Covering Your Legal Costs

Everyone, no matter how rich or important, is subject to the rule of law, but the costs of accessing the justice system can be prohibitively expensive for the vast majority of the population. As quoted in Maclean’s earlier this year: “Many Canadians find themselves too wealthy to qualify for legal aid, but not wealthy enough to afford a lawyer.” Often people are deterred from taking legal action because of the financial risk, stress and uncertainty associated with the process. Legal expense insurance (LEI) can eliminate the stress and uncertainty and also provide an affordable way to access the justice system.

LEI provides coverage to help individuals and companies alike cover the expense of taking legal action or defending their rights if they have a dispute with another party, by providing insurance designed to meet these costs. It is largely undeveloped in Canada, although it is not a new concept. In Europe, the birthplace of LEI in the 1920s, a large percentage of the population holds at least one policy. The European LEI market had a value of about Cdn$11.1 billion, according to the European Insurance and Reinsurance Federation (CEA). Canada, in contrast, currently has about Cdn$32.1 million.

So why has this type of insurance not taken off in Canada, even though there are similarities with the legal systems in countries such as Canada and the United Kingdom?

There are a number of probable reasons — including the size of Canada and its proportionately smaller population, different federal and provincial legislations, less interest in this specialized line of business shown by most of the large property and casualty insurers, which tend to be generalists, and the frequent misconception that Canada follows the US legal system.

The regulator of the legal profession in Quebec, the Barreau du Quebec, has been an active supporter for some time of LEI. In Ontario, Malcolm Heins, CEO of the Law Society of Upper Canada, recently said: “The Law Society believes that legal expense insurance is a useful insurance product, because it has the potential of making legal services more accessible and affordable for people who don’t qualify for legal aid. The Law Society’s access to justice committee is currently investigating with insurers the potential to make a more comprehensive legal expense insurance product available in Ontario.”

WHAT IS LEGAL EXPENSE INSURANCE?

Unlike conventional insurance, LEI does not make a direct payment for a claim. Instead, the insurance covers the legal costs involved in pursuing or defending a claim. Such costs include legal fees (lawyers’ and court fees), disbursements (including costs for experts, medical reports, etc.) and include adverse costs that can potentially be awarded against the policyholder in the event a case is lost. Policies also include access to legal advice that in many instances may be sufficient to guide the individual or organization through the complexities of the legal system and gain a better understanding of their rights.

It is often more beneficial for both parties to try and reach a settlement rather than go to court, which can be both stressful and time-consuming. The majority of legal disputes can in fact be settled by negotiation, which can be the fastest and most effective way of resolving a dispute.

WHO NEEDS THIS TYPE OF INSURANCE?

In general, everyone who owns or rents property, drives a car or operates a business needs LEI. For individuals, coverage can include disputes arising from the ownership or operation of a vehicle, employment issues, property problems such as boundary disputes, tax issues, identity theft, legal defense and lost income from attending court or being called for jury duty. Premium costs are not expensive and can be less than the cost of an hour or two of a lawyer’s time.

For businesses, the relentless increase of volume in business legislation, combined with a new willingness to take legal action against companies, can make things difficult or costly for any businesses without an in-house legal counsel or even internal HR staff. An LEI policy can include coverage for employment disputes, statutory license protection, tax issues, supplier disputes, for property protection including boundary issues and employee lost income as a result of court attendance or jury duty. In this fast-changing business world, a good LEI policy is essential if a company is to protect itself against the potential legal costs it may face.

In Europe, not surprisingly, the largest volume of claims under both personal and business policies emanate from employment issues. There’s no reason to believe the story will be different in Canada.

LEI IN ACTION

Here’s an example of how the coverage might work in practice. ABC Laboratories dismisses an employee for misuse of his computer. The company alleges the employee had been attempting to use functions that were not part of his authorized role. The LEI insurer helps ABC Labs through the disciplinary process (providing advice and letter templates).The employee is given appropriate warnings and the functions are removed from his computer. Later, the company discovers the employee had restored the functions and continued to use them. ABC dismisses the employee. The employee subsequently claims unfair dismissal, alleging the company did not correctly follow its disciplinary procedures. The LEI insurer appoints a lawyer to act on ABC’s behalf and the matter proceeds to employment tribunal, where ABC is successful.

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In Europe, the largest volume of claims under personal and business policies emanate from employment issues. There’s no reason to believe the story will be different in Canada.