FSA clarifies right to choose lawyer in legal expenses insurance

It has withdrawn from its website an undertaking given in 2006 by legal expenses insurer DAS agreeing to use a particular wording to describe the insured's right. Although that wording was approved by the FSA, the regulator now says the term restricts the freedom to choose and is in breach of European law and UK regulations.

The move has been prompted by the European Commission's interest in how member states have implemented the 1987 Legal Expenses Insurance Directive, following a European Court decision last year on an Austrian case.

Mr Eschig, along with several thousand others, wanted to pursue claims against two failed investment firms. But his legal expenses insurer would not cover the cost of the initial legal advice he obtained, or confirm that the same lawyer could carry on representing him in the action.

The insurer relied on a policy term that stated that, where several insured persons were pursuing similar claims, it had the right to select who would represent them. Mr Eschig, however, said the term contravened the Directive, which states that the insured has the right to choose his own lawyer in any inquiry or proceedings and when any conflict of interest arises.

The European Court agreed, rejecting the argument that collective actions should be treated differently from other cases. The decision makes it clear that any provisions in an insurance contract that detract from or qualify the insured's right to choose will be in breach.

The FSA has now decided that the DAS wording, which said the insurer could override the insured's choice of lawyer "in exceptional circumstances", falls foul of this ruling.

In a letter dated 19th July, the regulator has asked insurers to confirm by 30th September the actions they have taken to ensure their legal expenses policies comply with the Insurance Companies (Legal Expenses Insurance) Regulations 1990, which implement the Directive in the UK.

Interpretation

The letter also raises the issue of when the right to choose actually arises.

The Directive states, at Article 4, that the insured has the right to choose his own lawyer to defend or represent him "in any inquiry or proceedings" and whenever a conflict of interest arises.

Article 3 sets out alternative ways in which insurers can reduce the risk of any conflict of interest with their insureds, including giving the insured the right to choose his own lawyer "from the moment that he has the right to claim from his insurer under the policy."

This is replicated in the UK regulations. Regulation 5 states that insurers must adopt at least one of the prescribed arrangements for avoiding conflicts of interest, one of which is for the policy to give the insured the right to choose from the moment he has a right to claim under the policy.

Regulation 6 says the insured has the right to choose a lawyer to protect his interest "in any inquiry or proceedings" and whenever a conflict of interest arises.

The Financial Ombudsman Service (FOS) has in the past taken the view that, in the absence of a conflict of interest, the right only arises once proceedings are issued or an administrative procedure such as an inquiry has begun. Legal expenses insurers have interpreted the regulations in the same way. This has meant some insureds have had difficulty in recovering the cost of their lawyer's initial investigations and advice.

The FSA's letter of 19th July, however, suggests the regulator might be taking a different approach. With regards to Regulation 6, it states "It is important to note that the freedom of choice arises before the commencement of any inquiry or proceedings." Whether this will change the FOS position is not yet clear.