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Francis Regan[*]
Recent successes and failures of legal insurance schemes in Australia and overseas.
Legal expense insurance (LEI) is one of the ‘access to justice’ mechanisms that was considered in many societies in the 1980s and 1990s.[1] Governments, legal professions, and legal reformers in the rich western societies highlighted the potential of mechanisms such as LEI, contingency fees and class actions to improve citizens’ access to justice by controlling the cost of legal services. By controlling these costs, LEI and the other mechanisms promised to improve citizens’ access to legal services and the courts. LEI was particularly popular because it promised to improve access to legal services for the ‘in betweens’ or middle income groups. That is to say, it promised to improve access to legal services for the income group that were not poor enough to qualify for legal aid but not rich enough to easily afford the cost of legal services.
The evidence from the last two decades suggests, however, that LEI has been a qualified success in improving citizen’s access to justice. In general, it seems that the reformers had unrealistic expectations about the ease of developing LEI. The result is that while LEI is successful in some societies, the cost of legal services continues to be a problem for the ‘in betweens’ in many others.
This article takes stock of LEI developments in a number of societies over the last two decades and considers its prospects for the future. First, it describes the development of LEI in a group of common and civil law societies. It demonstrates that LEI has fared best in the societies with civil law traditions but that the picture is more ambiguous in the common law societies. It concludes by highlighting some lessons to be learnt from these developments. In the following section I explain the meanings of LEI.
LEI can be defined in a number of ways. One recent definition was proposed by the Australian government appointed Access to Justice Advisory Committee which proposed that LEI ‘schemes are designed to provide insurance cover, upon the payment of a premium, for the cost of specified legal services’.[2] While there are a number of different types of LEI, this umbrella definition is sufficiently broad to incorporate the wide range of variations between schemes.
There are many ways of organising LEI and these are reflected in the significant differences between continental Europe and North America, England and Wales, and Australia.[3] The range of schemes is, therefore, sketched below and the main differences highlighted.[4]
The pure form of LEI applies insurance principles that are similar to other forms of insurance. In LEI the insurance is a means of financing often unpredictable legal costs that arise in relation to often catastrophic events. The LEI cover spreads the risk of liability among policy holders. The policies are generally offered to individuals rather than to groups and the result is that the individual member’s costs are reduced because of the number of policy holders. The pure form of LEI originated in Europe, where it still dominates. It is generally operated by private businesses for profit although in some societies, including Sweden, there are close links with the trade union movement.
The second form of LEI is ‘Group plans’ that provide finance for legal services for individual members of groups. These include bulk purchases of legal services from private legal professionals, the employment of in-house lawyers for a specified group of people such as the members of a trade union and their families, and the education of members of a group about legal matters. These are often referred to as ‘prepaid’ plans because they do not use insurance principles but instead rely on bulk savings to create benefits for policy holders. The prepaid plans are found predominantly in the USA and Canada where they were developed to improve access to justice by reducing the cost of legal advice and representation. They are usually designed for groups of employees and are either totally employer funded, or jointly funded by employers and employees.
Usually LEI policies are sold to consumers in two ways:
• ‘stand-alone’ LEI policies are offered to individual consumers, or
• they are offered as ‘add-ons’ to existing policies that already have a high market penetration such as household or motor vehicle insurance.
Sometimes they are automatically included with existing policies at no extra cost to the consumer. In Sweden, for example, LEI is automatically included at no extra cost in most household insurance.
Delivery systems for the different forms of LEI also vary considerably. Some schemes use private legal professionals to deliver all services. The two main forms are ‘closed panel’ where clients choose from a specified group of lawyers or firms, or ‘open panels’ where clients can consult any lawyer of their choice. As I explained earlier, some schemes employ salaried lawyers and other staff to work exclusively for the members of the group and their families.
Finally, LEI schemes also vary in the services they offer consumers. At one extreme, some policies give a high priority to legal advice and minor assistance, while at the other extreme they offer legal services for litigation in relation to catastrophic, high cost events.
Before examining the recent developments, it is also important to recognise the relationship between LEI, publicly funded legal aid schemes, and other assistance with the costs of legal services. In brief, LEI cannot replace publicly funded legal aid because the cost of the policies means that it is unlikely ever to be popular among the poor/low income groups. LEI does not, therefore, replace the need for governments to spend money ensuring that low income groups have subsidised access to legal services. In the end governments have an obligation to such groups which cannot be replaced by LEI or other reforms to the legal system. Nevertheless, as I explain below, if legal aid is very generous and includes most of the population, the role of LEI will be very different to societies where legal aid is for low-income groups alone.
The role of LEI in a society is also influenced by other features of the legal system including whether there are no-fault accident insurance schemes or other mechanisms to assist litigation such as contingency fees and class actions. If such mechanisms exist there will be less need for LEI to assist with legal services for complex litigation.
The comparative evidence suggests that LEI is widespread in a number of civil law societies but has been less successful in the common law societies.
Sweden is one of the world’s most remarkable LEI success stories. It is estimated that approximately 90-95% of Swedish households have LEI policies. The astonishing success of LEI in Sweden must be understood in context.[5] First, rather than stand alone the policies are add-ons to the typical household insurance policies that are sold on the market. LEI is automatically included in the household policies and at no extra cost to consumers. Until recently the LEI policies were also closely enmeshed with the very generous legal aid scheme in Sweden. That is, LEI complemented the legal aid scheme by covering its main gaps including assistance for legal problems that were not covered by legal aid, the costs awarded against an unsuccessful party, and the cost of legal expenses for the small proportion of Swedes who did not qualify for legal aid. Paradoxically, therefore, LEI was successful because most Swedes recognised that it was in their interests to have LEI even thought most also had access to at least some legal aid. The Swedish acceptance of LEI can be best understood in terms of that society’s commitment to ‘risk protection’ in relation to many areas of human activity. Not only is Sweden the archetypical welfare state in terms of income support and other forms of welfare. It also has no-fault insurance for a range of accidents including medical, vehicle, and pharmaceutical.[6] In other words, LEI is successful in Sweden because because citizens expect to be protected from many forms of risk including legal expenses.
Nevertheless, the future of LEI in Sweden is unclear. Changes to legal aid in 1997 mean that most Swedes must rely first on their LEI rather than legal aid if they need legal services. Consequently, the cost of the household insurance is likely to rise and pressure may then be brought to bear to remove LEI from the household policies with the result that fewer people will have this from of risk protection. Finally, Swedish LEI may decline if European insurance companies enter the market and offer cheaper household policies that do not include the LEI component.[7]
LEI is also widespread elsewhere in European although there is considerable variation between societies. For example, more LEI policies are sold in Germany than any other European society by virtue of the size of that society’s population. In 2001, approximately 25 million policies were issued as stand-alone policies sold to individuals, in a population of 82 million. However, because most policies cover more than one person and usually a family, the proportion of the population covered is significantly higher than the data suggests.[8] LEI is successful in Germany for similar reasons to Sweden. That is, policies complement legal aid by covering legal matters that legal aid does not, they include a number of serious and complex legal disputes that must be resolved in court including motor vehicle accidents; they cover the opponent’s costs in unsuccessful cases; and client choice of lawyer is generally allowed. However, the policies also have large gaps. In particular, German LEI rarely covers the routine transactions such as legal advice and assistance with documents that are commonly included in the prepaid plans in the USA.
The German LEI policies are also attractive from the insurer’s point of view because the German legal profession operates on the basis of a fixed fee schedule.[9] The cost of legal disputes are, therefore, predictable, a major incentive for the insurers. Finally, other mechanisms designed to improve access to legal services such as contingency fees do not exist in Germany.
LEI is also developing in other European societies. For example, while approximately 10% of households have such insurance in the Netherlands this figure is growing at 16% a year.[10] LEI is also widespread in other Scandinavian societies although not to the same degree as Sweden.
LEI has not flourished in the common law societies to the same extent as in their civil law counterparts. There seems to be a number of reasons for this, including the generally weaker role of trade unions.
Among the common law societies LEI has developed most successfully in the USA. The policies in the USA are generally prepaid plans for predictable and specified events that are low cost, routine and high frequency. Meanwhile, the existence of contingency fees, class actions, and the absence of a costs rule means that legal services are generally available for unforeseeable and catastrophic events.
In contrast to continental Europe, the prepaid plans ‘emerged predominantly in the context of the group employee plans, either totally employer funded or jointly funded by union members and employers’.[11] The prepaid plans have been very successful. In 1997, 105 million people or 39% of the population were estimated to be covered by prepaid plans. Nevertheless, after spectacular growth in sales of policies in the 1970s and 1980s, group sales appear to have plateaued in the 1990s and future growth appears to lie in individual stand-alone policies.[12]
The policies vary considerably in their coverage and cost. In general the prepaid plans are designed routine matters including simple divorce and other family law matters, and wills and estates. Telephone legal advice is also central to many of the prepaid plans because it is cheap and can prevent problems from escalating into costly litigation. Finally, while prepaid plans rarely offer assistance for complex legal problems some offer discounts on private lawyers services for more complex matters.[13]
LEI has not been a success in England and Wales. One reason relates to the early sponsors of such policies. In the 1980s the Law Society was involved in designing policies that were targeted to the household insurance market. However, the policies were not a success in large part because the public were wary of the profession’s self-interest in the policies. More recently, attempts have been made to sell policies by alternative means. For example, about 30 insurance companies currently sell add-on LEI policies linked to household and motor vehicle policies. The coverage of the policies varies considerably but family and motor vehicle cover dominates. The cost of policies also varies, ranging from £4 to £20.[14] In addition, there are now policies for group coverage and telephone advice lines. While income from advice only policies was low, £3.76 million over 1991–1993, they have proved popular with consumers. Between 1991 and 1993 an average of 171,000 advice calls were made to advice lines annually by policy holders.[15]
Nevertheless, the penetration of LEI into the England and Wales market is at an early stage. Estimates of the total size of the market are rubbery but the estimated total number of people covered by the policies varies from 10-17 million.[16] The total premium income remained a relatively low annual average of £70 million between 1991 and 1993.
Future growth of the LEI market in England and Wales is uncertain. First, some providers are withdrawing from the market due to low demand for policies and increased competition between providers. At the same time demand is low because individuals believe that they have a low risk of incurring legal expenses and are therefore unwilling to purchase policies. They also believe that they can often get the legal help they need from other sources including legal aid or trade union advice schemes.[17]
This section describes two recent and contrasting Australian LEI developments. The first was an ambitious failure, the second has limited goals but is a quiet success.
The Law Foundation of New South Wales and the Government Insurance Office in NSW established Legal Expense Insurance Ltd (LEILtd) as a project to improve the community’s access to legal assistance by providing a commercially viable legal expense insurance product. The LEILtd project ran from 1987 to 1995.[18]
Initially, policies were designed to improve access to legal services for low to middle income families. Over time policies were also developed for specific groups of workers including childcare workers. The policy holders were covered for a specified and narrow range of legal services but the policies did not trigger many claims or generate customer loyalty. Drawing on the USA experience, the initial aim was to sell policies primarily to groups. Employees were a main target group and the idea was that unions would promote policies as an employee fringe benefit. However, trade unions and employer groups were reluctant to accept these policies as a means of providing legal services for their members/employees.
Service delivery involved a closed panel, a specified group of private legal professionals. In addition to the insurance benefits a number of non-insurance benefits were offered including a telephone advice service and minor assistance with documents for routine legal matters. The ‘telephone advisory service and educational efforts were popular with consumers and, in terms of access to justice, were arguably the most worthwhile achievements ‘of the project.[19]
The project ultimately failed to sell many policies for a number of reasons. For example, it proved difficult to convince potential consumers of the benefits of the policies; brokers and agents were not familiar with the product and did not promote it strongly; the public’s perception of the availability of legal aid resulted in reduced interest in the product; and it was difficult to sell the policies to employers as an employee benefit in tight economic times. In addition, there were a number of operational problems that inhibited the success of the project. Finally, close relationships were not developed with trade unions.
Furthermore, ‘Community attitudes and market practices in Australia are not conducive to achieving the necessary sales volume for legal expense insurance’.[20] Part of the reason for the lack of conduciveness is that ‘The Australian legal system — adversarial, without scheduled fees, and with the availability of costs orders — is not conducive to offering the level of affordable legal expense insurance benefits which would result in a high claims ratio’.[21] The relationship between LEI and legal aid was also a problem. Australia’s legal aid practices hindered the development of LEILtd because not only do the publicly funded Legal Aid Commissions in each State offer free, non-means tested legal advice to all Australians but also many people also assumed, incorrectly, that if it were necessary they would qualify for legal aid from the Legal Aid Commissions.
The failure of the LEILtd project can be highlighted in a number of ways. On the one hand, a relatively small number of policies was actually sold. About 30,000 policies were sold to groups. Second, while income from sales increased over the life of the scheme, income was never sufficient to outweigh the overall costs. Income from sales of premiums rose from $24 in 1989/90 to $155,303 in 1992/93 to $237,141 in 1994/95. Third, very few claims (a total of seven) involving legal action were made on the scheme. Fifth, relatively little use was made of the legal advice component of the scheme. For the years 1991–95, a total of 4368 calls were made to the telephone advice line.
In the end, however, the long-term impact of LEILtd might be significant. That is, it might be an important incremental step in opening up the market for this kind of insurance. The report estimates that there are now between 100,000 and 150,000 people with such policies in Australia, which is many more than were insured prior to LEILtd.
Perhaps the most successful LEI scheme in Australia is operated by the PSA, the main trade union for public servants, in South Australia.[22] The PSA established a trial LEI group scheme for its membership in 1991 that automatically included all members of the union. The early success of the scheme meant that the union leadership continues to operate the scheme to the present day. In the mid 1990s the scheme cost the PSA approximately $10 a member, or $250,000 for the 25,000 members.[23]
From the outset, the PSA scheme gave a priority to assistance with routine and less serious legal problems. Consequently, the scheme offered legal advice and minor assistance, rather than specialising in services for unpredictable catastrophes. Members with a legal problem first ring a telephone advice line and get professional advice. The advice component of the scheme is offered on a contract basis by the publicly funded legal aid body, the Legal Services Commission of South Australia.
Services are not limited to advice. Education materials are offered to members including pamphlets that provide easy to understand explanations of the law as it relates to a range of common legal problems. Assistance is also available for more complex legal matters if required. In the small number of matters that cannot be resolved over the telephone the member will be advised of their options which may include referral to a government agency, referral to a private lawyer to investigate the matter further, or in family law disputes they can be referred to family mediation. If they proceed to an interview with a solicitor under the scheme, the first interview is free.
If necessary, legal representation is also available for a range of matters including motor vehicle matters, personal and consumer problems, and most minor criminal matters. Agreement from the scheme’s administrators is required before such legal actions are accepted under the scheme and this decision is partly based on the likely chances of the matter succeeding. Since the scheme was established in 1991, it has provided assistance in over 9000 instances. Most assistance consists of advice and mediation and very few cases proceed to court. The bulk of the assistance is in relation to family law and civil matters.
While the PSA scheme is, therefore, a success story and one of the few in Australia, it is significant for two reasons. First, it demonstrates that it is possible to establish well-designed and targeted LEI schemes in Australia. However, while the scheme is successful it has had a weak demonstration effect — it has not resulted in other trade unions, or other organisations, establishing similar schemes.
There are a number of lessons to be learnt from the discussion in this article about the development of LEI. In general, the evidence reinforces the conclusion that LEI has potential to improve access to justice for the ‘in betweens’. In other words, governments, legal professions, and legal reformers can continue to be optimistic about its potential. LEI can in some circumstances and in some ways, improve access to justice for that group. It is not, however, a panacea. It is not simply a matter of deciding to establish LEI. Instead, the challenge is to decide how to improve access to justice, for which groups, and then identify the role of LEI.
It must also be recognised that LEI cannot solve the access to justice problems for the in-betweens. Policies rarely include all or most of the population which means that only those who actually have the policies benefit from them. The low-income groups in particular are unlikely to be included. In addition, the LEI policies vary considerably within and between societies.
The discussion in this article also suggests a number of lessons for common law societies. First, the experience in the USA, England and Wales and Australia, all suggests that in order for LEI to develop it needs to be promoted by significant groups. That is, it seems that either governments and/or employers and trade unions must promote LEI to groups. Where LEI has penetrated markets in the USA and Australia, it was because it was in the form of award bargaining or because the trade unions purchased the policy for the group as in the case of the PSA scheme. The evidence also suggests that stand-alone policies are unlikely to be successful either for groups or generally. The USA and Australian examples suggest that group or add on policies are, at least initially, more likely to be successful. Finally, close involvement by the legal profession seems to hinder the development of LEI. The lesson it seems is that the legal profession cannot be seen to be too closely involved in promoting its own financial self-interest.
The international evidence also suggests that LEI is more likely to flourish if two related strategies are adopted: targeted markets and incremental growth. That is, in the first instance LEI policies don’t seem to do everything well. Instead, LEI is more likely to succeed if the policies are carefully designed and targeted to a specific market. The schemes in the USA are generally limited to less complex legal problems and are often targeted to trade unions for the reasons discussed above. The PSA in South Australia is also targeted and allows for incremental market growth. The emphasis is on low-cost advice and minor assistance although more extensive assistance is offered if required. This experience could also be used to promote the value of such a scheme to other unions.
The final lesson is that if LEI is to be successfully developed it must be tailored to the specific circumstances of the particular society. This means that careful planning is needed in order to successfully develop these policies. The international experience examined here suggests that LEI will struggle in societies where there are other forms of assistance offered for particular types of legal problems. If these lessons are taken into account, however, LEI might begin to justify the reformers’ optimism of two decades ago.
[*] Francis Regan teaches legal studies at Flinders University.email: francis.regan@flinders.edu.au© 2001 Francis Regan (text)© 2001 John Lynch (cartoon)
[1] For a review of many possible access to justice reforms see the Access to Justice Advisory Committee, ‘Access to Justice An Action Plan’, Attorney General’s Department, Canberra, 1994. For a recent review of the literature examining the mechanisms designed to improve access to justice in Europe see Goriely, T., Access to Legal Services: A European Comparison, A Review of the Literature, Scottish Executive/Law Society, London, 2000.
[2] Access to Justice Advisory Committee, above, ref 1, p.260.
[3] As Pfennigstorf notes, there are significant differences between the way that the European societies organise LEI to the ‘prepaid plans’ in the USA. Nevertheless, for the purposes of this article it is reasonable to refer to all the approaches as legal expenses insurance. See Pfennigstorf, W., ‘A Summary Review of American and European Approaches to Legal Protection Insurance’, in W. Pfennigstorf and A. M. Schwartz (eds), Legal Protection Insurance: American and European Approaches, American Bar Foundation, Chicago, 1986, p.1.
[4] The following summary draws on Pfennigstorf and Schwartz (eds), above, ref 3 and The Law Foundation of New South Wales, Legal Expense Insurance: An Experiment in Access to Justice, Law Foundation of New South Wales, Sydney, 1999 available at <>. For a recent discussion of LEI in Europe and the implications for improving Access to Justice in Australia see Cannon, A., (2000) 9 ‘Legal Cost Insurance’, Journal of Judicial Administration 223–46. The article includes a French LEI contract.
[5] The discussion in this section draws on Regan, F., ‘Retreat from Equal Justice? Assessing the Recent Swedish Legal Aid and Family Law Reforms’, (2000) 19 Civil Justice Quarterly 168–84.
[6] The Swedish approach to risk protection for personal injury is compared to other societies, including New Zealand in Oldertz, C. and Tidefelt, E. (eds) Compensation for Personal Injury in SWEDEN and Other Societies, Juristforlaget, Stockholm, 1988.
[7] See discussion in Regan, above, ref 5.
[8] This section draws on discussions of the German developments in a number of chapters in Pfennigstorf and Schwartz (eds), above, ref 3, and Killian, M, ‘Legal Aid and Access to Justice in Germany’, Paper to the International Legal Aid Group Conference, Melbourne, 13–16 June 2001.
[9] The fixed fee schedule and its consequences are described in some detail in Liepold, D., ‘Limiting Costs for Better Access to Justice: The German Experience’, in Zuckerman, A.A.S.and Cranston, R. (eds), Reform of Civil Procedure: Essays on ‘Access to Justice’, Oxford: Clarendon Press, 1995.
[10] Levenkamp, P., ‘Legal Aid in The Netherlands’, Paper to the Inter- national Legal Aid Group Conference, Melbourne, 13–16 June 2001.
[11] Law Foundation of New South Wales, above, ref 4, p.9.
[12] Law Foundation of New South Wales, above, ref 4, p.10.
[13] Law Foundation of New South Wales, above, ref 4, p.10.
[14] Gray, A. and Rickman, N. ‘The Role of Legal Expenses Insurance in Securing Access to the Legal Services Market’, in A.A.S. Zuckerman and R. Cranston (eds), Reform of Civil Procedure: Essays on ‘Access to Justice’, Clarendon Press, 1995, p.312; also see the discussion in Prais, V., ‘Legal Expenses Insurance’, in Zuckerman and Cranston (eds), above.
[15] Gray, A. and Rickman, N., above, ref.14, p.314.
[16] Gray, A. and Rickman, N., above, ref 14, estimate that 10 million are covered while the Law Foundation of New South Wales, above ref 4 refers to 17 million.
[17] Gray, A. and Rickman, N., above, ref 14, p.315.
[18] The project is described in Law and Justice Foundation of NSW, above, ref 4.
[19] Law and Justice Foundation of NSW, above, ref 4, p.viii.
[20] Law and Justice Foundation of NSW, above, ref 4.
[21] Law and Justice Foundation of NSW, above, ref 4.
[22] The discussion in this section draws on the description in the Access to Justice Advisory Committee, above, ref 1, the PSA website, and correspondence from the PSA. The PSA website address is <http://www.cpsu.asn.au/sa/members.htm> .
[23] Access to Justice Advisory Committee, above, ref 1, pp.262–63.
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