Car accidents: high profit margin on motor legal expenses cover
The Law Society is targeting a fresh attack on before-the-event legal expenses insurers by seeking out a test case that aims to loosen their grip on policyholders’ choice of solicitor, it has emerged.
The news comes as the Office of Fair Trading (OFT) called on the Financial Services Authority to improve the way that insurers sell motor legal protection cover to drivers, amid concerns that consumers do not understand the product – and especially that they can opt out of buying it.
The society is seeking a test case to challenge the stand long taken by legal expenses insurers that a policyholder’s right to choose their solicitor – as contained in the Insurance Companies (Legal Expenses Insurance) Regulations 1990 – only kicks in once proceedings have been issued.
A Law Society spokesman said it does not accept this interpretation of the regulations, which implemented a European directive.
He explained: “The problem is that, given that a huge amount of work is done before proceedings are issued, this is too late for the freedom of choice to be meaningful, as clients are unlikely to want to change at that stage. Our view is that the directive applies at a significantly earlier stage and we are seeking appropriate test cases to challenge on that basis.”
Recently the High Court delivered a blow to legal expenses insurers by saying that they cannot hold non-panel firms to panel fee rates, although the case is now heading to the Court of Appeal.
Meanwhile, in announcing a market study into private motor insurance yesterday, the OFT said it had concerns over how motor legal protection cover is sold.
The key issues were the complexity of motor legal protection cover – making it hard for people to understand – and the fact that in many cases the judgement of whether the consumer can use the cover is made by the insurers themselves. “Further, consumers may not be fully aware that they can ‘opt out’ of buying this product.”
The competition body also found that some insurers are making a high profit margin on legal expenses insurance compared to standard motor insurance policies.
It said the FSA is best placed to remedy these problems because it has statutory power “to ensure that consumers are being treated fairly when the product is sold”.
The OFT’s market study is to focus on possible excessive costs caused by credit vehicle hire companies and insurers’ repairer networks, as personal injury claims are being dealt with through the Legal Aid, Sentencing and Punishment of Offenders Bill. The OFT estimated that private motor insurance premiums rose by around 12% between 2009 and 2010, and a further 9% between 2010 and the first three months of 2011.
Finally, legal expenses insurer Arc Legal Assistance has argued that the move by some legal expenses firms to become alternative business structures (ABSs) creates the risk of a conflict between the needs of underwriters and consumers.
The company said that with “a number of legal expenses insurers considering developing such structures, those adopting an in-house legal services model, where lawyers are directly employed by the company, risk creating a commercial conflict of interest exposing companies to allegations from consumers that its legal decisions lack impartiality”.
Arc director Richard Finan explained: “The concept of a legal expenses insurer’s own in-house lawyers undertaking legal case assessments has an inherent risk of conflict with the perception that the underwriter’s exposure rather than client interests at the heart of decision making.
“Using in-house lawyers to make initial decisions on prospects of success and the merits of cases raises very valid issues on independence that need to be addressed. Those legal expenses insurers using this model must clearly demonstrate a level of independence in the decision-making process to ensure consumers are protected from the commercial pressures such a structure would create.”
Surely the holy grail should not be the lowest motor premium, which inevitably squeezes out great customer service, but the best value premium. Then again perhaps insurance is after all simply a commodity like petrol, and the level of service is exactly the same standard whichever provider you choose. Perhaps one of the measures the OFT should consider in their investigation is the number of thank you letters received from clients by credit hirers and insurers relating to the same incidents.