Freedom to choose a lawyer.

The market of legal expenses insurances in The Netherlands is dominated by insurance companies who provide cover in kind. This means that the legal aid is provided by the insurance companies’ own legal experts. In most contracts there were only two exceptions to this practice:

  1. in case the insurer recognizes the positive chances of court proceedings and those proceedings required a legal representative (a qualified lawyer);
  2. in case the insured has a conflict with someone who was also an insured of the same insurance company.  

In practice this means legally trained employees of the insurer will in most cases take care of the interests of the insured. One must bear in mind that the premium for legal expenses cover is relatively modest. The average premium for an average cover amounts to approx. € 20 - € 25 per month. Needless to say that the hourly rate of a qualified lawyer will easily exceed the annual premium.     

In 2011 a Dutch insured requested its legal expenses insurer to incur the costs of a qualified lawyer to represent him in proceedings against his former employer. In The Netherlands proceedings concerning employment disputes do not oblige parties to be represented by a qualified lawyer. The insurer therefore refused to incur the costs of the qualified lawyer and offered legal representation by one of its own legal experts. The insured did not accept this offer and maintained the request and referred to (amongst others) the Council Directive 87/344/EEC of 22 June 1987.

Article 4(1) of the directive provides as follows:

Any contract of legal expenses insurance shall expressly recognise that:

(a)    where recourse is had to a lawyer or other person appropriately qualified according to national law in order to defend, represent or serve the interests of the insured person in any inquiry or proceedings, that insured person shall be free to choose such lawyer or other person;

(b)    the insured person shall be free to choose a lawyer or, if he so prefers and to the extent that national law so permits, any other appropriately qualified person, to serve his interests whenever a conflict of interests arises.’

The insurance company still refused to incur the costs of the qualified lawyer.

The insured requested the court in Amsterdam to order the insurance company to bear those costs. The request was rejected. This decision was upheld by the Court of Appeal. The insured contested that judgment before the referring court. The Supreme Court of The Netherlands decided to stay proceedings and to refer the following questions to the European Court of Justice for a preliminary ruling:

  1. Does Article 4(1) of Directive [87/344] allow a legal expenses insurer, which stipulates in its policies that legal assistance in inquiries or proceedings will in principle be provided by employees of the insurer, also to stipulate that the costs of legal assistance provided by a lawyer or legal representative freely chosen by the insured person will be covered only if the insurer takes the view that the handling of the case must be subcontracted to an external lawyer?
  2. Will the answer to Question 1 differ depending on whether or not legal assistance is compulsory in the inquiry or proceedings concerned?’

After consideration of the wording itself of Article 4 in different languages (Dutch, French, German), and the consideration of two previous cases regarding legal expenses insurance (Eschig-case and Stark-case) the questions were answered as follows:

  1. Article 4(1)(a) of Council Directive 87/344/EEC of 22 June 1987 on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance must be interpreted as precluding a legal expenses insurer which stipulates in its insurance contracts that legal assistance will in principle be provided by its employees from also providing that the costs of legal assistance provided by a lawyer or legal representative chosen freely by the insured person will be covered only if the insurer takes the view that the handling of the case must be subcontracted to an external lawyer.
  2. The answer to question 1 will not differ depending on whether or not legal assistance is compulsory under national law in the inquiry or proceedings concerned.

This means that insurance companies can no longer refuse to bear the costs of a qualified lawyer in case proceedings need to be commenced. The insured is free to choose – in case legal representation is not required – whether he wants to be represented by a legal expert of the insurance company or by a qualified lawyer paid by the insurance company.

However, the legal expenses insurers are not simply outlawed by the judgment.

The court ruled that this does not mean that Member States are obliged to require insurers, in all circumstances, to cover in full the costs incurred in connection with the defence of an insured person, on condition that that freedom is not rendered meaningless. That would be the case if the restriction imposed on the payment of those costs were to render de facto impossible a reasonable choice of representative by the insured person. In any event, it is for the national courts, if an action is brought before them in this regard, to determine whether or not there is any such restriction.

This ruling of the European Court of Justice will result in a change of the landscape of legal expenses insurance contracts (at least in The Netherlands).  

It is known that the legal expenses insurer in this case already amended its daily practice based on the judgment. It is expected that also other insurers providing cover for legal expenses will follow. Another effect of the ruling will be the amendment of policy conditions, i.a. providing for a limitation of legal expenses to a certain amount and the introduction of deductibles (the judgment leaves the insurers this option as long as the restrictions are reasonable). And, last but not least, taken in mind the current premium rates right now, an increase of the premium.