Before Eschig it was accepted that UK legal expenses insurers (LEIs) could insist on the use of their own panel solicitors up to the issuing of proceedings, because of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (the Regulations), which transpose the European Council Directive 87/344/EEC (the Directive) into English law. This approach was also formally approved by the Financial Services Ombudsman.

However, in Eschig, a group action claim, the ECJ disagreed. It held that European law guarantees a policyholder the right to choose his own solicitor from the moment that he has a right to claim legal expenses cover from his insurer. This legal right was not solely limited to cases where proceedings have already commenced, but instead exists from the outset of the claim (ie at the initial enquiry stage).

A letter from Ken Hogg, the Financial Services Authority (FSA) Insurance Director, sent to all LEI providers last month, supported this approach. He concluded that the freedom of choice to instruct a solicitor arises before the commencement of any enquiry or proceedings and, further, that any policy terms that detract from the freedom to choose a lawyer were not compliant with the Directive and also in breach of the Regulations.

Various LEIs disagreed and this prompted Mr Hogg to reconsider his opinion. He has since issued a revised letter, dated 12 August 2010, which includes two additional explanatory footnotes. These confirm the broad principle that the freedom to choose a lawyer under Article 4 of the Directive is guaranteed, but restricted to recourse to a lawyer in 'any enquiry or proceedings' or whenever a conflict of interest arises. They also refer to the Court of Appeal's decision of Sawar v Alam, which confirmed that freedom of choice is only triggered once efforts to settle the claim by negotiation have failed and legal proceedings must be initiated.

Despite this change in approach, all LEIs must still inform the FSA of the actions they have taken to ensure that the terms of their legal expenses insurance comply with the Regulations, following the ruling in Eschig, by 30 September 2010. It is, therefore, incumbent on all LEIs to carefully check their insurance terms to clarify if they are compliant with reference to the latest guidance.