Freedom fighters

Can legal expenses insurers still oblige a policyholder to use their panel solicitors, before proceedings are issued, in light of the European Court of Justice decision in Case C-199/08 Eschig v UNIQA Sachversicherung AG and the latest communications from the Financial Services Authority?

The British legal expenses insurance industry faces continuing uncertainty on a number of fronts, not least the looming Ministry of Justice reforms and the potential implications of Lord Justice Jackson's review on costs. If that wasn't enough, legal expenses insurers (LEIs) are now having to fight for the right to use their preferred panel solicitors (before the issuing of proceedings) following the ECJ ruling in Eschig and recent communications from the FSA regarding its implications.

Before Eschig, it was accepted that UK LEIs could insist on the use of their own panel solicitors up to the issuing of proceedings because of the Insurance Companies (Legal Expenses Insurance) Regulations 1990, which transpose the European Council Directive 87/344/EEC into English law. This approach was also formally approved by the Financial Services Ombudsman.

In Eschig, a group action claim, the ECJ disagreed. It held that European law guarantees a policyholder the right to choose his own solicitor from the moment he has a right to claim legal expenses cover from his insurer. This legal right was not just limited to cases where proceedings have already commenced but, instead, exists from the outset of the claim '“ that is, at the initial enquiry stage.

Despite this ruling, many UK LEIs have since refused to agree to the appointment of non-panel firms from the outset, relying upon the current version of the regulations which applies a more restrictive interpretation of the freedom of choice of solicitors than the directive.

Mixed messages

However, a letter from Ken Hogg, the recently appointed Financial Services Authority's (FSA) insurance director, sent to all LEIs in July, suggested that was not the correct approach. He concluded that the freedom of choice to instruct a solicitor arises before the commencement of any enquiry or proceedings and, further, that any policy terms that detract from the freedom to choose a lawyer were not compliant with the directive and were also in breach of the regulations. He also confirmed that the undertaking given by DAS to the FSA in July 2006 should no longer be relied upon and that it had been removed from the FSA website.

It seems there was then a backlash from the LEIs, who disagreed with Hogg's interpretation. This prompted a revised letter from Hogg to all LEIs, dated 12 August, which included two explanatory footnotes. These reiterate the broad principle that the freedom to choose a lawyer under article 4 of the directive is guaranteed but restricted to recourse to a lawyer in 'any enquiry or proceedings' or whenever a conflict of interest arises. The footnotes also refer to the Court of Appeal's decision of Sawar v Alam which confirmed that freedom of choice is only triggered once efforts to settle the claim by negotiation have failed and legal proceedings must be initiated.

Hogg's revised letter, therefore, marks a significant U-turn. He now seems to accept that an LEI may insist on its own panel solicitors, at least up until the time when litigation is pending and all negotiations have been exhausted, provided there is no conflict of interest and the LEI complies with at least one of the solutions listed in article 3(2) of the directive.

Despite this, all LEIs must still inform the FSA of the actions they have taken to ensure the terms of their legal expenses insurance comply with the regulations, following the ruling in Eschig, by 30 September 2010.

Further confusion

So, where does this leave the insurance industry and the legal profession when it comes to panel solicitors? The content of Hogg's original letter is unfortunate, since it has brought further confusion to what was already a grey area of law. Furthermore it seems very few lawyers are aware of Hogg's revised letter. For example, the September edition of the Association of Personal Injury Lawyers (APIL) magazine refers to Hogg's July letter but does not mention the revised August version. The article consequently concludes that policyholders can now choose their preferred solicitors from the outset of the claim. LEIs can therefore expect a raft of applications from non-panel firms for LEI cover in the coming weeks.

While LEIs can take some encouragement from Hogg's revised letter, organisations such as APIL continue to lobby hard with the FSA, the Financial Ombudsman, the Law Society and other interested parties in their campaigns to promote freedom of choice. This latest can of worms is therefore likely to remain open for a while yet.