Legal expense insurance gains in popularity
Canadian Bar Association says it's pushing it as an option for consumer
Roger Bickers first heard of legal expense insurance about 15 years ago when a neighbour’s stone wall toppled over and crushed his German brother-in-law’s trailer. Bickers, now a senior account executive at Heart Lake Insurance in Brampton, Ont., started to freak out, but his brother-in-law stayed calm, explaining he was insured.
“So I’m thinking it’s a property claim on his trailer,” Bickers says. “I’m thinking what we’d do here is I’d phone my house insurance company and I’d say, ‘Hey, my little mobile trailer in the back, I need to make a comprehensive claim, something fell on it.’” But that wasn’t his brother-in-law’s game plan at all.
According to Bickers, his brother-in-law said, “I told my neighbor he’s got five days to tell me he’s going to pay [for the damages] or I’m going to sue him with my legal expense insurance.”
“What the hell’s that?” replied Bickers.
Legal expense insurance (LEI)—which 44 percent of German households buy, according to a University of Toronto review of access to civil justice—provides policyholders with legal advice, as well as funding for legal representation.
The first step to any claim is a call to the insurer’s legal advice line, prompting a lawyer to assess the situation and provide rudimentary advice. “Most insurance companies don’t want to hear from clients because if they do it’s a claim,” says Kevin Le Messurier-Girling, president of Sterlon Underwriting Managers, an LEI loss-adjusting firm in Oshawa, Ont. that primarily works with Lloyd’s of London cover-holders in Canada. With “legal expense insurance, you want to hear from the client because you want them to be using the legal advisory service. They’re risk-managing their own business, which means we have a chance to nail a small problem… before it becomes a much larger issue.”
If the problem can’t be solved with a phone call, the advice line contact will set up an appointment between the customer and an appropriate panel lawyer. There can be some flexibility in the choice, but a client hiring their cousin who’s a real estate specialist for an employment law issue is strictly verboten. Of course, the insured’s problem must be covered by their policy, which usually means no willful acts, and separate policies for personal and professional matters.
“There are nuances within the policy wordings between each of these companies,” says Bickers. “So for instance, [one insurer] may say we cover contractual disputes but you have to enter into the contract after the policy starts. In other words, if you’re already leasing your studio, it’s not going to be covered under our contractual disputes. While [another] may say we cover contractual disputes even if your lease exists as long as there’s not any action on your dispute for [the first] 60 days in the policy.”
At Sterlon, customers are only eligible for representation if they ask for and follow the legal advice they receive through the telephone help line. “…If the boss walks in,” says Le Messurier-Girling, “and he hasn’t had his Tim Horton’s that morning, for whatever reason, and the first face he sees he says, ‘I don’t like you anymore, get out,’ then there’s no advice taken. You know he’s going to get stung for wrongful dismissal, and we’re not going to pay for it.”
DAS, a German legal expense insurer that opened in Canada in 2010, also excludes cases without reasonable prospects of success. In other words, the company will only provide coverage if it thinks the client has a good chance of winning the court case. “We’re not here to support frivolous cases,” says Jeffrey Kless, DAS Canada’s marketing manager.
And incidentally, neither company supports family law cases. Doing so “would open us up to adverse selection, to be quite frank,” Kless says. That is, divorce is more predictable than slip-and-falls and unjust terminations, and insurers don’t want people to buy a policy with the intention of using it in a month or two.
The Canadian Bar Association, which partnered with DAS in 2013 to promote access to justice with LEI, is concerned with this coverage gap, and has suggested insuring separation agreements but not litigation. “We certainly would like to see [family law coverage] happen, but we also understand there are practical matters that have to be figured out,” says CEO John Hoyles. In the meantime, DAS customers can at least direct their family law questions to the telephone help line.
Arag Canada won’t offer family law insurance when it begins selling LEI policies in May 2016 but “there are various potential products that we would introduce in the future,” including a divorce law product, says director Peter Talacek. “The challenging part with that product is you can imagine over 50 percent of marriages end in divorce these days. So it’s a challenging area to create an insurance solution, when you know that, for example, the majority of your customers eventually will want to use it.”
The average Canadian can’t call up their broker and buy an LEI policy—DAS, as well as Sterlon and Arag, only sell personal lines coverage through associations and insurer-partners that bundle the coverage into home and auto policies.
“I just received my letter of cancellation from DAS last week [in early February],” says Bickers. “I’m really bummed. I want to have it! It was only $300 a year or something.”
DAS stopped offering their personal lines policies in November 2015 after experiencing “some adverse selection,” says Kless, though the policies represented less than one percent of the company’s total book of business. It turned out customers were more likely to buy a policy when they anticipated having legal problems in the near future.
Going forward, Talacek says that Arag fully expects to be able to offer individual coverage, but doesn’t yet have a timeline in mind. For now, Hoyles recommends interested individuals join a program or association whose premiums include LEI.
Sterlon offers coverage to entrepreneurs as well as niche professionals such as physicians and educators, and like DAS, wouldn’t sell individual policies due to adverse selection. But the company would “entertain a group personal line product” in which all members of an association, alumni network or other group automatically get LEI, which is how the product works at SGI Canada.
SGI—which began offering the DAS product in November 2014—embeds legal expense insurance in its home and auto policies in Saskatchewan, Manitoba and B.C., which eliminates selection risk and brings premiums down. DAS manages all the LEI claims, and “we never know about [them] so we never increase the policy or remove claims-free discounts or anything like that,” says Kurtis Reeder, a personal lines segment manager at SGI. The company pays a set fee to DAS, which they will examine and adjust every three years, based on the DAS’s loss ratio. “They shouldn’t be losing money in providing this coverage, and if they end up making too much money providing the coverage then we need to bring it down to a more affordable level for customers.”
So far, SGI policyholders have called the helpline 383 times, including 202 calls for civil litigation and 45 for family law. The insurer has paid out 34 claims, the majority of them for contract disputes and property protection issues.
The big marketing spin on LEI, of course, is that it improves policyholders’ access to justice. In 2014, DAS and the Canadian Bar Association produced a white paper discussing how LEI can help more middle income Canadians afford proper legal representation: “The financial security that legal expense insurance provides gives Canadians the confidence they need to pursue their legal rights, even against the deep pockets of large corporations…” It also found the average hourly rate of an experienced lawyer is $379, a seven-day civil trial can cost up to $124,000, and half of Canadians don’t believe they have the resources to hire a lawyer.
Julie Macfarlane, a law professor at the University of Windsor, agrees that many Canadians face serious barriers in accessing justice. Her 2013 study on self-represented litigants mentioned 30 to 40 percent of Canadians in civil court represent themselves, and many started working with a lawyer but ran out of money before their trial. It’s unclear whether these litigants see worse outcomes in court or not, but “we have lots and lots and lots of data now that shows whether they have a good outcome or not, they have an utterly miserable time.”
And since many Canadians earn too much to qualify for legal aid—in Ontario, the income cut-off is under $12,000 for a single person—there aren’t many places they can turn to for funding. The DAS/CBA paper found Canadians would rely on their savings (39 percent), lines of credit and credit cards (37 percent) and liquidating assets such as RRSPs (29 percent) to pay for legal fees, but many simply don’t have such resources.
But whenever Macfarlane asked the self-represented litigant community about LEI, she received negative feedback. “The reason we’re getting pushback is that people are saying ‘Well, that’s just lawyers making money again.’ Now I don’t think that’s very fair or true. And I think there are lots of reasons in logical terms… for people to have legal insurance. But I think that it’s going to come up against a kind of cultural resistance that reflects the negative feelings that a lot of people now have about lawyers.”
Macfarlane also points out it can be a challenge for the insurance industry to convince consumers that legal expense is something they actually need. “For civil, they’ve got to convince people that [disputes over wills, employment or property damage are] a likely part of their future, and I don’t know how many people are going to think that.” She concedes Canadians don’t expect their houses to burn down or flood “but people are used to the idea [of home insurance]. Plus, if you get a mortgage… you don’t have any choice.”
So a big step would be convincing Canada that LEI is accessible and useful. The Canadian Bar Association is “taking every opportunity that we have when we’re in the public forum to talk about LEI as an option,” says Hoyles, who points out real estate agents and financial advisors could also educate their clients about the coverage. And Quebec’s legal regulatory society, the Barreau du Quebec, has produced a series of radio and TV ads promoting LEI—including an animated short titled “The Story of Four Well-invested Dollars”—and has set up websites in English and French explaining the coverage and which insurers offer it.
While brokers in other provinces don’t have that level of help from their law societies, they can always bring it up with their clients. But many don’t, says Roger Bickers, because it takes quite a lot of work to understand the policies, train all the staff in a brokerage and explain the value to clients. And if you’re selling a $300 legal expense policy with only a $45 commission, you might not think it’s worth your time and effort.
But not doing so, Bickers says, is akin to “not providing your clients D&O cover because you don’t understand D&O.”
Copyright © 2016 Transcontinental Media G.P. This article first appeared in the April 2016 edition of Canadian Insurance Top Broker magazine