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Commercial Legal Expenses

Commercial Legal Expenses

SECTIONS

Intro

Benefits of Legal Expenses

Benefits of Commercial Legal Expenses Insurance Cover

Outline of Commercial Legal Expenses Cover

Legal Costs

Employment Tribunals

Legislation

Taxation

Compensation

Extensions

Geographical Limits

The Advisers

The Service

INTRO

Commercial legal expenses insurance is designed to provide cover for a business to protect itself in the event of being sued by employees, customers, suppliers or others, or needing to pursue an action in respect of its own legal rights. 

Types of policies  

Commercial legal expenses insurance can be arranged as: 

  • A ‘stand alone’ policy, tailored to meet the requirements of the client
  • A scheme or package policy - for small to medium sized enterprises (SMEs). 

New and more onerous UK and European legislation is constantly being introduced.  Companies must keep up-to-date with all the changes as a breach in compliance, no matter how minor, can leave the company vulnerable to legal action. 

Key areas of law which place pressure on a business are: 

Employment law  

This is a particularly active area of legislation and as employees can pursue industrial action against their employer free of charge; it is a major exposure to most businesses.  There were 218,000 tribunal claims in 2010/11, a rise of 44% since 2008/09. 

Health and safety 

Increasing and usually more onerous legislation and environmental legislation is being imposed on companies. 

Liability cover 

Policies such as: 

  • Employers’ liability
  • Public liability
  • Products liability
  • Professional indemnity 

Provide indemnity for legal costs incurred in defending actions arising out of events insured by that policy, such as nuisance, trespass, accidental injury to third parties. 

In respect of wrongful arrest or false imprisonment, cover often extends to both defence costs and the damages awarded for wrongful arrest and false imprisonment. 

Some limited cover for legal defence costs arising out of specific legislation, such as the Health and Safety At Work Act 1974, the Food Safety Act 1990 or the Consumer Protection Act 1987, is provided under the above policies.  

BENEFITS OF COMMERCIAL LEGAL EXPENSES INSURANCE COVER 

Note that cover under liability policies is only for defence costs; they don’t provide an indemnity for legal costs incurred in pursuing the policyholder’s rights.  This is the benefit of the commercial legal expenses insurance policy. 

Public liability policies do not provide cover for general disputes over the possession of freehold or leasehold property. 

In addition to legal defence costs, commercial legal expenses insurance can cover costs incurred in protecting or pursuing the policyholder’s legal rights arising out of: 

  • Property (premises) disputes
  • Contractual disputes
  • Bodily injury of any director or employee
  • HM Customs and Revenue tax investigations
  • Statutory licence disputes. 

Benefits to a client for insured events

  • Provides expertise and resources to pursue or defend legal disputes
  • Premium costs can be low, starting at approximately £150 - £200
  • Protection can be significant as legal costs start at £150 per hour
  • Saving expenditure on legal costs can have a significant effect on the profits of the business, in addition to saving time and effort of senior management
  • Covers the cost of employing solicitors and, where appropriate, barristers and other experts
  • Financial support to meet legal costs awarded against the policyholder
  • 24 hour legal advice from experienced solicitors, barristers, industrial relations practitioners and tax experts
  • Access to in-house expertise to resolve consumer or employment disputes without going to court
  • Reassurance that if the company fails in a civil action and the opponent’s costs are awarded against the company, then the policy can provide an indemnity for these additional costs.  This can encourage a company to pursue its legal rights when it might not otherwise do so. 

OUTLINE OF COMMERCIAL LEGAL EXPENSES COVER 

Cover may come as a standard package or the policyholder may have the option of selecting which covers they require. 

Key cover  

Provides the policyholder with an indemnity: 

  • Against legal and professional expenses
  • For certain awards of compensation
  • For costs and expenses only incurred with the prior consent of the insurer. 

The scope of the legal proceedings insured depends on the sections of the policy selected. 

Employment disputes  

A company can have a wide range of employment issues, each of which may lead to employment disputes. 

Cover provides for defence costs for disputes with employees, ex-employees or prospective employees arising from contracts of employment and alleged or actual breaches of employment-related legislation. 

Where the policy covers the compensation awards following such proceedings, it is generally a requirement of the policy that the policyholder has sought and followed the advice of the insurer’s legal advice helpline or online risk management service, prior to the matter becoming a dispute or claim under the policy. 

Policies often set out specific circumstances, when advice must be sought before the insured acts, for example, prior to: 

  • Carrying out a disciplinary procedure or action
  • Dismissing an employee
  • Implementing a redundancy programme
  • Dealing with a grievance, including cases of discrimination, whether formal or informal, from an employee
  • Adverse amendment of an employee’s terms and conditions of employment. 

The policyholder is expected to use the legal advice service in order to try and avoid the usual pitfalls that lead to disputes and legal proceedings including employment tribunals.

Failure to seek advice as required could invalidate any claim for compensation awards although defence costs, subject to the prior consent of the insurer, could still be covered. 

Bodily injury  

Provides cover for pursuing compensation following an event that causes the death or bodily injury of an insured person, at the request of the policyholder. 

This type of protection can be very useful to the self-employed because: 

  • They are not able to claim under their employers’ liability policy as they do not have an employer
  • Their income may vary considerably from month to month or even week to week therefore, proof of earnings/losses may be more complicated than usual
  • They may not have any income whilst absent due to injury. 

Additional options  

Bodily injury cover can extend to include pursuing compensation for members of the insured’s family injured in the same event.  Generally, the criterion is that the policyholder or employee (if cover is requested for employees) must have been injured in order for cover to apply to family members. 

It is preferable for a claim to be handled by a specialist solicitor recommended by a legal expenses insurer, rather than the injured party having to rely on: 

  • Their existing solicitor who may not have a great deal of experience of personal injury claims
  • A ‘no win no fee’ legal services company, which, due to the terms and conditions of such agreements, may be reluctant to pursue a case which is more complicated than the average. 

Libel and Slander  

Policies may extend to pay for legal costs to take action against another party who, by making defamatory remarks, damages the company’s reputation. 

Additional Features of Commercial Legal Expenses Insurance

Criminal prosecution defence 

Commercial legal expenses policies indemnify the insured against legal costs incurred in defending criminal prosecutions.  This usually includes the costs of appealing against the service of an improvement or prohibition notice under the Health and Safety at Work Act 1974 or the Food Safety Act 1990. 

Policies may also cover legal expenses incurred in defending a civil action taken against them following wrongful arrest in respect of an accusation of theft.  

Exclusions  

Cover excludes: 

  • Prosecutions for motoring offences - a separate motor legal expenses policy can be purchased
  • Prosecutions for tax or national insurance offences - considered under a different section of the commercial legal expenses policy
  • Fines or penalties the policyholder has to pay as a result of any prosecutions. 

Data protection 

The Data Protection Act imposes strict rules on companies to adhere to confidentiality when in possession of particular personal data.  

Cover provides an indemnity for legal expenses incurred if the company is involved in defending a breach of the Data Protection Act.  It can also pay any awards or an out-of-court settlement.   

Property protection 

Legal action over property rights and responsibilities can be a major exposure.  Policies cover legal expenses for defending or pursuing proceedings in respect of disputes over: 

  • The possession of freehold or leasehold property, for example, between the landlord and tenant
  • Actual or alleged nuisance or trespass 
  • Physical damage to property. 

Taxation and VAT  

Cover indemnifies the policyholder in respect of professional expenses incurred in being represented in an investigation by Her Majesty’s Revenue and Customs, for example, VAT.  

Professional expenses include accountants’ and other professional advisers’ charges not just legal costs, although not fines, penalties, tax or interest.

The defence of criminal prosecutions is excluded.  Policies are unlikely to cover representation costs in investigations where dishonesty is alleged.                            

Loss of licence 

If the licensing authority proposes to revoke or suspend a licence, the financial stability of the business could be threatened. 

Cover indemnifies legal expenses incurred in appealing against the suspension, revocation, imposed alteration or refusal to renew a government issued licence or certificate of registration. 

Contract disputes  

All organisations rely on contracts to establish working relationships and to address the responsibilities on each of the contracting parties. 

If something goes wrong, leaving either party feeling aggrieved, legal action may be pursued against the guilty party.  Such action is, usually, concluded with a financial settlement to the damaged party. 

Cover indemnifies the costs incurred in defending or pursuing an action under a contract for the purchase, sale, hire or provision of goods or services.  This risk is very close to a ‘commercial trading’ risk, and therefore it is usual for cover to be subject to a number of limitations: 

  • A minimum amount in dispute, such as £1,000 or even as low as £250
  • A higher excess than the rest of the policy - the excess may be expressed as a percentage of the total legal expenses incurred
  • Exclusion of contracts which would be covered by other sections of the policy, for example, property leases or rental agreements and employment contracts
  • Exclusion of insurance contracts; there would be a severe conflict of interest if the policyholder sued the insurer
  • If the dispute relates to money owed, insurers may insist that the matter be referred to an approved debt collection service within a specified time from the invoice due date (say, 30 days) or direct to themselves within a longer time period (say, 90 days). 

Contract dispute cover is not available for all occupations.  Insurers are generally reluctant to provide contract cover for industries where disputes and litigation are more common, such as the construction industry. 

Employment Practices Liability

Employment practices liability insurance is particularly relevant and attractive to large employers. 

There are about 20 changes to employment law annually, which companies need to keep up with.  The major problems arise from: 

  • Understanding the impact of new or amended legislation on the business
  • The consequences of failing to comply with specific legislation. 

For example, if a company is considering dismissing an employee, the company must follow the 13-step procedure introduced in the Employment Act 2002, even if the employee has been employed by the company for less than 12 months. 

Failing to follow the procedure, even by missing just one step, such as notifying the employee of their right to appeal, could result in a hefty claim for compensation from the ‘injured’ employee. 

If an action arises the business may be hit by the: 

  • Cost of senior management time
  • Legal costs incurred in defending the action
  • Damage to the company’s reputation. 

Such actions can arise from these circumstances: 

  • Wrongful dismissal
  • Discrimination - this can be alleged for race, gender, religious belief, age or disability reasons
  • Harassment in the workplace.  This could include abuse, bullying and defamation of character
  • Failure to promote or employ.  A business needs to adhere to good interviewing techniques and, possibly, have two people to do the interviews, (helps to remove the possibility of bias).  All internal vacancies need to be correctly advertised and all applicants given an equal chance to obtain the position
  • Inflicting emotional distress including stress caused in the work place 
  • Misuse of personal data involving legal proceedings under the Data Protection Act
  • Wrongful deprivation of career prospects, such as not allowing an employee to pursue a particular career path
  • Breach of employment contract, for example, arising out of the hours of work written into the employment contract
  • Breach of employment legislation. 

Insuring clause  

The intention of the policy is ‘to pay costs incurred by and awards against the policyholder, arising from employment wrongful acts’. 

The definition of a wrongful act varies among insurers with some listing 20+ wrongful acts and others being quite restrictive as to what the policy covers. 

The policy covers claims made against the policyholder for employment wrongful acts, brought by: 

  • A current, prospective or past employee
  • A partner or prospective partner
  • A director, non-executive director or officer or prospective director
  • The Equal Opportunities Commission, the Commission for Racial Equality, the Disability Rights Commission or any other officially recognised regulatory, professional or trade body (this applies in the event of an investigation being carried out on the policyholder). 

How cover operates 

Cover is written on a claims made basis with costs inclusive up to an aggregate limit of indemnity.  A deductible or retention will apply to each and every claim. 

Jurisdiction 

The territorial limits are, normally, worldwide but most insurers restrict the jurisdiction to the courts of England and Wales with policy law being governed by the English courts. 

Policy wording  

Employment practices liability policy wordings contain standard insurance exclusions, exclusions specific to employment practices liability insurance and other exclusions that are dependent on the extent of cover provided under the Employment Wrongful Act definition. 

Mergers and acquisitions 

Most policies allow the automatic inclusion of a newly acquired subsidiary or a merger situation.  The wording usually imposes some restrictions in that: 

  • The change does not represent more than a specified level of growth (say 10%) in the size of the entity
  • No assets are acquired in the USA. 

The cover granted by mergers and acquisitions is restricted to wrongful employment practices of the acquired business after the acquisition date.

Increasing Legal Costs

There are a few reasons why escalating legal costs are continuing to cause concern to businesses, and these are looked at below.

LEGAL COSTS

Solicitors can be amongst the most expensive professionals in terms of hourly rates.  Charges can range from around £200 to £400 per hour, dependant on grade and location.  Added to this can be the barristers’, court and other administrative costs and expenses.  The rates are reviewed regularly, and the above range refers to the 2010 review, with no subsequent review in 2011 or 2012.

Costs like this soon add up and can have a negative impact on the profits of the business.

EMPLOYMENT TRIBUNALS

The growing number of employment tribunals and increasing compensation awards provide evidence that today's society is becoming much more litigious (inclined to take legal action).

Statistics suggest that a business is ten times more likely to have a claim relating to an employment dispute than to suffer from fire damage to their premises.

There are a generally increasing number of employment tribunals from year to year and in the year to March 2011 there were 218,100 claims accepted.  

Hearings take over a week, in most instances and costs nearly always have to be paid by each side, regardless of who wins.  

Figures are published annually by the Employment Tribunal Service and as an indication of the costs awarded, for the 12 months ending March 2011 the maximum award of costs was £83,000, with the average award being £2,830.  The majority of claims during this period related to the ‘working time directive’.

LEGISLATION

Increasing demands are put on companies with new and more onerous legislation being constantly introduced.

There is also an added burden from the many European Union (EU) directives that companies have to adhere to. It has been suggested that only 1 in 10 companies actively try to keep up with changes in European Union laws.

TAXATION

Tax investigations by HM Revenue and Customs place heavy burdens on businesses countrywide. There has been particular focus in recent years over the status of small to medium enterprises and their contractors.

In recent years there has been a significant increase in the number of times HM Revenue and Customs have legally seized the assets of a company to ensure that their tax debt is paid in full.

Employment Disputes

Numerous regulation changes increase the likelihood of an organisation inadvertently breaching the law.  This is due to the fact that the management are not always aware of the full impact brought about by changes in legislation.

Employment law and the fear of a claim from an employee, ex-employee or even a potential employee is the driving force behind many companies seeking commercial legal expenses insurance.

Employers are now facing a major exposure from employees who may wish to bring a legal action against their employer.  These employees often have nothing to lose as it is unlikely the claimant will be charged to bring the action.  The Government are currently reviewing the position and it may be that a charge will be made to bring a claim, but this is unlikely to occur before April 2013.

Employment disputes, apart from the legal costs incurred, are time consuming at senior management level and can be very costly. Such actions can also cause significant damage to a company's reputation.

The Health and Safety Executive and the Environmental Agency are just two authorities imposing very strict procedures into the working practices of companies.

Companies have to be well informed to keep up with all the changes in legislation. A slight breach in complying with legislation can leave the company vulnerable to legal action, and the resulting fines and penalties.

Defending legal actions costs money, which cannot always be recovered.  A spurious accusation of harassment in the workplace by an employee can be costly to the employer who has the task of proving the allegation is false.

In the early days of legal expenses insurance there was a concentration on pure underwriting based on the costs of financing claims if they occurred.

Now insurers tend to favour using risk management tools such as online support services, to reduce the likelihood of their clients becoming involved in legal disputes.

Many businesses that are forced to review their policies and procedures in order to comply with changing legislation have access to insurers' advisory services to assist in managing these exposures.

The Value of Having Legal Expenses Cover

This is a growing area of concern for companies.  A company can become involved in legal action from a wide range of employment issues, which in turn lead to employment disputes.

Employment issues are perhaps a key reason why businesses are thinking more about the value of having legal expenses insurance.

The following are examples of how legal action may arise - disagreements in respect of:

  • a contract of employment
  • working hours, pay (including compliance with the minimum wage directive) and conditions for full and part time workers
  • bonus and/or discretionary pay
  • maternity rights and parental leave
  • redundancy and/or severance pay
  • recruitment and retirement issues

Legal actions can also arise out of:

  • disciplinary actions
  • unfair and/or wrongful dismissal
  • breach of discrimination laws and discriminating against gender, race, disability, religious belief or age
  • bullying and harassment at work.

COMPENSATION

When an employee or claimant is successful, the tribunal will award compensation. There are two parts to the award, a basic award and a compensatory award.

The amounts awarded are likely to change each year and are based on the claimant’s individual circumstances, including age, length of employment service and the nature of the claim, for example, discrimination, unfair dismissal and so on.

The compensatory award for discrimination and/or harassment is unlimited.

In addition to the legal expenses involved, commercial legal expenses insurance will pay the compensation awarded against the employer provided the policyholder has followed the advice of the insurer's legal helpline and/or the ACAS Statutory Code of Practice on Discipline and Grievance.

It is worth clarifying here that both a commercial legal expenses policy and an employment practices liability (EPL) policy could provide cover for legal expenses incurred and the tribunal awards in respect of employment disputes.

The amounts awarded are likely to change each year and are based on the claimant’s individual circumstances, including age, length of employment service and the nature of the claim, for example, discrimination, unfair dismissal and so on.

The compensatory award for discrimination and/or harassment is unlimited.

In addition to the legal expenses involved, commercial legal expenses insurance will pay the compensation awarded against the employer provided the policyholder has followed the advice of the insurer's legal helpline and/or the ACAS Statutory Code of Practice on Discipline and Grievance.

It is worth clarifying here that both a commercial legal expenses policy and an employment practices liability (EPL) policy could provide cover for legal expenses incurred and the tribunal awards in respect of employment disputes.

Policy Conditions and Extensions 

Typically, most policies will include the following conditions:

  • observance and compliance with the terms and conditions of the policy; failure to do so could invalidate a claim
  • the insured must take reasonable steps to prevent a claim such as keeping business books, records and accounts and submitting tax returns without undue delay to the correct government body
  • the cancellation rights of both parties specified in the policy.
  • The claims conditions include:
  • insurers giving consent to proceed
  • appointment of representatives and advisers by insurers. If the insurers and policyholder cannot agree on an acceptable adviser then the matter will be referred to the appropriate professional institute to chose a suitably qualified person
  • reasonable measures being taken by the insured to minimize the cost of claims
  • the insured losing all benefits under the policy in the event of a fraudulent claim
  • the effect of insolvency of the insured. The insurer can cease to handle any claims on behalf of the insolvent party
  • notification of claims including special proceedings where an employment tribunal is involved
  • appeal procedures
  • the conduct of legal proceedings including recovery of any costs and expenses by the insurer.

EXTENSIONS

In addition to protecting against unexpected legal expenses incurred the policy may provide cover for:

  • professional fees and expenses incurred in carrying out an investigation
  • specific compensation awards such as those awarded in employment tribunals
  • witness attendance expenses.  This is generally payable to the insured as compensation for loss of production when workers attend a court hearing or tribunal.  A daily rate is usually specified in the policy, subject to a maximum amount.

This cover can be extended to include jury service attendance for key employees.

GEOGRAPHICAL LIMITS

A standard policy tends to restrict cover to legal actions arising or pursued in the United Kingdom. However, the UK is not always sufficiently wide in terms of geographical limits for some events covered under the policy.

For some contracts and for cover relating to infringement of copyright and patents, a worldwide limit may be required. For specific events such as these, the territorial limits in the policy will usually be extended to worldwide.

Some insurers will however, impose a restriction (a jurisdiction clause) that the legal action has to be brought in the United Kingdom.

The Advisory Service 

There is different terminology for the complimentary service that accompanies the commercial legal expenses policy.

Some insurers refer to it as a helpline, while others call it legal advice, for example 'lawphone'. Whatever the term, it all adds up to a service which is available to the insured to provide advice.

All commercial legal expenses insurance is backed up by a legal helpline.  The helpline is increasingly becoming the focus of legal expenses insurance and more often, the reason cited for a commercial client buying the insurance.

Insurers often sell the product with emphasis on the risk management tool of free ‘legal advice’.  Prevention is better than cure; better to avoid the dispute/action completely than have to provide a defence.

The service provided is that of expert advice, sometimes 24 hours a day 7 days a week. The scope and usefulness of the service can be the defining reason why a buyer selects one policy as opposed to another.

THE ADVISERS

Most insurers provide access to advice on commercial legal and taxation matters which can include:

  • qualified lawyers and a panel of solicitors
  • tax experts to provide advice on personal, corporation and value added tax matters
  • accountants
  • health and safety professionals
  • employment law specialists
  • counsellors.

The advisers, if consulted independently and outside of the legal expenses service, would come at a sizeable cost to the client.

THE SERVICE

The intention of the advisory service is to:

  • provide legal advice
  • provide information on aspects of the law
  • advise on correct procedures
  • offer guidance in complex legal and employment matters.

It is in the interest of the insured and insurer that information and advice is available at an early stage in a dispute or better still before any dispute arises.

The way in which a dispute is managed can be the key to the outcome and in particular can be a method of damage limitation.  Legal costs can be minimised if the dispute is handled correctly.

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Commercial Legal Expenses

Legal expenses do not come cheap and unexpected legal action could financially cripple your business. A Commercial Legal Expenses Insurance policy enables your business to protect itself should it face legal action, or should you need to pursue legal action yourself.

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