When commercial disputes arise, an insured party will often have a particular legal adviser that it knows and would prefer to instruct to act for them in the dispute. However legal expense insurers will often resist attempts by the insured to choose its own lawyer. Instead it will insist that in order for the insured to gain the benefit of its legal expenses insurance policy, its legal adviser must be replaced by the insurer's own panel lawyers otherwise cover will be refused.
This guide provides guidance to insured parties and explains why insurers cannot dictate who should provide representation in these circumstances.
Why freedom of choice is important
A potential conflict of interest can arise between a legal expense insurer and the insured. The insurer is generally responsible for funding the insured's legal fees and any compensation awarded against the insured. There is therefore an obvious commercial incentive for the insurer to concentrate its efforts on reducing the level of compensation to its lowest achievable level, while at the same time using the cheapest legal advisers. The cheapest option may not be in the best interests of the insured.
The law
The Insurance Companies (Legal Expenses Insurance) Regulations provide the insured with the authority to choose who it wishes to instruct as its lawyer. This is supported by the Solicitors' Code of Conduct. A solicitor's agreement with a third party's restriction on client choice could compromise the solicitor's independence, or may not be in the best interests of a client.
It has been argued that the right of the insured to choose its own solicitor under the Regulations only arises once proceedings have begun. However, the Regulations also suggest that the right to choose arises "from the moment [the policyholder] has the right to claim from the insurer under the policy". In 2001, the Court of Appeal provided clarification on this issue - the right arises when it becomes clear that recourse is to be had to legal proceedings.
The problem
Despite the law, insurers often refuse to accept that the Regulations apply as this would effectively mean that they are prevented from imposing their own panel of lawyers on their insureds and be unable to control the supply of legal advice and legal costs. Insurers also argue that insurance policies are difficult to understand, and that only its panel lawyers are able to understand the issues involved or that the particular policy in question does not provide legal expense insurance when it fact it does, or that the policy is not covered by the regulations when in fact it is.
On other occasions insurers insist that they will only cover the insured at a rate equivalent to the panel lawyers' rate or refuse to agree to meet the costs of the chosen solicitor, even thought this refusal to provide cover for those costs unfairly restricts the insured's choice of legal representation.
Where does this leave the insured?
Where an insurance company provides legal expenses insurance it must also provide the freedom for the insured to choose its own lawyer. This choice becomes even more important where a significant amount of work has already been undertaken by the insured's chosen firm - for example, in investigating the background to the matter. It would clearly be inappropriate to instruct lawyers from an insurer's own pre-selected panel after such investigatory work had begun.
The Financial Ombudsman Service has confirmed the above points, and also recommended that it is appropriate to use the insured's own solicitor in any cases where there is a suggestion of a conflict of interest or in large and complex matters. This means that if an insurer insists on a panel lawyer, the insured may be able to refer the matter to the Financial Ombudsman Service.
Practical steps
An insured should notify its insurer of its preferred legal adviser as soon as possible so that issues over representation can be resolved at the outset. An early meeting or discussion about this is recommended. Its preferred lawyers can support this process by explaining why they are best able to represent the insured's interest and also providing assurance that arrangements are in place to provide effective reporting to insurers.
The insured may also be able to encourage its insurance broker to apply pressure on the insurer regarding legal representation. Alternatively, insured parties with a large influence over insurers can of course insist on selecting its own legal advisers failing which insurance cover will be bought elsewhere.