A matter for the law

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First published in ITIJ 96, January 2009

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What are the benefits of providing legal cover under the terms of a travel insurance policy, what does such cover cost, and what should it include? Andrew Morton reveals all

Legal expenses cover as part of a travel insurance policy is rarely seen outside of the UK. Within the UK, it is a standard term and can provide useful benefits for insured and insurer alike. Having said this, it is important to understand its limitations, and issues over exclusions and cover can arise when the consumer has only seen the availability of ‘legal cover’ in the policy summary.

Civil law claims

In the UK, standard cover will usually provide £25,000 or £50,000 for legal costs and expenses incurred in pursuing claims for compensation for personal injury or death during a trip. There are then normally a series of exclusions such as:

* Actions brought against the tour operator or travel agent. This exclusion has often appeared because it is the travel company that has sold/branded the policy with the holiday. Even where this is not the case, the clause is usually contained within the policy.

* A case of low value or where there are no reasonable prospects of success. For this exclusion it is usually necessary for the insurer to have ready access to legal advice so that the insured can be given reasoned advice on the merits of a claim. The lawyer needs to be familiar with private international law.

* A costs recovery clause. In some jurisdictions, such as England and Wales, it is possible to recover legal fees on successful conclusion of a claim for compensation from the defendant. In most jurisdictions this is not a possibility or recovery is limited. This clause operates so as to clawback all or part of the insurer’s outlay on legal fees from the compensation recovered where the legal fees are not recoverable from the defendant. In practice, this means that the viability of taking legal action needs to be looked at very carefully from the outset. There is little point advising the insured to pursue a claim for €10,000 damages when the unrecoverable legal fees will also amount to €10,000 as there is no net benefit to the insured.  Again, experienced legal advice for the insured and the insurer is vital from an early stage.

Perhaps because of these exclusions and restrictions on cover – or perhaps because of consumer ignorance that the cover is available – the number of claims on the legal expenses part of travel insurance policies is low. But it could be argued that it is in the interest of insurers to highlight if not encourage legal expenses claims for a number of reasons. Firstly, the cover provides a very real benefit to the insured often with very little risk to the insurer because of the legal fees recovery clause and the possibility of clawing back legal fees from the third party in certain jurisdictions. Secondly, the pursuit of a claim for damages by the insured provides a vehicle for the insurer to pursue some of their own outlay under their rights of subrogation.

Where there is a case of serious personal injury or death, the insurer’s outlay for medical treatment, repatriation and relatives’ travel costs can be considerable. But, a negligent third party who has caused the injury and has insurance provides a means of recovery. It is often difficult to pursue such a recovery in the absence of the co-operation of the insured, and this is best achieved when they have a stake in proving negligence themselves. It is to be remembered that the right of subrogation only extends to recovery of outlay that the insured would have been able to recover from a third party themselves had they not been insured. This means that losses such as repatriation costs and medical treatment can be pursued by the insurer but purely contractual outlay between the insured and insurer (such as a lump sum payment for a specific type of injury such as loss of a limb) cannot.

"In January 2009, new European Union Regulations known as Rome II will come into force … Whilst the new rules will not affect the rights of any particular country’s courts to hear a case, they will affect how that court deals with issues such as liability and the level of damages"

In deciding the viability and merits of legal action, one of the most important factors is the options the insured and insurer have on jurisdiction. There are marked differences even within Europe in the systems of law: procedures, speed of operation, level of damages, recoverability of costs and overall efficiency all need to be taken into consideration. Most jurisdictions operate a fault or negligence-based system, and this basis of legal claim is likely to be the relevant test where action for personal injury, death and related losses is contemplated. Despite this broad unity in cause of action or theory of law, there is a great difference between a theoretical right of action and the obstacles and practical difficulties between the theory and exercising the right. There are many occasions when it is necessary to advise any individual or body contemplating litigation that whilst a particular country’s laws provide them with a remedy, the cost, delay and sheer inconvenience of pursuing it mean that the case is not viable. The key is to have the experience and international contacts to be able to make a decision at the earliest possible stage before time and money are expended on abortive action.

cuffedInternational variations

In January 2009, new European Union Regulations known as Rome II will come into force, which will be incorporated into the domestic laws of each EU member state. They are designed to create unity and certainty in the provision of private international law insofar as it governs cross-border issues between the citizens of European states. It remains to be seen how these regulations will be interpreted by the Courts and if they all have any practical beneficial effects on how litigation is conducted. Whilst the new rules will not affect the rights of any particular country’s courts to hear a case, they will affect how that court deals with issues such as liability and the level of damages. There is a move towards a clearer default position that the location of the accident where the injury occurred will be the country whose laws will be applied to the case – even if that application of law is being made by a foreign country’s court.

In the US, the high cost of litigation and the contingency fee system present dangers for the unwary European insurer. US lawyers in personal injury cases are often paid by taking up to 40 per cent of the damages recovered by the plaintiff rather than recovering their costs from a defendant. In serious injury cases, the damages can run to many millions of dollars and so a European insurer covering personal injury and death claims for travellers to America should take care to cover this issue or they may find a claim for very large fees (or at least the policy limit) on conclusion of the case. This can be done by specifically excluding the cover in North America or stating clearly that any action in jurisdictions where a contingency fee system operates must follow that system.

Perhaps because of the contingency fee system, legal expenses for personal injury and death claims in US travel insurance appears to be a rarity. With a sufficiently serious injury and a good case, an individual would not generally face difficulty in obtaining legal representation at no financial risk to them, and this may account for this type of cover not appearing to be relevant to US insurers where the concept of recovered costs is alien. However, it may be appropriate for US insurers to consider such cover for their insured travelling to European destinations because of the added value this brings, and to assist with their own recovery.

Criminal law and liability cover

Many consumers will believe that the cost of representation in any police investigation or foreign criminal proceedings will be covered by the legal expenses in their policy. Apart from rare exceptions they will be wrong. If such cover is made available or an insurer is considering offering this cover (such as in corporate travel insurance policy or a policy for those working abroad), care should be taken in assessing this risk: unlike the provision of legal expenses for personal injury or death, there are virtually no circumstances in which legal costs can be recovered or offset, and even a fairly straightforward problem could quickly develop into a large outlay. Exclusions and caps on cover would need to be in place to avoid the potential for large loss. Having said this, the attraction of such cover in a corporate policy where the company sends its executives abroad for work can be seen. Cover such as this could be used to add value and help an insurer compete in this market.

As with the cover for personal injury and death, however, it is important for any insurer to have a good network of lawyers in countries where they have risk for any criminal law cover or representation before foreign courts and in police interviews. Here, in fact, the issue can be more acute because of the need for local legal representation in the town or region where the insured happens to be at the time the problem arises. There are dangers in allowing the insured to select their own lawyer because this could cause problems down the line if he or she proves to be incompetent, and there may be a temptation for the lawyer to see insurance backing as a licence to generate fees. The best solution is to have contacts in large cities in the country where the problem has arisen who have a feel for the best lawyers in the local regions and can help contain costs. At the very least, any insurer would need their own domestic lawyers who have a network of trusted contacts in other jurisdictions.

"the cover provides a very real benefit to the insured often with very little risk to the insurer"

The other area where insurers are likely to find the need for assistance from a lawyer experienced in private international law is under the public and personal liability cover which is standard in, at least, UK policy. Here, the insured is on the receiving end of a claim or legal action brought against them by a third party rather than looking to fund their own case. In the UK, cover is usually capped either at £1,000,000 or £2,000,000.

A number of standard exclusions exist such as inter-family claims or claims arising out of use of a motor vehicle, which very much restrict the number of claims made using this cover. Furthermore, it is often fundamental to the decision by a third party whether to pursue the insured to find out if they have the liability cover that makes them worth pursuing. One of the most common areas where this cover is brought into use is in skiing collision cases which can throw up some complex cross jurisdictional issues. For insurers, the same issues relating to jurisdiction and the application of foreign legal systems arise, but as defendants to the action the claimant will have more control over this issue.

Overall, legal cover under travel insurance has a low claim rate and if worded properly can be low risk for an insurer. Despite this, it can appear to a consumer to be a potentially valuable benefit and must assist sales if it can be shown to be available as an added benefit.