When there's an accident at work, lawyers are often instructed immediately to advise in dealing with an investigation by the Police and the HSE. This is usually followed by a notification of the accident to the insurers. Despite the fact that a specialist lawyer is already advising and is familiar with the case, insurers often insist upon policyholders using lawyers from their own panel to provide representation during the course of the proceedings. As a result, policyholders may feel both frustrated and anxious in having an unknown lawyer imposed upon them.
Why Freedom of Choice?
Many policyholders are rightly anxious about the potential conflict of interest which can arise between an insurer and the policyholder in civil and criminal matters.
In civil matters, 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 to reduce the level of compensation to its lowest achievable level whilst at the same time using the cheapest legal advisers.
In criminal matters (such as health and safety prosecutions) the insurer may be responsible only for paying the insured's legal fees. The commercial incentive for the insurer is to deal with the criminal investigation and proceedings as cheaply as possible as it will be the insured who will pick up the bill for the fine and prosecution costs.
The result of this potential conflict is for the criminal proceedings to be handled in a way which may not sufficiently protect the insured's reputation or its vulnerability to a large fine. Further, it is unlikely to receive specialist advice to prevent a recurrence of the accident.
Does the policyholder have to accept this less than desirable proposition?
The Law
The Insurance Companies (Legal Expenses Insurance) Regulations 1990 provide the policyholder with the authority to choose who it wishes to instruct. So when the law appears clear-cut, why has its application proved so tricky?
One reason could be that the arguments in respect of freedom of choice of solicitor have not been the subject of an in depth examination by the English Courts. In the case of Sarwar v Alam (2001), the Court of Appeal considered legal expenses insurance in the context of a road traffic accident. Freedom of choice was discussed to the extent that the Court thought, obiter, that in a large case raising unusual or difficult issues it might be inappropriate for a claimant to be denied freedom of choice of solicitor. However, no definitive guidance on the subject was given.
Another reason may be the continued refusal of insurers to accept that the Regulations apply. Acceptance of the application of the Regulations would effectively mean that insurers would be prevented from imposing their own panel of lawyers on their policyholders. As a result the insurers would not be able to control the supply of legal advice in this area and subsequently they would lose the stranglehold which they have exerted over panel lawyers. Also, policies are often drafted so as to be difficult to understand. In the absence of clarity insurers have been able to argue that only their panel lawyers understand the issues involved. This is clearly not the case.
Occasionally, policyholders with financial clout may exert influence over insurers in negotiating their selection of legal advisers. This has been seen as a compromise by the insurers, due in part to the ability of the policyholder to transfer their insurance cover in future.
On other occasions insurers have insisted to less powerful policyholders that they will indemnify the policyholder at a rate equivalent to the panel lawyers' rate. This may be a breach of the indemnity provision, depending upon the policy in question. In a Decision of the Financial Ombudsman Adjudicator against Cornhill Insurance plc dated 3 May 2002, the policyholder initially agreed to the instruction of panel solicitors to progress his claim, but decided to instruct more specialised solicitors at a later date. The adjudicator recommended to Cornhill that it agree to meet the costs of the chosen solicitor, stating that Cornhill's initial refusal to provide indemnity for those costs would 'unfairly fetter' a policyholder's choice of legal representation.
If the policy is drafted in such a way as to be confusing, requiring constant cross-referencing the policyholder may be left in the dark about the insurer's exercise of discretion in choosing a panel lawyer. This refusal to draft policies in plain and intelligible language has been identified by the Financial Ombudsman as a problem which puts policyholders at a distinct disadvantage.
Avoiding the Regulations
Insurance companies have attempted to avoid the regulations in a number of ways :
'The cover we provide is not actually legal expenses insurance.'
Due to the fact that the insurance is not provided as a stand alone policy, nor contains an express statement that the type of cover is in fact 'legal expenses insurance' (but is actually an extension of legal expenses costs) insurers have been known to argue that their policy gives them complete conduct and control. This is simply an attempt to avoid the application of the Regulations.
'The Regulations do not apply in this particular situation.'
It is true that the Regulations may not apply in all circumstances. These excepted circumstances include disputes or risks in connection with sea-going vessels, difficulties whilst travelling abroad, or insurance contracts providing civil liability cover. Also exempt is the situation where the insurance cover is limited to risks arising from the use of a road vehicle and is connected with a contract to provide assistance in the event of an accident or breakdown. Criminal matters, such as health and safety prosecutions, are not exceptions from the Regulations.
Another factor to consider is the avoidance of a conflict of interest. The philosophy behind the legislation is to protect policyholders. This is done by avoiding conflicts of interest by insurers where they are providing different types of insurance cover as specified in European directives, employer's liability and legal expenses. In other words, where an insurer provides cover in respect of both legal expenses and another class of insurance i.e. an accident including industrial injury and occupational diseases, then the Regulations will apply and cannot be excluded.
Having established that a policyholder has the freedom of choice, it is open to insurers to set out in the policy a level of premium which it will be prepared to accept.
'Regulation 4 has not been satisfied and therefore the Regulations cannot apply.'
Regulation 4 requires the insurer to set out in a separate section the legal expenses cover where it is provided under a policy relating to one or more of their classes of general insurance business. Put simply, this regulation is a requirement on the insurer where the cover is included in a separate section to specify the nature of the legal expenses cover. It does not restrict the rights of policyholders.
Crystal clear
Although there may be no question that a panel lawyer is capable of representing the insured in many circumstances, there is a conceited view amongst insurers and an ignorant acceptance amongst policyholders that insurance companies are able to dictate who is to provide advice and representation to the policyholder.
However, the position is crystal clear: where an insurance company provides legal expenses insurance either as part of a general insurance policy or as a stand alone policy, then it must also provide the freedom for the policyholder to choose its own lawyer.
This becomes even more noteworthy where a significant amount of work has already been undertaken in investigating the background to the matter or in taking steps to avoid a prosecution prior to the insurer considering whether it wishes to engage a panel lawyer's services. The policyholder's own lawyers' are free from any question of conflict of interest with the insurer's interests and have a clear duty towards their clients. They will also acquire a particular expertise and knowledge of the issues.
Finally, the Financial Ombudsman has taken an interest in this subject and his website contains some general advice that it is appropriate to use the policyholder's own solicitor in cases where there is a suggestion of a conflict of interest, and in large or complex matters.
The message to policyholders is therefore clear – do not be afraid of your freedom of choice!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.