BTE: Yet another fees conflict?

Consumer Focus have produced some interesting research on before the event (BTE) insurance, calling into question the way in which BTE works. See here for a nice summary.  Particular concerns include:

  • Low consumer knowledge about products (what they cover, how referral fees work in the background), partly because BTW is bundled in with other products so consumers have little understanding of what they are buying for their £x thousand pounds of legal expenses cover.
  • (To my mind, very) low levels of satisfaction from those who have used it to bring a claim (only 48 per cent of those who had successfully used the product were satisfied with it).
  • Low levels of adviser choice (under insurance policies consumers are referred to panel solicitors without being given a choice: something which my own research (‘Something for Nothing’) suggests may be interpreted as a recommendation to go and see that solicitor)

The following passage sums up the report nicely:

“One of our biggest concerns regarding this market relates to the transparency and fairness of the common practice of precluding consumers from choosing their own solicitors when they wish to make a claim. We wish to see a shift from this restrictive practice. At the very least we wish to see some degree of independence in the initial determination of whether a case is meritorious. We do not consider it appropriate that some insurance companies employ in-house solicitors to make this assessment, without giving consumers any recourse to an independent appeal process. In Germany regulation precludes in-house lawyers from making initial assessments of this nature and we believe that this rightly recognises the conflicts of interest issues that can arise. Moreover, there needs to be more transparency around the relationship between insurance companies and the panel of solicitors which they use. Consumers ought to know that solicitors’ firms commonly pay insurance companies for referring cases to them. It is essential that the litigant should feel confidence in his or her legal advisers and this increased transparency will enhance the integrity of the system.”

For me the most important finding is this not the choice point but the independence point (though they are related). Insurers have a conflict of interest when deciding a claim. They must fund and bear the (sometimes sizeable) risk or say the claim lacks merit.  This may make them more likely to turn down meritorious claims than other forms of funding, unless they are simply acting as a referrer of no win no fee work to panel firms (when the value of BTW as ‘insurance’ is somewhat limited – though may become less so post-Jackson).  Although this conflict is present in most (all?) insurance claims situations the difference here is that the notion of a claim is defined by a concept (say, whether a claim has reasonable prospects of success) which the claimant has very little chance of knowing themselves and which the insurance company, thus, ultimately controls.

We looked at this conflict of interest issue in the Something for Nothing research. It was alleged that, in employment cases, contingency fee lawyers were turning down
cases unless they were sure fire winners. We were able to look at this by asking clients how their employment claim was funded and whether they had been turned down by any other funder. Albeit on a small sample, insurers and trade unions were the funders where we found evidence of ultimately successful cases being turned down (and then taken on by contingency fee lawyers). If anyone was cherry-picking, it was the insurers and the Unions.

All fee arrangements give rise to conflicts of interest usually between the lawyer and her client (hourly rates may encourage too much work being done on cases; contingency fees may encourage under settlement; CFAs are accused of both (!)) or between client/lawyer and funder (legal aid funders, trade unions and insurers have incentives to cut funding when the client’s interests merit continuing). The question is whether there are proportionate means of tackling those conflicts. SRA conflict of interest rules are an inappropriate instrument for dealing with the problem (it will be very hard to prove a conflict in any case, particularly given the ubiquitous nature of conflicts when fees are in play). A German style right of appeal may help as might a stronger, entity-regulation-style focus on understanding the relationships between firms and insurers. Both would be resisted by the insurers as increasing cost and making BTW unaffordable (they will resist watering down of choice on the same basis).  One wonders, also, whether the SRA has the resources to undertake such a task.  It’s not a new problem, having been around since well before the Legal Services Act, but one very helpfully underlined by the Consumer Focus report.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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3 Responses to BTE: Yet another fees conflict?

  1. Jon Busby says:

    I worked in the LEI game for 5+ years so have a bit of insight.

    My sense was that the management of the claim was the determinator on how profitable insurers are. Prospects of success come into play with the definition, on paper, being 51%+. The reality is that some insurers may hike that up to 75% but how do you prove that when you, as a consumer, lack expertise?

    Hugh dilemma…independence v profitability.

    RTA’s are pretty clear cut. Med neg less so. Then you get into the messy business of neighbour disputes which are always highly emotive or employment cases where (at least when I was involved in BTE), there is no cost recovery, unlike say PI, so the insurer burns.

    Another add re referral fees. I don’t get the argument that their removal will lead to a reduction on premiums in fact the opposite will happen. I can think of large insurers who subsidise their insurance premiums via referral fees. In fact I once worked on a model where the referral fee income from motor would pay for the BTE on household and still make a huge profit.

    The irony. A large insurer may be acting as a defendant on one side but on the other flogging a pi file to a panel firm for £600+. Pick the bones out of that one.

    ps 3 years since I worked in LEI so things may have changed…hmmm

  2. Legal Expenses Insurance (LEI) has been de-valued in recent years with underwriting rates reducing to unsustainable levels. This is largely due to the LEI market using the lack of consumer awareness to maintain a low claims frequency, with LEI cover often lost amongst the core insurance products purchased. Therefore customers are not aware of the benefits that cover can bring them when a legal dispute arises.

    I fully agree with the findings of the Consumer Focus report that customer awareness of LEI needs to be improved, which should begin to see a marked improvement in LEI underwriting premiums being charged (although to maintain an affordable premium to customers the most appropriate vehicle for the sale of LEI continues to be through a core product such as motor or household insurance, otherwise standalone LEI, especially for consumers using the German model, will prove a cost barrier for most people). This should also see a return to proper underwriting techniques being employed to determine risk, and will certainly highlight the deficiencies of some providers trading on price alone.

    The use of customers having wider freedom of choice than is currently provided by the EU Directive would have an impact on premiums being charged, which would impact on customers access to justice, as well as potentially jeopardising a clients claim if their chosen solicitor does not have the requisite knowledge and expertise.

    At Allianz Legal Protection, cases are managed by independent, impartial panel solicitors who have the neccessary expertise relating the the claim in question, especially as we often provide various heads of cover under the policy. Our involvement with the claim is to validate from a technical perspective, i.e. was cover in force and is the cause of loss covered under the terms and conditions of the policy. It is then our expert panel who decide on prospects of success, not to protect our balance sheet but to ensure the customer has a chance of a succesful settlement and outcome – Treating Customers Fairly working in practice!

  3. Beth says:

    As a trade union rep, I am disappointed but not at all surprised to hear that unions cherry pick the cases they will support. We sell our members a bill of goods that their union will support and protect them when they need it, but really unions seem to go for the biggest wins and high profile cases, rather than those with the most merit.

    I have also heard of union officials representing members in tribunal when they have been turned down by the union’s solicitors. This much lower cost to the union, though almost certainly less effective than having an actual trained lawyer. On the other hand, it’s almost certainly better for the member than facing the tribunal alone or dropping the case altogether.

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