28 February 2014 | www.newlawjournal.co.uk14 legal update CommerCial

Hobson’s choice?Alison Padfield considers the limits on the freedom to choose a lawyer

The freedom to choose a lawyer under a policy of before the event (BTE) legal expenses insurance is expressly set out

in reg 6 of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (SI 1990/1159). The right is to choose a lawyer “to defend, represent or serve the interests of the insured in any inquiry or proceedings” (reg 6(1)), and there is also a right to do so at an earlier stage if a conflict of interest arises between the insurer and the insured (reg 6(2)). The regulations implement Directive 87/344/EEC, and reg 6, which requires the freedom to be expressly set out in the policy of legal expenses insurance, essentially reproduces the wording of Art 4 of the directive. Some aspects of the freedom have been considered in a series of recent cases, but important issues remain unresolved.

Does the freedom provide effective protection?The freedom is to choose a lawyer in connection with “proceedings”. Most insureds would no doubt anticipate that the stage at which their legal expenses insurance would entitle them to instruct a lawyer of their choice would be the start of the pre-action protocol procedures. However, whether this is so is, at best, unclear. Lord Phillips MR observed in Sarwar v Alam [2001] EWCA Civ 1401; [2002] 1 WLR 125 (at para 44), a case which concerned the recoverability of legal expenses premiums: “During the course of the hearing...members of the court made critical observations from time to time about the size of some of the BTE insurers’ panels and the possible inappropriateness in these post-Woolf days of a BTE claimant being denied freedom of choice of solicitor (at any event so far as the members of the Law Society’s or some other reputable panel of approved personal injury solicitors are concerned) at the time the procedures in a pre-action protocol come to be activated.”

The Jackson report (Review of Litigation Costs: Final Report (December 2009)) said (at 8.1.3) that reg 6 was interpreted both by BTE insurers and by the Financial Ombudsman Service as meaning that the insured has a right to choose his or her lawyer at the moment when proceedings are issued, but not earlier, and commented: “By that stage, of course, it is not normally practicable for the claimant suddenly to switch lawyers.”

Indeed, the potential difficulties facing an insured wishing to change lawyer are illustrated by the Professional Negligence Pre-Action Protocol, which provides (at para B2.3) that the letter of claim is not intended to have the same formal status as a statement of case, but that if the letter of claim differs materially from the statement of case in subsequent proceedings, the court may decide, in its discretion, to impose sanctions. This is an unattractive prospect for most insureds and, in the absence of case law interpreting reg 6 as applying at the pre-action protocol stage, the panel solicitor initially instructed by the BTE insurer will typically retain conduct of the matter once proceedings are issued.

“ The court said that freedom to choose a lawyer does not mean that member states are obliged to require insurers, in all circumstances, to cover in full the costs incurred”

When can the insured claim?Lord Phillips MR expressed unease in Sarwar v Alam about the terms on which the insurer in that case was in practice prepared to allow its insured to instruct a non-panel lawyer. This has been considered in several recent cases, both at European level and domestically. In Erhard Eschig v UNIQA Sachversicherung AG [2009] C-199/08), the Austrian statute governing legal expenses insurance appeared to permit legal expenses insurers to litigate only test cases, rather than allowing their insureds to appoint lawyers to act for them individually, in circumstances where the insureds’ claims all arose out of the same event and gave rise to similar issues.

Mr Eschig wished to bring legal proceedings arising out of the loss of his investments, including against certain asset management companies. Several thousand other investors, some of whom also had policies of legal expenses insurance with the insurer, UNIQA, were in the same position. In its judgment, the European Court of Justice (ECJ) confirmed that Art 4 does not permit a legal expenses insurer to reserve the right

IN BRIEF f The freedom to choose a lawyer under

BTE legal expenses insurance does not currently appear to apply until after pre-action protocol stage.

f The ECJ and the Court of Appeal have confirmed that insurers may restrict the costs payable under a policy of legal expenses insurance.

f The Financial Conduct Authority has been slow to monitor compliance by legal expenses insurers with mandatory legal requirements.

www.newlawjournal.co.uk | 28 February 2014 15legal updateCommerCial

to select the legal representative of all the insured persons concerned where their claims all arise out of the same event.

In reaching its decision, the court said the directive did not seek to completely harmonise the member states’ legal expenses insurance contracts and that, as EU law then stood, those states remained free to determine the body of rules applicable to those contracts. It also said that it was for the national court to interpret the provisions of the Austrian statute, taking into account the ECJ’s interpretation of Art 4, to achieve the result sought by the directive.

What can the insured claim?Eschig was a case in which the terms which the legal expenses insurer sought to impose would have effectively denied its insured the right to choose a lawyer—or, indeed, the right to instruct a lawyer at all—pending the resolution of test cases. In Stark v DAS Österreichische Allgemeine Rechtsschutzversicherung AG [2011] C-293/10, the question was whether the insurer was entitled to limit its indemnity to the amount normally charged by a lawyer established in the place of the court before which the proceedings had been brought, even if the insured instructed a lawyer whose office was further away and who was therefore under the local rules entitled to charge more.

The ECJ said that Mr Stark was able to choose his lawyer without opposition on the part of his insurer, and that he would have to bear only the additional amount of the fee charged by the lawyer. The court said it did not consider that, as a general rule, this would hinder the insured’s freedom to choose his lawyer, although it added that this was a matter for the national court.

Importantly, the court said that freedom to choose a lawyer does not mean that member states are obliged to require insurers, in all circumstances, to cover in full the costs incurred, on condition that that freedom is not rendered meaningless, and that this would be the case if the restriction imposed on the payment of costs were to render de facto impossible a reasonable choice of representative by the insured.

Application of the Stark principle by the Court of AppealThis principle was applied by the Court of Appeal in Brown-Quinn v Equity Syndicate Management Ltd [2012] EWCA Civ 1633; [2013] 1 WLR 1740. Solicitors working for a firm on the BTE insurers’ panel moved to a non-panel firm. The insureds wished

to continue to instruct the solicitors at their new firm, where the hourly rate was significantly higher. Longmore LJ (with whom Lloyd and Macfarlane LJJ agreed) said that a refusal to accept the appointment of an insured’s lawyer of choice, on the basis that he would only be accepted if he charged no more than the non-panel rates, would be “a serious inhibition of freedom of choice and thus contrary to the regulations” (para 21). The Court of Appeal held that the insurer’s standard terms of appointment for non-panel lawyers, which included the hourly rates, were incorporated by reference into the contract of insurance, and therefore applied unless they were in breach of the regulations.

“ Regulation 6 requires that the insured’s freedom to instruct the lawyer of his choice be expressly stated in the policy”

However, the court drew from Stark the proposition that insurers can seek to limit the costs for which they are liable to the insured provided the freedom of choice guaranteed by the directive “is not rendered meaningless” (para 28) and then applied that proposition to the facts of the case. Longmore LJ said that a court determining whether the remuneration offered by the policy was so insufficient as to render the insured’s freedom of choice meaningless would require evidence of such insufficiency before it could avoid or strike down any provision in an insurance contract relating to the level of costs and expenses payable. As the Court of Appeal was not prepared to find, on the extremely limited evidence before it, that the insurers could not rely on the non-panel rates, it made a declaration that the insurers were obliged to pay only the appropriate non-panel rates.

Most recently, in Sneller v DAS Nederlandse Rechtsbijstand Verzekeringsmaatschappij NV [2013] C-442/12, the insured wished to bring proceedings for unfair dismissal. The legal expenses insurer had indicated that, in accordance with its policy terms and conditions, it was prepared to provide legal assistance to Mr Sneller only through one of its own employees,

who was not a lawyer. The ECJ said this was a breach of the claimant’s freedom to choose a lawyer under Art 4, and added that it made no difference that the proceedings were in a forum which did not require the claimant’s representative to be a qualified lawyer. The court reiterated the Stark principle, and also observed that the insurer and insured remained free to agree cover for a higher level of costs, possibly against payment of a higher premium by the insured.

The future of policy terms infringing reg 6Regulation 6 requires that the insured’s freedom to instruct the lawyer of his choice be expressly stated in the policy, but this requirement was breached in the policy considered by the Court of Appeal in Brown-Quinn. This reserved to the insurer the right not to accept the insured’s choice in “exceptional” circumstances, which were not defined, and to terminate cover in other circumstances connected with the choice of lawyer. Longmore LJ said the facts of the case had revealed that the insurers exhibited “an insouciance to their obligations under the directive and the regulations which leaves one quite breathless” (para 8), and that it was quite wrong that, despite a warning shot delivered to legal expenses insurers by the Court of Appeal in Sarwar v Alam (Lord Phillips MR having expressed “unease” (at para 44) about the terms on which it appeared the insurers were in practice willing to allow an insured’s solicitor of choice to act for their insured), insurers should, many years later, be issuing policies which did not comply with the regulations.

The Financial Conduct Authority is ideally placed to ensure that legal expenses insurers comply with their obligations under reg 6 as it has power to require insurers to remove unfair terms from their policies. In 2010 its predecessor, the Financial Service Authority, wrote to legal expenses insurers reminding them, in the light of Eschig, of their obligation to comply with the directive and the regulations. It is difficult to imagine a clearer example of an unfair term than one which breaches a statutory requirement. However, there is, as yet, no indication on the FCA website that it has written to legal expenses insurers following the observations of the Court of Appeal in Brown-Quinn. NLJ

Alison Padfield is a barrister at Devereux Chambers & author of Insurance Claims, 3rd edition, 2012 (padfield@devchambers.co.uk; www.devereuxchambers.co.uk)