tenants’ complaints against their landlords is concerned, may need to do more to
promote the Housing Ombudsman.


4E.III.6   The Royal & Sun Alliance Group published a report in December, 2005 in conjunction with
Toynbee Hall and Demos, which, although the focus is on household contents insurance is still
relevant. They point out that three million low-income families have no such insurance and that the
situation is made more difficult by changes in social housing policy with much being handled by
smaller housing associations. This has been provided and continues to be provided through ‘with-
rent’ insurance and this could be extended to cover LEI for these families. They, too,
recommended that the Housing Corporation could play a part in this, not only by publicising the
Housing Ombudsman but also by checking the availability of such insurance through their
inspection processes.


4E.III.7   One interviewee commented that if there is a real move to extend the market for legal
expenses insurance then this would need to be accompanied by a simplification of cover and
processes so that it is suitable for the mass market. If both of these conditions can be fulfilled at the
same time, then insurers would see a better case either for better advice and assistance (building
on the advice desks and phone lines that many offer) or for a simpler policy offering a broader
cover and with a claims process that is simpler but still allows insurance companies to exclude
claims that policy holders were contemplating pursuing when they took out the policies. Some of




                                                   55
these issues arise from the following statement made by the chief executive of DAS on the future
development of the UK LEI market.


IV. Future issues in the UK legal expenses insurance market


     (i)       BTE Legal Expenses Insurance


4E.IV.1    The first point to notice is that
           ‘although there is widespread availability of legal expenses insurance, there are
           comparatively few UK underwriters of Class 17 products and most companies offering
           cover are in fact intermediaries using a third party underwriter, including solicitor firms
           offering accident related products. The traditional model of legal expenses insurance has
           been affected by the level of referral fees payable by solicitors wishing to undertake
           personal injury work. This has distorted the previous underwriting model, leading to market
           fragmentation. A further difficulty has emerged for insurers, whereby disputes over free
           choice of lawyer are now extremely common (because of the value of personal injury work)
           and this has significantly increased costs for insurers. At the same time, in the non-motor
           arena usage and awareness of policy cover has increased significantly and there has been
           an upward trend with regards to claims costs.


           In the BTE sector, it is essential that legislators pay attention to some of the key areas of
           difficulty, especially issues surrounding free choice of lawyer and market fragmentation, to
           ensure in particular that the sector is regulated properly. However, given a stable legal
           environment, the future outlook for personal lines legal expenses insurance remains
           positive and that once the Legal Services Bill becomes law some legal expenses
           insurances will also deliver low cost legal services, in association with insurance products,
           as is already common in North America. This will provide consumers with a wider choice of
           services at competitive prices.’


4E.IV.2    However, it is recommended that further attention should be given to the regulation of
BTE/LEI as further restructuring of the market takes place. For example, a large and complex



                                                     56
company may have two subsidiary companies selling motor insurance through these competing
companies and may acquire one or more law firms. Two policy holders have policies from each of
the companies applying to the same accident and look to their legal expenses insurance to deal
with the accident. They need to be sure that the claim is viewed independently and that conflicts of
interest do not occur. The regulatory issues need to be clarified and companies offering legal
expenses, owning law firms to ensure that potential conflicts of interest are appropriately handled.




                                                 57
          (ii) ATE Legal expenses insurance


4E.IV.3   DAS pointed out that…
          ‘although over the last ten years, most of the challenges (faced by the ATE market) have
          been overcome through binding court decisions, the government has now decided to
          review the recoverability of ATE premiums in lower value cases. The review appears to
          have been prompted by the desire for liability insurers to reduce their claims costs….this
          review has destabilised the ATE market and if the current proposals are taken forward
          both the availability and cost of ATE will be adversely affected, which in turn will affect
          access to justice, especially for claimants with lower value cases.’


4E.IV.4   The interests of three parties will have to be balanced: liability insurers, legal expenses
insurers and the public. The purchase of BTE insurance appears to be growing but there may be a
problem in that some families with limited budgets, but above the eligibility limits for legal aid, may
not buy an add-on policy, but in the event of an accident, they may not be covered and will need
access to justice then. BTE is obviously preferable but ATE may be still be required.


Dr Oonagh McDonald
Ian Winters
Mike Harmer




                                                    58

				
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