What is Legal Expenses?

A simple definition:

Legal expenses, also known as legal protection insurance is taken out by individuals or companies for protection against defending civil and criminal actions brought about by the other individuals or companies or alternatively to pursue them where legal expense will be incurred.

There are 3 main basic types of legal protection:

• Personal - covering householders for consumer disputes, personal injury, employment, neighbour and employment disputes.
• Motor – to recover uninsured losses (ULR) from a motor accident
• Commercial - protecting businesses against the costs of disputes e.g. employment disputes, health and safety, taxation, prosecution defence.

Legal expenses is typically sold as an add-on to household or motor insurance, through a scheme but can be sold as a stand alone product. A scheme is an arrangement with an intermediary to distribute legal protection products on the insurers behalf to the end customer.

Many consumers believe that their motor insurance gives them complete cover, this is not the case unless their policy includes uninsured loss recovery (ULR) this is where legal protection comes in to play. The policyholder if not held liable for an accident without having ULR, would still have to pay for losses such as the policy excess, hire car and legal costs if bringing a claim for personal injury.
Household contents insurance does not normally cover consumer disputes or personal injury claims. Legal expenses insurance added on to a household policy can cover the policyholder for consumer disputes, employment disputes, neighbour disputes to name but a few.  

Over the last 30 years legal expenses insurance has developed into many forms, the main difference being how they are sold. Legal protection insurance policies are mainly sold Before the Event (BTE) and After the Event (ATE). An intermediary is normally involved in the sale on legal expenses insurance, typically BTE sold through brokers, insurance companies and affinity groups and ATE through solicitors.

These policy types are explained below:

Before the Event

This is usually sold as an add-on to a household or motor insurance policy. It covers the consequences of an event which has not yet occurred. 

After the Event

This type of insurance is taken out after the event has occurred to insure you against the risk of losing your case. It is also referred to as ATE Insurance, Conditional Fees Insurance, CFA insurance, Post-Event Insurance, AEI or Legal protection insurance.

No Win No fee

This is a feature of ATE insurance. No- win-no fee typically relates to conditional fee agreements (CFA’s). Under these agreements if you win your case you must pay your solicitor’s fees and any expenses for items such as expert’s reports, these are known as disbursements. If you lose you don’t have to pay any fees to your solicitor. However you may have to pay your opponents legal costs and both sides disbursement fees- these can be considerable.

Regulation

Legal expenses insurance is subject to Financial Services Authority (FSA) regulation and subject to the rules of the Financial Ombudsman Service and The Insurance Companies (Legal Protection Insurance) Regulations 1990.