The Court of Appeal in (1) Christine Brown-Quinn (2) Webster Dixon LLP & Ors v (1) Equity Syndicate Management Ltd (2) Motorplus Ltd  EWCA Civ 1633 examined the boundaries of a before-the-event (BTE) legal expenses insurance policy and an insured's freedom to choose its lawyer, and reminded legal expenses insurers of their obligations under the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (the Regulations).
Three insureds (the Insureds) brought claims before the High Court in 2011, seeking declarations that their BTE insurance would cover their solicitors' reasonable fees up to the policy limit of £50,000. The defendant insurer, Equity Syndicate Management Ltd (the Insurer), objected to the appointment of the solicitors, who had been chosen by the Insureds and were not on the Insurer's panel of approved legal representatives, and refused to indemnify them for their fees.
In a similar manner to most BTE insurers, the Insurer retained a panel of solicitors to whom it promised large volumes of work in exchange for discounted fixed fees. The Insurer only approved the appointment of non-panel solicitors by its insureds, where those non-panel solicitors agreed to the Insurer's standard terms of appointment (which provided for a fixed hourly rate (the Non-Panel Rate)).
During the first instance hearing in the High Court, the Insurer reversed the position it had taken in pre-trial correspondence and conceded that the Insureds were still covered if they instructed solicitors who did not accept the Non-Panel Rate, and that the recoverable fees were not limited to the Non-Panel Rate (the Concession). Instead, the Insurer submitted that it was only obliged to cover such fees as were (in the absence of agreement) assessed pursuant to the Civil Procedure Rules (CPR) 48.3 (in essence, costs which are 'reasonably incurred' and 'reasonable in amount', as assessed by the court).
The Insurer argued that the Non-Panel Rate should be the starting point of any assessment, such that any departure would only be justified if the Non-Panel Rate was shown to be unreasonable. Mr Justice Burton instead adopted a middle course and said that the Non-Panel Rate was relevant as a comparator but not as a starting point.
The inclusion of the Non-Panel Rate in the assessment as a comparator, reflected Burton J's sympathy for the commercial position of the Insurer, whose premiums are calculated with reference to low panel rates and Non-Panel Rates, negotiated and set to keep down the quantum of legal costs and expenses. If much higher fees were deemed recoverable, with no regard for the Non-Panel Rate, premiums would eventually have to be increased to cope with the additional burden, pricing some litigants out of the market. Other factors that he said should also be taken into account in an assessment included:
- the availability of other suitable (panel) firms
- the location of the chosen solicitors
- the specialisation of the chosen firm and any particular qualification for taking on the instant claim
- the complexity of the claim
- the importance of the claim to the insured
- the substance and strength of the proposed defendant to such claim
- the nature of the work to be carried out, particularly whether it should sensibly be carried out by senior solicitors whose rates would inevitably be higher than the Non-Panel Rate.
Burton J concluded that an insurer was not entitled to decline to accept an insured's choice of lawyer on the basis that the lawyer's fees exceeded the insurer's Non-Panel Rate. The fact that an insured's chosen solicitor charged fees in excess of the Non-Panel Rate did not constitute an 'exceptional circumstance' in which an insurer may decline to accept the insured's choice, under the policy.
The Insurer appealed this decision, which granted the declarations sought by the Insureds.
On appeal, the Insurer sought to withdraw the Concession made in the High Court, and argued that any recovery by the Insureds was in fact confined to the Non-Panel Rate. Lord Justice Longmore criticised the Insurer's conduct, but stated that it was "the court's duty to decide the parties' legal rights, whatever the distaste with which it views the behaviour of the parties in the lead-up to the hearing." He allowed the Insurer to withdraw the Concession, once satisfied that the Insureds would not be prejudiced by this.
Once permission to withdraw the Concession had been granted, the Court of Appeal considered the policy terms and unanimously agreed that they entitled the Insureds to recover the Non-Panel Rate, but no more than that. If they chose solicitors whose rates exceeded the Non-Panel Rate, then it was up to the Insureds to arrange payment of the difference. The Regulations, which implement European directives on legal expenses insurance, enshrine an insured's freedom to choose a lawyer under a legal expenses contract. The Insureds submitted that liability for the difference inhibited their freedom under these Regulations. Longmore LJ disagreed and said that "the fact that some potential insureds may be unable to pay extra to secure the solicitor of their choice can hardly mean that all insureds can always choose any solicitor however expensive he may be and expect the insurers to pay."
In deciding whether any policy term so restricted an insured's freedom of choice as to prevent reliance on it, the Court of Appeal considered a decision of the European Court in Stark v DAS Oesterreichische Allgemeine Rechsschutz-Versicherung A.G. (2011) Case C-293/10. This stated that an insured's freedom to choose his lawyer under European law, did not mean his legal costs must be covered in full by the insurer in all circumstances, provided his freedom was not "rendered meaningless". An insured's freedom would not be rendered meaningless if (a) the restriction related only to the amount of cover provided; and (b) the reimbursement provided by the insurer was sufficient. The European Court said the freedom would be rendered meaningless if the restriction on payment imposed by the insurer, were to "render de facto impossible a reasonable choice of representative by the insured person".
From this, Longmore LJ concluded that a court would require evidence that the remuneration offered by the insurance policy was so insufficient as to render the insured's freedom of choice meaningless, before it could strike down any provision in a policy relating to costs. In light of the "meagre" evidence submitted by the Insureds of such insufficiency, the Court of Appeal decided it could not prevent the Insurer from relying on those policy terms, which limited the Insured's entitlement to recovery of the Non-Panel Rate but no more.
Despite an overall victory for the Insurer on appeal, in which Burton J's order was set aside and a declaration granted that the amount the Insurer was obliged to pay was limited to the Non-Panel Rate, the Court of Appeal was heavily critical of the following clauses in the policy. They said the Insurer had exhibited an "insouciance to their obligations under [the Regulations] which leaves one quite breathless".
General Condition 2.3
…you can choose an appointed representative by sending us the suitably qualified person's name and address. We may choose not to accept the choice of representative, but only in exceptional circumstances.
General Condition 5
If an appointed representative refuses to continue acting for you or if you dismiss an appointed representative, the cover we provide will end at once unless we agree to appoint another appointed representative.
The Regulations make clear that the insured's freedom to have a lawyer of his choice, must be expressly stated in the policy. Longmore LJ said the above clauses were almost the opposite, they clearly did not comply with the Regulations and they must be either deleted or comprehensively re-drafted.
The Court of Appeal's decision is both a victory and a warning shot for BTE insurers. Clauses such as those above where an insurer arbitrarily seeks to inhibit its insured's freedom to choose a lawyer, will be struck down for want of compliance with the Regulations. However, the decision that the Insurer must pay the Non-Panel Rate but is not obliged to pay any more than that, must be viewed as a victory. The possibility that insureds who are able to provide evidence that the remuneration offered by their policy is so insufficient as to render their freedom of choice meaningless, may have the offending policy provisions struck down, provides a lifeline for those for whom there really is no alternative to their chosen solicitor.