No appetite for BTE?
Date: 14 January 2011
Authors: John Peysner & Angus Nurse
Issue: Vol 160, Issue 7448
Categories: Opinion, Insurance / reinsurance
John Peysner & Angus Nurse explain why BTE is unlikely to be the cure-all solution to access to justice
In an ideal world a viable solution for the problem of access to justice for individuals trapped between collapsing legal aid and stubbornly high lawyers’ fees would be legal expenses insurance (LEI), specifically before the event insurance (BTE). The Jackson review of costs, Lord Young’s review of health and safety laws and the compensation culture, and the government’s consultation paper on reform of legal aid have all renewed attention on BTE.
Buyer be brave
At the level of exhortation the government clearly thinks BTE is a good idea. Lord Young proposed investigating the practicality of a national scheme and claimed that an extension of BTE would be a fair solution to the problem of access to justice. However, the fact that only half a page out of the 224-page legal aid consultation paper is devoted to this topic suggests that it is no panacea and, in fact, it is a very problematic product.
Moral hazard, that is the risk that individuals only buy insurance when they wish to claim on insurance, is clearly an issue for BTE. It is arguable that a funding mechanism that replaces civil legal aid should, in the same way, only engage when it is needed, for example, when the marital rows increase. Conditional fee with after the event insurance or contingency fee financing operates on this “call in when needed” basis. However, on a cost benefit basis it is reasonable to say that the advantages of a large pool of risks with premiums paid in advance keeps premiums down for all at the expense of the individual caught out without cover. They, like the MINELA (modest income, not eligible for legal aid), simply fall through the cracks.
BTE a cultural shift?
Any such widespread pool suggests a culture change in the attitude of individual citizens to legal risk mirroring the change that small businesses have made facing the risk of tribunal claims from their employees. Many now insure either directly or through trade bodies. Is such a cultural change likely? The model that is put up are the European countries, particularly, Germany which has extensive BTE penetration of about a third of the population. However, the comparison is overdone. German BTE has a long history based on a model of social insurance begun in the late 1870s as a bulwark against socialism. It was recognised that these new rights and a wider social consensus required access to justice to enforce them and the key was predictable and affordable legal costs across both transactional and non transactional activity. (Rather similar to the theory behind the introduction of civil legal aid in England in 1947 as the welfare state was set up.)
From the point of view of an English lawyer, particularly a litigator, it is breathtaking to note that this system of “fixed costs” has retained its basic format since 1877! Affordable costs are not a strong feature of legal costs in England (although solicitors are beginning, for example, to offer fixed price divorces) but they may be offered by the corporations about to enter the legal market and take advantage of the flexibility offered by alternative business structures.
As the first author found while researching BTE in Germany 10 years ago, sales are made on commission by individuals to neighbours and affinity groups. This is suitable for a product which is relatively low price with repeat purchases. The German BTE distribution mechanism is very different to that of insurance sales in the UK; formerly a broker-based system but increasingly through direct selling. It is not impossible for such a system to emerge in England. After all in the US, the cradle of capitalism and advertising, there are huge credit unions in the police and other organisations based around “sale” of their service on a colleague to colleague basis. Altogether, these unions have 87 million members and the top five (by assets) are employment based. However, it would take some time for such a market to emerge in the UK.
Insurance moves
This suggests that any expansion of BTE will depend on the energy and enthusiasm of mainline insurers and Lord Young’s proposal that they’d be willing to design a suitable consumer-friendly product. The interest of such insurers will normally depend on the profitability of the product—the price of developing, marketing and administering it and the “burning rate” (the claims against the premium income stripped of overheads). What is odd about BTE is that in England and Wales it is not normally a stand alone product but attached to another product, typically house or motor insurance. Lord Young’s proposal was for consultation with the industry on developing such products specifically aimed at individuals and the SME (small and medium enterprises) market. While the government in its consultation paper talks about a BTE stand alone product it’s quite difficult to find a comprehensive product.
The products out there will always have a limit of indemnity, which is not unexpected, but they are also limited in coverage to, for example, consumer disputes, neighbour disputes, or a dispute with HM Revenue & Customs, together with a telephone advice line. The more typical “add on” BTE is distinguished by its extreme cheapness against a general background of expensive legal fees. How can this work? It is an open secret that the panel lawyers regard BTE not as a source of direct fee income but as putting them in a position to identify “paying” cases such as personal injury cases and to establish a relationship with the insured, converting them into a client, and signing up a CFA. In other words it’s a referral system. While, this may well be an acceptable business model it is certainly opaque and individual clients may not be aware that the lawyers do not get paid for their work and indeed may have to pay to get it.
Changing the legal expenses market
Clearly, this arrangement cannot sustain a change to be the main source of legal advice and help post abolition of civil legal aid without a substantial price hike. Conventional wisdom suggests that consumers will not pay serious money in advance for legal advice but could they be persuaded? Insurers are among the most sophisticated marketers in the UK marketplace. With a series of knowing post-modern advertisements (nodding dogs, meerkats and so forth) they have made the intrinsically complicated and potentially frightening topic of buying insurance into fun.
Could they do the same for BTE? While Lord Young proposes the development of stand alone products and development of consumer and SME-friendly BTE, insurers haven’t yet tried to significantly expand the BTE market or extol its virtues, instead relying on the referral business model. Perhaps, the legal aid changes may offer an opportunity to terrify the population by telling them they have lost legal aid support (which because of scoping and eligibility changes most of them didn’t have anyway) and in a series of telling scenarios—wife discovers frequent but unknown numbers called on husband’s mobile phone account…—offer the protection of BTE. Not an appealing prospect, and possibly contrary to Advertising Standards Agency rules, but it seems hard to imagine what less will do to persuade individuals to buy insurance they don’t have to as compared with car insurance (required by the state) or house insurance (required by your mortgagee).
The future for BTE?
The government’s consultation document highlights specific instances, employment or housing cases where LEI would be a viable alternative to publicly funded legal aid perhaps tacitly recognising the unlikelihood of it becoming a widespread household product. All in all while BTE will undoubtedly have a place in the post legal aid world, alongside contingency fees and other ideas it is unlikely to be the cure all solution to access to justice.
Professor John Peysner is a solicitor, professor of civil justice and head of the law school at the University of Lincoln.
E-mail: jpeysner@lincoln.ac.uk
Dr Angus Nurse is research fellow at Lincoln Law School.
E-mail: anurse@lincoln.ac.uk
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