First published in ITIJ 132, January 2012
It has been noted that the legal expenses component of some UK travel insurance policies is in retreat. Costas Andrea asks, is this the end of legal expenses as we know it?
The provision of legal expenses cover has been one of the basic benefits of a UK travel insurance policy for many years now, but it seems to be declining. Is it destined to disappear altogether? The issues discussed here, while primarily centred on the UK travel industry, will have relevance and significance to the global industry, as many parent companies of legal expenses and travel insurers are non-UK based. Further, the compensation culture is not purely a UK phenomenon and many of the concerns raised will no doubt resonate further afield.
Shock or not?
Having worked with travel legal expenses for nearly 25 years, I was curious when I came across a travel insurance policy recently that did not have any legal expenses cover. A little investigating soon revealed a number of policies that either excluded legal expenses cover completely, charged an additional premium as an optional extra, or made it subject to an excess, usually of £250.
This should not be a surprise. Providing legal expenses cover with a travel insurance policy was one of those benefits that should never really have been there in the first place. When first introduced, it was a benefit borrowed from motor insurance policies, together with much of its policy wording. Legal expenses on motor policies cost the insurer nothing – the UK legal costs rules meant that the loser paid the winner’s cost. Solicitors would fall over themselves to get legal expenses work, guaranteeing the insurer would not have to pay anything. It was therefore an added benefit for the insured that cost the insurer nothing, and from which solicitors did very well too. It was certainly a ‘win, win’ situation for everyone.
Things became even better when referral fees came along. Legal expenses insurers soon realised they were sitting on a goldmine – not only would they not have to pay any legal fees to provide their insured with legal cover, but they could earn a referral fee for each claim. Bearing in mind each claim could earn around £750, it has been big business.
Unfortunately for the legal expenses insurer, the benefit did not work quite as well for travel claims as it did for motor claims. There were obvious reasons for this, the primary one being that the UK is one of the few jurisdictions where the loser in a legal dispute pays the winner’s costs. In most other countries, the winner pays his own legal costs; he has a hefty legal bill even if he is completely successful.
Therefore, where legal action has to be funded in a country that does not reimburse costs even if successful, we have a recipe for a pretty expensive commitment for the insurer. The only reason it worked on UK motor policies was because the solicitors did not need to charge the insurer for their costs because they could recover them from the other side. Where those costs are not going to be recovered, no solicitor will run a case for free. This meant the legal expenses insurer had to pay the appointed solicitor’s fees, as well as the foreign lawyer’s fees, with no hope of recouping any of their outlay.
This is where referral fees came to the rescue. It has still been worthwhile providing travel legal expenses because of the frequency with which these claims could be pursued in the UK. With legislation such as the Package Travel Regulations and the European Motor Directives, around half of all foreign accident claims that actually run can be pursued in the UK. Therefore only half of the claims, those run abroad, had to be paid for – the other half cost nothing to run and generated income at £750 each. Consequently, the referral fees paid by solicitors made up for the loss-leading claims that had to be run abroad.
Providing legal expenses cover with a travel insurance policy was one of those benefits that should never really have been there in the first place
Unfortunately all good things must come to an end. There has been a significant and increasing awareness both of the public and government of the downside of the compensation culture. The greatest distrust has been reserved for referral fees. The government’s justice website stated on 9 September 2011 that ‘rising insurance costs will be tackled by a ban on referral fees, announced today as part of the Government’s commitment to curb compensation culture’.
Ban on the horizon
Lord Justice Jackson, on whose review the ban on referral fees was based, recently repeated his call for a ban, citing the ‘middle men’, such as legal expenses insurers, as the beneficiaries of the system, rather than claimants.
In the very near future, therefore, referral fees will undoubtedly be banned, meaning nothing will be earned by legal expenses insurers on any travel claim, even ones that can be pursued in the UK. While those UK cases will not cost the insurer anything, the remainder of claims, which have to be run abroad and for which the insurer must pay all legal fees whether the claim is won or lost, will still be there. The singularly most important element for travel legal expenses insurers to make a profit will be removed.
It remains to be seen whether the industry will find ways around a ban, much as it did before referral fees were permitted. If it does, the worry is that referral fees will be driven underground, with less transparency. That said, times are different now and there are calls from organisations such as the Association of British Insurers (ABI) for any ban to be watertight and to apply across the board.
Assuming it is, it is difficult to see how any profit can be made from travel legal expenses claims in the future. It is certainly easy to see how a loss can be made. Perhaps this is the reason that there are increasingly fewer providers with an increasingly larger share of the market. The writing has been on the wall for some time about a ban on referral fees, which has led to some providers leaving the market. That said, it is still difficult to see how even those handling huge volumes can make any profit once referral fees are banned.
Consequently, we are seeing the market react by removing legal expenses, charging an extra premium for it or charging an excess. But will these changes have any significant impact and if so, what?
- Removal of benefit: I doubt most consumers would even notice if their travel insurance policy did not have legal expenses cover. Most travel insurance policies are bought on price, with little regard for the actual content or levels of cover. Its removal is therefore unlikely to impact on the number of polices sold much, or at all.
- Additional premium: if consumers want to pay a premium for legal expenses, the providers would surely be happy to accept this. For a price sensitive product, however, my guess is that very few people will want to pay an additional premium. There are already ‘basic’ policies on the market excluding legal expenses and this must increasingly be the way the industry will evolve.
- Charging an excess: this is quite interesting – the travel insurance policy can still be sold on price with the additional benefit of legal expenses insurance, thereby differentiating the policy from those basic policies where it has been dropped. Having the insured putting their hand in their own pocket before pursuing a legal expenses claim will certainly make them think twice and will dramatically reduce the number of claims being made. Where those claims are made, at least the providers can recoup £250 towards the costs.
One thing that is clear is that the policy wording is getting tighter. Increasingly, conditions such as the option to buy off the claim or making sure it is economically viable are found, which were simply not there in the past. The intention is obviously to prevent loss leading cases even getting off the ground.
It remains to be seen whether the industry will find ways around a ban, much as it did before referral fees were permitted
Drawing the above together, we are faced with a product that should probably never have been included on a travel insurance policy in the first place, finally showing itself for the loss leader and drain on premium income it was always destined to be once the safety blanket of referral fees had been removed. There can therefore be little doubt in my opinion that the legal expenses cover we have grown accustomed to over the years will either change radically or gradually disappear. My guess is that it will continue to be offered, but at an additional premium, which no one will pay for and which will effectively lead to no legal expenses being provided in the future.
Pros and cons
This will, of course, result in winners and losers and we should consider into which category each of the players falls.
- The UK Government: the stated aim of a ban on referral fees is to do away with the compensation culture, reduce the amount of money in the industry, which will in turn lead to fewer and less expensive claims, which will drive down insurance premiums overall. A ban on referral fees will certainly achieve all these goals, apart from any noticeable reduction in premiums, or certainly not for quite some years. Still, from a public relations perspective and as a way of cleaning up the system, I think we would have to say the government would be an overall winner.
- Legal expenses insurers: it is difficult to see how this group can emerge a winner if what they provide disappears. Of course, they will diversify and concentrate on profitable areas of their business, but providing travel legal expenses will not be one of those areas. Their primary area of work, which earned £750 per claim, will disappear. While they will change, they will certainly be losers once referral fees are banned.
- Solicitors: at first glance, they would appear to be winners. They will no longer have to pay £750 per claim, which is certainly a drain on resources and comes straight off the bottom line. However, they have been willing to pay these sorts of sums for many years now. They have swallowed the pain of it because they made enough at the end of the case from the other side. The problem for this group is that a regular, reliable and profitable source of work will be turned off. If there are no travel legal expenses claims, they will not have the work to do. Solicitors too will of course adapt and change, but their choices are limited to two:
- Chase the claims that are out there, but which are now not being referred by their legal expenses insurer clients. We must all brace ourselves therefore for more advertising for injury claims (which must surely make us all losers!)
- Abandon travel-related injury claims.
- Given solicitors’ limited options, I think we must consider them losers.
- The public: for those with an interest in seeing justice done, many claims that would have been pursued will no longer be. This will be a shame as, whilst monetary compensation can never adequately make up for a serious injury, it does help with many of the financial consequences which result. For those who buy a policy in the future with no legal expenses cover, and who go on to have an accident, they might lose out. If their claim is one that can be pursued in the UK, they will probably find a solicitor prepared to take it on a ‘no win, no fee’ basis. However, those whose claim can only run abroad will certainly be losers. Those who pay an extra premium or whose policy contains an excess will be in much the same position as they are now – neither winners nor losers.
- Travel insurers: not having to worry about triggering a legal expenses claim when they try and pursue a recovery for their outlay will certainly be a help for insurers, as will saving the premium/handling fee paid to the legal expenses insurers. As discussed above, I cannot envisage a drop in the actual number of policies sold purely because there is no legal expenses cover provided. Overall therefore, I think insurers will come out as winners.
The conclusions to draw are clear, as we see them already happening: travel legal expenses will continue to change, becoming a luxury benefit rather than a basic benefit leading to less take up and an ever shrinking claims market. It might even disappear altogether ...