Significant Decision on Legal Expenses Cover under Liability Policies

Enterprise Insurance PLC sub nom Frederick David John White v Ozon Solicitors Ltd (3 February 2017)

This decision – the first one we know of on the issue – gives important guidance on the interplay between liability insurers’ rights to manage the defence of a civil claim under a liability policy and the rights of an insured under the regulations governing legal expenses insurance.

Those rights are governed by The Insurance Companies (Legal Expenses Insurance) Regulations 1990. The essential point, particularly from an insured’s point of view, is that the Regulations guarantee an insured’s right to choose their own legal representative once there are proceedings (Regulation 6). An insurer cannot consequently require an insured to use a particular law firm.

Regulation 3 sets out a small number of exceptions to the application of Regulation 6, the pertinent one being Regulation 3 (3), which provides that the Regulations:
. . . do not apply to anything done by a person providing civil liability cover for the purpose of defending or representing the insured in an inquiry or proceedings which is at the same time done in the insurer’s own interest under such cover.

The Facts

The decision arose from an application by the liquidator of Enterprise Insurance for delivery up of files and related material from the respondent solicitors, who had previously acted for Enterprise.

Enterprise had been declared by the Financial Services Compensation Scheme to be in default and the liquidator was appointed over Enterprise in 2015. In 2016, the liquidator terminated the solicitors’ retainer and asked for all files to be transferred to another solicitors’ firm. The liquidator later disclaimed the policies issued by Enterprise on the basis that claims that had already been made would be honoured. Apparently, millions of pounds were owed to thousands of consumers. The FSCS had said it would rely on the liquidator’s judgment as regards compensation for to eligible policy holders. At the time of instant hearing there were 1,300 outstanding claims made with motor insurance policies underwritten by Enterprise.

The liquidator argued that he was entitled to transfer the work and files pursuant to a claims control clause in the motor insurance policies, which stated that he had full discretion on conduct of any claim. The solicitors argued that:

(i) the liquidator was not entitled to rely on the control clause as that would be a breach of the insured’s right to choose their own lawyer under the Regulations; and

(ii) that any discretion under the claims control clause was not unfettered so that even if the clause was in principle capable of allowing the insurer to change solicitor, the power conferred by the clause was subject to a limitation, we presume of reasonableness, although this is not stated in the summary of the judgment.

The Decision

The judge, unsurprisingly in our view, found for the liquidator. He did so on three grounds:
(i) The claims control clause entitled the insurer not merely to nominate solicitors at the outset, but to change solicitors. Enterprise had that aspect of control and in principle was entitled to not only nominate solicitors at the outset but to change solicitors. That was not an un-commercial result; it was the insurer that had to pick up the bills and it made sense that it could choose the legal representatives.

(ii) Regulation 6 was designed to avoid conflicts of interest between insurer and insured, for which there was clear potential in a conventional legal expenses situation. Regulation 3, however, provided the regulations did not apply to civil liability representation given to and insured which was at the same time done in the insurer’s own interests Where, the insurer was involved in litigation in order to limit its liabilities, the aims underlying the Regulations were not engaged, and the Regulations were not meant to apply in such situations. To hold otherwise would, the judge said lead to confusion.

(iii) How the power was exercised by the insurer was a matter of contract between the insurer and the insured, and to that extent it did not concern the solicitors. On the facts the power had been validly exercised. (The relationship had broken down over the level of fees.)

As we have commented, this decision is not surprising. Although, and as the judge commented, the language of Regulation 3 (3) could be clearer, this decision clearly supports the obvious purpose behind the exception. Moreover, to hold otherwise would be commercially wrong, as the judge appears to have said: It was the insurer that had to pick up the bills and it made sense that it could choose the legal representatives.

Claims control conditions are found in every liability policy and so this decision will on the face of it apply across the board. Consequently this decision is an important clarification of insurers’ rights. That said, however, we imagine that an insurer that exercised the right to change legal representation capriciously or for wholly invalid reasons might encounter problems if the insured chose to contest the decision.

It should also be stressed, however, that the Regulation 3 (3) exception only applies where an insurer is providing civil liability cover. It consequently leaves open the question as to whether this decision would apply where, as is frequently the case, liability insurers provide costs cover in respect of criminal prosecutions; for example, in respect of Health and Safety prosecutions. Such cover generally being something of a standard extension under all UK liability policies.

Whilst it is arguable that the exception should apply because the basic purpose of a liability policy is to provide an indemnity in respect of civil liability, and defence of any such prosecution is often (but not always) in an insurer’s interest, we consider the better view is that it would not do so. The cover under the standard extensions is in effect a ‘stand-alone’ cover, and is not always linked to their being a claim or potential claim under the policy. More to the point, however, the cover is not given in respect of a ‘civil liability’. It may be that at some stage the courts will be asked to decide this point but for now it remains moot.

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