A European ruling on group actions looks set to change the legal expenses landscape. Leigh Jackson looks at the ramifications for insurers in the UK.
In September the European Court of Justice made what could become a landmark ruling altering the operation of legal expenses insurers both on the continent and in the UK.
The case — C-199/08 Eschig — allowed Austrian policyholders to choose their legal representatives in group claims for the first time, rendering the 'mass claims clause' favoured by legal expenses insurers in the country obsolete. Both in Austria and throughout many European nations, legal expenses insurers have, in the past, used their panels to handle group actions, preventing insureds from selecting their own counsel.
According to the insurers, limiting freedom of choice in such circumstances simplifies the arrangements by allowing access to its specifically appointed experts and controlling their costs.
"Our clients only gain an advantage from the mass claims clause," says Ingo Kaufmann, director of DAS Austria of the ruling. "We are talking about gigantic procedures where the expectations and interests of hundreds of consumers have to be managed and bundled. By selecting specialist lawyers, we are able to optimise the professional competence to best defend our clients' interests."
The right to choose
Under the European Union legal expenses insurance directive, policyholders have long held the right to choose their lawyers from the moment legal proceedings have been issued. While this has been followed readily in non-group actions, the days of insurers exempting themselves from the directive in group actions appear to be over.
Andy Glynne, head of products and pricing at First Assist, says the court’s ruling was always likely given the wording of the directive. “It seems, in this case, that the proceedings had already been issued and so removing freedom of choice contravened the EU directive.”
He adds: “We believe that the judgment handed down by the ECJ is right because the client has freedom of choice at that stage.”
But regardless of the forseeability of the decision, there are likely to be ramifications for legal expenses insurers across the continent. “On reading this judgment the blood of legal expense insurers around Europe has run a few degrees colder because it could significantly increase the cost of claims to them,” says Andrew Welch, head of insurance at law firm Stephenson Solicitors.
“Group actions in all jurisdictions are notoriously expensive with huge potential for costs to be duplicated or wasted.”
Mr Welch continues: “Legal expenses insurers believe that by ensuring such cases are only dealt with by their nominated solicitors they will not only have a greater degree of control over the costs but it will also benefit the consumer by ensuring only solicitors with the necessary competence and expertise are instructed.”
But how will this affect legal expenses insurers in the UK? With class actions still relatively rare domestically, and the market for legal expenses policies varying significantly, should UK insurers sit up and take note?
There is general agreement among UK insurers that the effect of the Eschig is likely to be relatively small — at least for the time being. Mr Glynne states: “In terms of the way First Assist operates I don’t see any material change. The ruling does not alter our understanding of the EU directive or the way we operate.”
In addition, the number of policyholders in both mass and individual claims that opt to use a firm not provided by the insurer is low. “I could count on one hand the number of cases that go off panel once proceedings have been issued,” says Richard Finan, director of Arc Legal Assistance.
“Where leakage occurs is where an insured has gone to an off-panel firm from the outset of the claim. At that point — if they are not using a panel solicitor — we can factor that into our costing and the premium will be higher.”
While there have been relatively few group actions in the UK to date, the advent of consumer groups — such as Which? — bringing a number of mass claims to the courts could prompt an increase and thus make Eschig more directly relevant in the UK.
Tony Buss, managing director of Arag, says: “I believe group actions will increase, particularly Competition Act claims. There could be an explosion of claims in this area.”
But, in his view, legal expenses insurers operating in the UK would be able to cope without the ‘mass claims clause’ by making use of after-the-event insurance policies.
ATE insurance is not used on the continent, with mass claims handled through before-the-event policies, and so insurers do not have a clear idea of legal costs prior to the proceedings. They may take a heavy hit if claimants decide to use off-panel counsel.
Mr Buss continues: “If group claims increase domestically, there would be a ready market — with ATE — to provide protection for that risk. I believe there is an appetite among insurers to back the right cases. Eschig won’t affect ATE, as the insurers will enter the case fully knowing who the lawyer is. Once you are set for the risk itself you can act accordingly. In that sense it’s a good alternative.”
A bleak outlook
Others believe that the outlook could be more bleak for insurers both in the UK and on the continent, with the end of the ‘mass claims clause’ likely to affect the number of firms offering covers for group actions.
“The difficulty with class actions is that some of the members of the action might have legal expenses funding while other members may not;” says Mr Finan.
“The concern that legal expenses insurers have is where an off-panel solicitor is loading more fees towards the customers that have insurance. The reality of what we are now seeing is that more and more insurers are starting to remove cover for class actions.”
And with fewer insurers prepared to offer cover for group claims, the people that are most likely to lose out are claimants.
“It is a nonsense that cases of this nature cannot be efficiently directed through one lawyer,” says Tony Baker, director of trade body the Legal Expenses Insurance Group.
“In the end, the real impact of Eschig may be to deny access to justice for thousands of people across Europe, who could have otherwise relied upon legal expenses insurance cover.”
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