What is legal expenses insurance?

Knowing what kinds of insurance your business needs can be confusing because of the abundance of types available, so it might not be immediately obvious whether an insurance product is the right fit for you.

In this edition of Ask the Expert, our business disputes solicitors cover what legal expenses insurance is and how it works so that you can decide if it might be beneficial for the needs of your business.

What is legal expenses insurance and how does it benefit businesses in commercial disputes?

Legal expenses insurance insures against any future legal costs your business may incur if you find yourself involved in a commercial dispute. These costs can include the fees for solicitors, barristers and expert witnesses as well as court costs, which can often be hefty, so this type of insurance can prove extremely valuable for a business that might not otherwise be able to easily afford to begin legal proceedings – or defend them if faced with a claim against it – without it affecting the financial stability of the company.

What types of disputes are typically covered by legal expenses insurance?

The types of disputes typically covered by legal expenses insurance often include those that are contractual or employment related or involve property, tax or intellectual property (IP). It’s important to carefully choose a policy that best suits your company’s requirements so that as many of your legal expenses as possible are covered.

Does legal expenses insurance cover the costs of in-house legal teams or external lawyers?

It’s usually the case that legal expenses insurance covers the costs associated with external lawyers. Some policies might include a degree of limited coverage for the costs linked to in-house legal teams. The terms of the policy itself should make it clear whether there’s any provision for this.

Does legal expenses insurance cover the other party's legal fees if you lose the case?

Legal expenses insurance only covers your legal costs as the policyholder. Although, some policies include after the event (ATE) insurance, which means that the other party’s legal fees might be covered if you lose your case. If it doesn’t, it’s worth considering whether to purchase a separate ATE insurance policy if you’re worried about being liable for the other party’s legal fees.

What are the consequences of not having legal expenses insurance?

There can be serious consequences for your business if you don’t have legal expenses insurance in place. The financial burden for funding your legal fees in a dispute may need to come out of the company’s funds – or even your personal funds, which can have a detrimental impact on your resources. You may also bear the brunt of the other party’s legal costs if you lose and you don’t have a legal expenses insurance policy that includes ATE insurance in place.

What are the disadvantages of using legal expenses insurance?

There are a few disadvantages of using legal expenses insurance. You might be limited in your choice of lawyer by the requirement to use one from your insurer’s panel; there could be exclusions and limitations in the policy that affect the amount of coverage available or types of dispute covered; the premium for the insurance might prove costly for your business, or there could be delays caused by the insurer’s pre-approval process before you can begin or defend legal action.

How does the claims process work, and what documentation is required?

The first step in the claims process is for you to notify your insurer of the dispute you’re involved in as soon as possible. They’ll then assess the claim before letting you know whether your situation falls within the scope of the legal expenses insurance policy. As a general rule, the insurer will require a legal opinion from a solicitor or a barrister that the merits of your claim/defence are at least 51% before agreeing to fund the case. If your insurers approve your claim, you’ll need to provide certain documentation in support of it. This includes, but isn’t necessarily limited to, any contracts or agreements that are relevant, along with any related correspondence, details of any legal advice that you’ve already received and invoices in support of that advice.

Can I use a lawyer of my choice?

Whether or not you can use a lawyer of your choice will depend on the terms of the insurance policy. It’s common for insurers to have an approved panel of lawyers that they allow policyholders to instruct so if you’d like the freedom to choose your lawyer, it’s advisable to pick a policy that allows you to do this before taking out coverage.

What happens to the insurance if my claim or defence is successful?

If your claim or defence is successful, the legal expenses insurance policy will usually cover the legal costs you’ve incurred as far as the financial limits of the policy will allow. It’s also worth highlighting that if the court orders the losing party to pay your legal costs, there’s a good chance that you’ll need to repay these to your insurer if they’ve already covered any of these costs on your behalf. Again, the terms of your policy will set out what’s expected in circumstances such as these.

Summary

Whilst taking out legal expenses insurance can have many advantages for your business, it’s wise to take professional advice to be certain that it’s right for you and if so, which product on the market is best suited to your needs. Safeguarding your business against significant legal costs if a commercial dispute arises is the main aim of this kind of insurance, so many companies decide that the benefits outweigh any disadvantages – and are ultimately glad that they have some financial peace of mind if there’s any risk at all of litigation on the horizon.