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BTE insurance is often sold as part of a package to individual policyholders along with products such as household insurance. An increasing number of small and medium sized businesses are also taking out legal expenses insurance as a bolt on to policies such as D&O, public liability and commercial risks.
Typically, insurers impose a number of exclusions and financial caps which limit the policyholder’s ability to bring a claim and most, if not all, BTE policies seek to restrict the appointment of lawyers to those on an approved “panel”. It has long been a bone of contention that the panel system restricts freedom of choice and may well fail to provide the insured with the level of specialist expertise required for various types of legal disputes.
Many panel firms currently pay referral fees to the insurers for a steady stream of new work. Some firms may also offer substantially discounted charging rates and sometimes agree to take on cases on the basis of a conditional fee agreement.
Whilst a typical BTE policy will say that the insured must appoint lawyers from the insurer’s panel, an insured’s right to choose its own lawyer is protected by the 1990 Insurance Regulations¹ which cover BTE legal expenses insurance. However, in circumstances where the policyholder wishes to appoint “non-panel solicitors” the insurers will generally seek to dissuade the insured from doing so by:
• interpreting the LEI Regulations, and in particular Regulation 6, as meaning that the insured does not have a choice of lawyer prior to the issue of proceedings thus restricting an insured’s choice of lawyer at the outset of a case to panel solicitors;
• requiring a non-panel lawyer to be “approved” and to agree to restrictive terms and conditions which include (but are not limited to) reduced hourly rates, reporting obligations and indemnities;
• seeking within the policy terms to reserve the right to refuse a non-panel firm’s appointment save in “exceptional circumstances”.
Many “non-panel” firms find such terms onerous given that they, in contrast to panel members, are not organised to operate profitably on these terms and do not have the benefit of a continuing flow of work arising out of the panel solicitors referral relationship with insurers which would enable them to do so.
In 2011 the High Court made two significant decisions which dealt with what constituted exceptional circumstances.
In Pine v DAS Legal Expenses Insurance Company Limited  EWHC 658 QB the policyholder sought to appoint her own choice of barrister on a “public access” basis. DAS insisted on the involvement of a solicitor to monitor the case arguing that Ms Pine’s desire to act in person was an exceptional circumstance allowing it to decline cover unless a panel firm was instructed. The Court rejected DAS’ argument that Ms Pine’s desire to represent herself with the assistance of a barrister instructed on a public access basis was an “exceptional circumstance” and DAS were thus required to indemnify Ms Pine for her legal costs. The Court also went on to observe that a refusal of the insurer’s non-panel terms by a policyholder’s chosen solicitor would also not be classed as “exceptional circumstances” justifying a refusal by insurers to appoint.
The more recent case of Brown-Quinn & Webster-Dixon LLP v Equity Syndicate Management Limited  EWHC 2661 (Comm) dealt with a number of issues including whether insurers were entitled to decline the insured’s choice of solicitor on account of the non-panel solicitor’s hourly rates being in excess of the insurer’s fixed panel rates. Although insurers subsequently abandoned the point in respect of outset cases (instructions to panel solicitors from the outset) the High Court ruled that the fact that the chosen solicitor’s rates exceeded the insurer’s non-panel rate did not constitute “exceptional circumstances” and policyholders were entitled to expect that their “reasonable fees” would be covered by BTE insurance and that the reasonableness of such fees would be determined by the Court applying the normal costs rules.
Where are we now?
The latest decisions give insureds greater choice, enabling them to instruct lawyers with whom they have an existing relationship or who may be recommended for complex or specialist litigation.
The decision supports the Law Society’s view that insurers cannot impose terms on non-panel solicitors which effectively deny clients the right to choose their own solicitor. The Law Society continues to seek a test case to challenge the contention that an insured’s right to choose their solicitor only arises once proceedings have been issued. Although the Brown-Quinn judgment does not deal specifically with the imposition of other onerous terms on non-panel solicitors, if it can be said that these also fetter the rights granted under the LEI Regulations they too may be capable of challenge.
Equity Syndicate Management Limited is appealing the judgment on the grounds that any attempt to control solicitors’ remuneration rates payable under a legal expenses policy does not represent a barrier to the Claimant’s freedom of choice. It has been suggested by insurers that the decision conflicts with the European Court of Justice ruling in Stark v DAS Oesterreiche ² which clarified that a rate is reasonable as long as it enables the purchase of legal services across a spectrum of local solicitors. The appeal is expected to be heard between April and October of this year.
The Jackson Report, whilst criticising insurers for failing to allow BTE insurance policyholders complete freedom of choice of solicitor, emphasised the importance and benefits of BTE insurance. If the reforms are implemented Lord Jackson seeks to promote wider awareness and provision of BTE insurance in an effort to fill the gap left by the potential contraction of the ATE market as a result of ATE premiums no longer being recoverable. But can the current BTE model really be expected to improve access to justice for those who are most likely to lose it under the reforms?
Currently the BTE products on the market tend to be purchased (often unknowingly) as a bolt on to other insurance policies at no – or a negligible – increase to the insurance premium. The income generated from referral fees has kept the cost of BTE “add on” cover artificially depressed. It is expected however, that if the ban on referral fees, proposed under the Jackson Report, is implemented the cost of BTE premiums will increase significantly.
Taking into account the potential ban on referral fees – coupled with the inability to restrict non-panel solicitors to panel rates – it is no wonder that insurers want to overturn the decision in Brown-Quinn arguing that “a system which enables legal services to be bought by LEI companies at reasonable cost is essential so that premiums can remain affordable”.
It is clear that, for BTE insurance to continue to exist in the post Jackson environment, and subject to the appeal in Brown-Quinn, insurers will have to give serious consideration to more flexible arrangements with non-panel solicitors and to significant hikes in premiums or changes to the policy wording so that the insured’s choices and level of cover under the policy are more transparent.
If insurers are to expand the current BTE market it may well be necessary to take into consideration the success of our European neighbours who have better developed BTE insurance markets and greater availability of stand alone BTE insurance products.
There is clearly the potential for the BTE market to expand but to do so ,such “add on” policies must be more consumer-friendly and will need to be tailored to meet the sometimes more sophisticated legal services requirements of commercial insureds with access to representation of the appropriate calibre, albeit that such policies will come at a price.
 The Insurance Companies (legal Expenses Insurance)Regulations 1990 SI 1990 No 1159
 Stark v DAS Oesterreiche Algemeine Rechtsschutzversicherung AG  Case C-293/10