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29th September 2005
The effect of British patients joining the potential multi-billion dollar law suits against the manufacturers of the painkiller Vioxx may have a significant impact on household legal expenses insurance. Rebecca Conway, Claims Manager of Arc Legal Assistance considers this and other recent developments in claims.
Insurers have historically seen legal expenses insurance (LEI) as a low cost add-on to core household policies. Low prices have been sustained on the basis that there is low awareness of the benefits provided and therefore low claims frequency. However, under FSA regulation clients should be given key facts on the benefits of the cover which will raise their awareness of its existence.
Penetration of household LEI, however, is highest among socio-economic groups A and B, leading to an articulate and well informed policyholder base. If a policyholder has a legal problem and is unaware of the benefits provided by the policy their first port of call will generally be a discussion with a solicitor. Prior to the Court of Appeal case of Sarwar v Alam in 2001, solicitors were reluctant to explore the availability of LEI for fear of losing the case to the provider's own panel solicitor. Solicitors therefore pursued cases on a private client basis without a claiming on the LEI cover. Sarwar, however, set a precedent that solicitors must check the availability of LEI before entering into any other form of funding agreement with the client. This has probably been the largest single reason why the claims experience on LEI accounts has increased over the past four years. Predictions of further dramatic rises in claims frequency are probably alarmist and currently without justification.
The nature of the cover attracts a small proportion of serial or professional claimants. The policy will only support a claim that has a reasonable chance of succeeding. Occasionally policyholders will be absolutely convinced that they have a cast iron case when in fact they do not have a leg to stand on from a legal viewpoint. Managing these claims will always be challenging and require specialist and experienced claim staff, especially when policyholders are being represented by a non-panel solicitor who has an incentive to persuade the LEI provider to accept the claim as his fees will be covered, win or lose.
The majority of claims arising under this cover however will be fairly straightforward and the LEI market has identified a number of solicitors who are highly commercial in their approach and employ leading edge technology to ensure efficiency. Claim costs, in general, can remain well controlled and these firms tend to be those that secure places on providers' panels.
Claims that can significantly affect policy costs are the unusual ones. Many policyholders would not expect such claims to be covered, but in fact they often fall within the standard sections unless exclusions are applied.
A good example is clinical negligence. These claims are notoriously difficult to assess, since to succeed it must be shown that the claimant has suffered injury as a direct result of advice or treatment that has fallen below that of a reasonably competent professional. Although claims frequency is very low, costs are disproportionately high as a large proportion of cases will have to be abandoned following a costly preliminary investigation.
Injuries arising from defective products will also be covered unless excluded. While some of these will be straightforward, for example falls from collapsing garden chairs or hammocks, others will be highly complex. A current example of this is a spate of claims arising from the anti-depressant drug Seroxat, which may cause suicidal thoughts in young people. Another is claims arising from the drug Sabril, used to treat epilepsy which may have caused vision defects and blindness. In addition, recent newspaper reports indicate that the families of as many as 2000 British patients who died after using the painkiller Vioxx, could join a potential multi-billion dollar lawsuit against the drugs manufacturers. These claims could potentially be covered.
Accidents at work follow a similar profile. The majority are straightforward trips and slips but a minority are highly complex such as asbestos related conditions which may involve multiple defendants and relate to employment up to 40 or 50 years prior to the claim.
Another area of evolving law affecting personal injury relates to psychological injury including post traumatic stress disorder. Claims involving these elements can be highly specialist and problematic in terms of outcome.
Contract cover for consumer goods claims will be generally straightforward. We've all heard about the problems of faulty washing machines or holiday nightmares. However, unless there are specific exclusions, financial mis-selling cases could be covered. A current claim trend relates to shortfalls on maturing endowment policies. Statistics show around 80% of policies still in force are in danger of failing to meet the sum needed to pay off the policyholder's mortgage. A Treasury Select Committee report suggests that as many as 60% of endowment policies may have been mis-sold. Similarly, some 400 claimants, many with LEI support, are pursuing claims against Equitable Life, following a Court decision in 2000 that the company had to meet a liability of over £1.5 billion to one group of their members who had guaranteed benefits.
Employment claims usually surround the termination of the employment, and/or alleged discrimination resulting in the policyholder being disadvantaged. As employment law becomes more complex, so do the employment claims. Another emerging area is age discrimination. A common tactic of solicitors acting for claimants is to incorporate an allegation of discrimination within a straight forward unfair dismissal claim. This has the advantage of removing the limit on the size of the award the Tribunal can make, presenting the defendant with the dilemma of whether to settle the matter early or to risk uncapped damages. This meansan increase in costs and therefore the management of the claim.
So how does the evolving claims profile affect the future of the household LEI product?
The challenge is to provide products that meet the needs of different policyholder bases rather than employing a one size fits all approach. Full cover includes risks that may only be applicable to a very small minority of the policyholder population. The introduction of key exclusions may have a dramatic impact on cost. Given that the LEI add-on is an important source of revenue for many intermediaries, it would be naive to think that the only response to the evolving market environment is to increase prices. The position is far more complex than this. Providing the best solutions will increasingly need a combination of bespoke policy wordings for different customer groups and highly cost effective claims handling.
This article appeared in Insurance Times