Insurers are getting very excited about an unsung kind of cover. Commercial legal expenses is set to soar, and soon. Michael Faulkner asks why that is

AXA is hoping to increase its business tenfold in this class. Norwich Union (NU) began a major new drive in September. New insurer PRI sees this as a core part of its business and is looking for it to play a major role in the market in 2003. And Royal & SunAlliance (R&SA) and Zurich are proposing new initiatives for the New Year.

But what are they all talking about? The answer is: commercial legal expenses (CLE) insurance.

CLE has been available for a number of years. DAS, the market leader, has been around since 1975. So what has caused this renewed interest?

AXA casualty insurance manager David Williams cites the "potential of the market" as the key motivator in AXA's new initiative. "The market is ridiculously underdeveloped. In 2000 the CLE market amounted to £107m; in 2002 it is only £137m. It could be so much more," he says.

Williams points to other European countries as examples of mature markets where CLE and other legal expenses products are widely purchased: "In Germany virtually every family has legal expenses cover. And in Sweden, you can only get legal aid if your failure to purchase legal expenses cover was reasonable. These countries show what can be done."

Another reason for this renewed interest is that it now seen as important part of an insurer's client retention strategy. Including this cover is an easy way for insurers to add value to their packages. DAS Legal Expenses underwriting and product development manager David Hoynes points out that CLE came out as a high priority in research looking at what should be included in packages.

SME focus

AIG Europe product development manager Simon Housego says: "We want to provide products that help brokers with their business. CLE is a great way to achieve this, particularly in relation to those products which are aimed at smaller businesses: these customers do not have in-house legal departments."

PRI business development manager Leo Gibbons says that CLE's attraction for PRI is down to its customer base. "Our target market is UK SMEs, and we will be extending the range of services that we will be offering to these clients. This will include risk management. CLE fits in with these aims."

Yet despite this enthusiasm from some insurers, the CLE market has been suffering from capacity problems, according to Gibbons. "The market hasn't hardened considerably compared to other lines. This has been coupled with a distinct underperformance in the legal expenses market, with the result that capital has shifted to other more profitable lines."

Gibbons says that a number of Lloyd's syndicates have pulled out of this class of business, including Markel and the syndicates that support the activities of Abbey Legal Protection and LPMG.

Nevertheless it seems that insurers like AXA, Zurich and PRI are prepared take a longer-term view. In the battle for product and service differentiation, CLE may well be an important weapon.

But the reasons for including CLE in package policies may be more than just keeping brokers happy and improving client retention rates.

David Haynes says: "Historically the take up of this [CLE] cover by customers has been low. Brokers have tended to neglect it because they don't understand it. More recently, it has been ignored because brokers are too busy trying to sell the increased rates on other covers. "

So packaging CLE with other covers may be a way to increase sales.

Simon Housego comments: "It may be well be the way forward to sell CLE as a package rather than a stand-alone cover. But there is a fine line between what the client is prepared to pay for."

Brokers are key

And Zurich distribution and marketing manager David Smith says: "Brokers want access to CLE, but it is part of a bigger picture [that includes directors' and officers' cover (D&O) and employment practice liability (EPL)]. People want to buy these covers at one time."

But brokers are seen as key to making the CLE marker a mature one. "Brokers have a far more detailed insight into their clients than insurers," says Frost. And Gibbons agrees: "The key is establishing broker relationships."

But historically, one of the problems that insurers have faced when attempting to sell CLE is a lack of understanding of the product: not only among brokers and clients, but also among insurers themselves.

NU product manager Matt Frost says: "In the past brokers and insurers have not had enough knowledge about the product. CLE has tended to be the concern of a small number of specialist insurers. But now insurers are starting to take it more seriously."

Frost says that the market needs to become more educated about legal expenses insurance, and its growing importance due to the increasing amount of legislation affecting companies since 1997. To this end NU has produced a guide entitled "Commercial Legal Expenses: Understanding the Brief". This explains the CLE market and the importance of the cover, and addresses many of the criticisms that have been levelled against the product.

Gibbons says that PRI will also be spending a great deal of time and effort ensuring that its agency brokers and clients understand CLE. This will involve training on aspects such as claims and a regular newsletter on risk exposures.

The online angle

Online systems are also becoming an important tool in the marketing the product and educating brokers and clients, according to Haynes. DAS will soon be launching a new resource called, which will provide policy and legal information, and downloadable documents. And Composite Legal Expenses has recently launched a new online quotation system IQ2003.

Insurers are also looking at ways to develop the product.

Simon Housego says: "The main issues facing a product developer are the policy language and the cover. Neither has changed over the years. The language is not plain English. And the product itself has not changed, but the risks have: such as increased outsourcing and home working."

Risk management is now an area of focus for many insurers. Matt Frost says NU's approach is that CLE insurance is only a partial solution and must be backed up by an appropriate risk management solution.

Gibbons also says that risk management must be the way forward. "EPL cover was written without good risk management in place, with the result that there were a lot of claims. This loss-focused approach is not the solution. Companies need to lead in terms of consultancy and legal advice etc."

PRI is also looking at the way claims are handled. "Claims have been a constant thorn in the side of the CLE market. We aim to change the traditional approach that is taken with claims," says Gibbons.

"We want the policy to pay claims. And we plan to establish a claims charter with brokers to keep them informed of the progress of each claim. Too often brokers do not find out what is going on until something goes wrong with the claim."

A further area development is cover for contracts disputes. NU's new CLE policy includes it and AXA is also seeking to do so.

"This is an area that is usually taken out," says David Williams.

"But that is what CLE insurance is all about. We want to put in full contract cover as part of the bundle."

But there are difficulties with including this cover, warns Leo Gibbons. "Insurers cannot be involved in the contractual negotiations that arise pre-dispute. And when a dispute arises the fallout can be massive.

"In employment disputes, however, the situation is different. Checks and balances can be introduced to limit claims."

Price sensitivity

Gibbons points out that the additional cost of including this cover is also an important issue.

"Adding contract cover will increase potential exposure and raise premiums, which may make the cover too expensive. CLE is a price sensitive cover.

"It is only manufacturing and industrial clients that benefit from contract dispute cover," he says.

"For other, smaller, businesses, employment disputes and health and safety issues are more important. As such contract cover may not be necessary."

New moves in commercial legal expenses

Norwich Union

In September 2002, NU launched a new CLE policy as part of its commercial packages. The new cover is "an enhanced version of the DAS policy" and is "designed with the future in mind" to cope with legislative changes, contractual disputes and debt recovery, according to product manager Matt Frost.

NU has also introduced a website ( in conjunction with DAS Legal Expenses, which contains comprehensive human resources information and tools.


PRI has only been in the CLE market since September 2002, but already has a book of business worth £10m.

According to business development manager Leo Gibbons, PRI is planning to "play a substantial role in the market in 2003". This will involve working in partnership with composite insurers and building a range of PRI branded products to be delivered through brokers.


Casualty insurance manager David Williams says that AXA is in the process of negotiating a deal, probably with Abbey Legal Protection, to increase its CLE business ten-fold.

Its new CLE policy will be included in its packages and will cover contractual disputes and have a strong risk management focus.


Zurich is planning to launch a combined executive insurance package in the first quarter of 2003. This will be modular; policyholders will be able to pick from a range of covers including legal expenses, directors' and officers' (D&O) and EPL.

Distribution and marketing manager David Smith says the timing of the launch is very important: "We are not going to introduce it to a market that is still focused on liability rates. We will wait until the market is ready."

CLE: the facts and figures

Why is the commercial legal expenses sector set to soar? One of the key drivers of commercial legal expeses is tribunals. Companies need legal cover to cater for the increasing risk of tribunals and the resulting inflation of awards.

130,000 - the total number of tribunal cases in 2000/01

25% - the growth of employment tribunal applications in last year

60% - the growth in employment tribunal applications in the last three years

375% - the growth in employment tribunal applications between 1990/91 and 2000/01

£52,600 - the new cap on unfair dismissal cases (up from £12,000 in 1999)

50% - the increase in the business cost of tribunal cases between 1999 and 2001 (from £426m in 1999 to £633m in 2001).

64% - the percentage of tribunal applications coming from employees who had not tried to resolve the problem directly with their employer