With the ongoing pandemic significantly affecting businesses’ ability to trade across the UK, substantial pressure is being faced by many.
Many companies are facing tough decisions about staffing, experiencing contract disputes, or dealing with interventions by regulators. These are all time-consuming and stressful matters that already struggling businesses must deal with. UK SMEs already lose £13.6bn each year from legal issues, so having the protection provided by legal expenses insurance (LEI) is crucial. Ian Hollingworth ACII, Chartered Insurer and Head of Legal Expenses & Tax Claims at Markel UK, explains what we should know about LEI and why it’s so important.
Why take out LEI?
LEI provides cover for your legal costs for a solicitor to defend or pursue a wide range of legal actions. That includes issues such as contractual disputes over money owed for a service or goods provided, defending regulatory action against a doctor following a complaint from a patient, evicting a tenant who is refusing to pay rent, or defending an employment dispute from an employee.
How does LEI protect you?
When a legal dispute that requires the intervention of a solicitor arises, LEI provides cover for the reasonable costs incurred by the appointed solicitor. Cover is usually provided on a claims-made basis, meaning the policy will provide cover for a legal dispute that is identified and reported to the insurer during the period of cover.
Why is it important that companies have LEI?
Costs of a legal dispute can be significant for a business, and sometimes they are unable to fund the costs directly. Legal disputes can prevent companies from trading and cause them to lose everything. For example, if a business has a large contract but the main contractor refuses to pay, the effect on cash flow may mean the business has inadequate funds to pay for a solicitor to take legal action to recover the sums owed.
With LEI, the business can obtain legal support without having to pay those costs themselves. LEI is sometimes seen as an optional extra to a general insurance policy, but it’s incredibly important and provides significant benefit for a low cost.
Is LEI as important for SMEs as it is for larger businesses?
It could be said it is more important. Large businesses often have the funds to pay for their own legal support or even retain in-house legal staff, whereas SMEs rely on general high street solicitors that may not possess the necessary expertise to deal with the dispute faced.
LEI not only provides the necessary legal support, it also offers access to expertise as insurers have relationships with large-panel law firms who are equipped to deal with these more complex legal actions. At Markel we also have an in-house law firm, Markel Law, that has expertise in many areas and works closely with the claims team to provide the best support to the policyholder and provide a seamless link between insurer and lawyer.
Some businesses decide to pay for legal advice ONLY when it’s needed. Why is this a bad idea?
Costs can be very high in a legal action, sometimes running to six-figure sums. LEI removes the risk of such exposure by providing a low-cost solution and peace of mind.
Are there excesses and exclusions people should be aware of?
Like all insurance, there may be an excess under the policy, which is usually quite low at between £250 and £500, although in many instances there can be no excess where an insurer’s panel law firm is instructed.
There will also be limits for a single dispute, usually between £250,000 and £500,000, with the possibility of smaller inner limits for certain matters. LEI only provides cover for legal costs and not for damages that arise, such as a fine imposed following a Health and Safety Executive (HSE) investigation or a sum awarded against a policyholder in a contract dispute. There can be exceptions where some compensatory cover is also available, such as in an employment dispute where the LEI policy may pick up non-contractual awards made against the employer.
Why is it so important that companies understand the cover they’re taking out?
There are many levels of cover within LEI. Companies must consider the nature of their business and the types of legal disputes they might face, then seek the level of cover for those potential eventualities. For example, any business employing staff faces a risk of an employment dispute and it’s important that the LEI policy includes this cover, whereas a sole trader wouldn’t need that type of cover. A dental practice would need to obtain cover for regulatory disputes that may arise from a complaint to the General Dental Council, and any business that is involved in the sale of goods or services may face a contract dispute with a customer or supplier.