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The Insurance Companies (Legal Expenses Insurance) Regulations 1990 (section 6), paraphrased, states that an insured has the freedom to choose their own solicitor under an insurance contract for legal expenses, also referred to as legal costs, in any proceedings.
Whilst there is acceptance that freedom of choice is essential from the outset in some cases, for example where use of a panel solicitor would produce a conflict of interest, or where the case is highly specialised, in the majority of “routine” cases the legal costs insurance industry uses panels of solicitors up to the point of proceedings being issued.
From the perspective of the legal costs insurer, the main driver for policy rates is whether claims are handled by panel or non panel solicitors. This differential has two elements to it:
Firstly, when dealing with panel solicitors, the insurer is negotiating arrangements in relation to all of its diverse range of claims in bulk. This means that service standards and rates for handling claims in volume are negotiated. Therefore, a panel solicitor is a known quantity to the insurer so the cost of vetting, managing and monitoring their activities are greatly reduced.
The second element is that the panel solicitors’ rates are generally highly competitive. Dealing with high volumes of claims, the panel solicitor is able to gear up to produce financial efficiencies. Agreeing target average costs per claim can often reduce claims costs and decrease underwriting risk. A panel solicitor may also fund disbursements during the life of the case, reducing administration costs for the insurer and improving the underwriting cash flow profile.
The economics of the situation are clear, but is increased use of panel firms compliant with the Regulations and are policyholders disadvantaged by it?
As far as compliance is concerned, the industry relies upon the wording of the Regulations, which state that freedom of choice is a requirement in “proceedings”. A recent Financial Ombudsman ruling considered in detail a complaint where freedom of choice, or the lack of it, was the issue. They considered recent arguments that “proceedings” should be taken to have started at the time when any significant legal enquiry commenced, a much wider interpretation of the term than the legal interpretation that proceedings have actually been issued in Court. The Ombudsman concluded that these arguments did not have sufficient strength, and that compliance with the Regulations did not require the insurer to offer a choice of solicitor earlier in the life of a case than was its present practice.
Are policyholders disadvantaged by the use of panel solicitors? The answer from a number of sources is that they are not.
The insurers would argue that the policyholders benefit from significantly lower policy costs. They would also assert that the use of panel firms produces a consistently high level of quality of service. The Ombudsman supported this view in their ruling, finding no evidence that panels routinely disadvantage policyholders.
Last year a comprehensive review of the legal costs insurance market based on interviews with insurers, solicitors and policyholders was published by the University of Westminster. Called “In Sure Hands”, it was generally supportive of the use of panel firms. Where policyholders identified areas for improvement, these focussed upon delays or lack of communication rather than the fact that they were not given a choice of firm. Policyholders who had been allowed to stay with a non panel firm were reported as saying that they would probably use the insurer’s recommended solicitor next time.
The use of panel solicitors is therefore a response to market pressures, driving down the policy price and providing assistance on a broad range of legal matters at highly attractive rates. The industry view is that restriction of solicitor choice to a panel prior to proceedings is compliant with the Regulations and there is a weight of independent evidence that the practice does not disadvantage policyholders.
One major issue for the industry is the need for clear explanations in policy wordings on how solicitor arrangements are handled. Wordings must set out in unambiguous terms that panel solicitors will be used up to the point of proceedings being issued. Experience shows that where this is the case, the policyholder very rarely has a problem with using the recommended firm.
There also needs to be an acceptance that full freedom of choice, where it is a necessity, comes at a price. “In Sure Hands” suggests a sliding scale of premiums depending on how broad the choice of solicitor will be. This would allow the insured to tailor the policy to their specific requirements. This suggestion could improve both clarity and understanding in the market on the main cost drivers affecting the pricing of these products.
The legal costs insurance industry is managing a difficult balancing act between the right to freedom of choice and the need to produce highly cost effective products. Increasingly what is needed is the promotion of greater understanding of the dynamics of this balance to clients and the construction of clear options based on differential price structures to allow genuine choices to be made at the point of sale.