In the final installment of our three-part feature, Ian Jerrum looks at provisions typical of UK commercial legal insurance policies and considers the role of risk management in today’s market

ommercial legal expenses insurance (LEI) policies typically provide cover for a range of legal defence costs and expenses, including those arising from disputes relating to tax, contractual and employment issues.

For scheme packages, the extent of cover is normally agreed between insurer and broker based on scheme member needs.

In cases of policies covering a single organisation, some of these allow the insured to specify the types of event to be covered. A company may, for example, be concerned about protecting a license to trade or pursuing bad debts. Such extensions to a standard range of cover normally require a slightly higher premium.

Policies are typically issued and renewed annually, with a limit of liability imposed against each insured event subject to a maximum indemnity limit for the period of insurance. Indemnity limits for SMEs generally range from £50,000 to £250,000. Those for larger companies range from around £500,000 to £10m.

Rates are calculated either by applying a rate to payroll or turnover (typical for companies with turnover under £10m), charging a fixed price, or charging a percentage of a total package premium (for example, 5-10%).

Most insurers impose a policy excess, typically starting at £250 to £500. Increasing the excess normally secures a reduced premium.

Commercial LEI policies can sometimes be extended to cover professional fees and ex-penses incurred in conducting investigations, witness attendance expenses, time comp-ensation and other compensation awards.

A standard UK policy restricts cover to legal actions arising in or pursued within the UK. For some contracts, and for cover relating to infringement of copyright and patents, a worldwide limit may be agreed, though some insurers impose the restriction that the action be brought in the UK.

Support services

Most insurers provide a support service to advise and inform clients on legal, tax and employment issues and correct procedure. These come in the form of law advice or risk management and are often delivered via a helpline or ‘lawphone’ .

Typically, the support gives access to a panel of qualified lawyers, tax experts, accountants, health & safety professionals, employment law specialists, and counsellors – all of whose services would otherwise cost companies significant sums.

Some insurers now offer risk management resources online, which can be helpful as they allow policyholders facing similar issues to exchange ideas through online forums.

A legal helpline offering expert advice 24/7 is increasingly central to commercial LEI provision, and is often cited by clients as the main reason for purchase or for selecting one insurer over another.

The current strong emphasis on risk management is based on the proven assumption that the way a dispute is handled can have a very significant influence on eventual costs and expenses.

Larger clients in particular are often encouraged to undergo a business health check when they take out a policy, which may be included in the purchase price. This can include an independent risk assessment and a review of working practices to seek out and address any vulnerabilities. It would also review employment documentation and health and safety policy statements.

Along with the initial policy documents, insurers have traditionally issued a comprehensive hard copy manual containing useful information on employment, health and safety, landlord and tenancy issues, tax, contractual matters and court procedures. This often provides checklists to assist with compliance and general corporate good housekeeping (information contained in the manual is now found on many insurers’ risk management websites).

Promoting LEI

Commercial LEI policies generally contain an exclusion stating that indemnity will not be provided if it is covered in another held policy such as directors’ and officers’ liability (D&O), professional indemnity (PI) or employers’ liability (EL).

Some insurers, facing losses on D&O policies, are looking to limit the cover these provide and are promoting LEI to fill the gaps. F or example, defending employment disputes and funding compensation awards could be seen as more appropriately the role of LEI than D&O.

Dovetailing D&O and LEI – or both along with PI – allows clients to access the important benefit of free legal and risk management advice. There is also talk of combining employment practices liability (EPL) with EL. This could give clients greater confidence that their liability under the wide and increasing range of employment exposures and legislation is fully covered.

Insurers, of course, would also benefit through reduced administration and streamlining.

Common exclusions:

• blanket war exclusion,

• claims within the first three months without evidence of continuous cover

• cover for contracts entered into outside the policy period or exceeding a stated minimum

• legal expenses incurred without written authorisation from the insurer

• proceedings outside territorial limits

• non-contentious matters other than debt recovery

• pre-existing disputes

• disputes resulting from intentional wrongdoing

• disputes within an insured company or group

• fines or penalties (other than employment awards and settlements)

• allegations of defamation or malicious falsehood

• pollution, seepage or contamination

• civil proceedings relating to death, bodily injury, disease or illness

• loss destruction or damage to property

breach of professional duty (except tax-related, where specifically covered).