Brokers are realising the benefits of commercial legal expenses (CLE), but there is some confusion over the details. Steve McQuaid has some of the answers

What are the five main reasons why a business needs commercial legal expenses (CLE) cover?
1. Litigiousness - litigation is becoming increasingly common.

2. Resource - many companies just don't have the resources to understand and deal with the increased litigation in-house.

3. Legislation - the frequent introduction and continuous amendments to employment and taxation legislation creates additional complexity for businesses, for example, the Disability Discrimination Act and the imminent introduction of the Age Discrimination Act.

4. Bureaucracy - increasing legal and regulatory issues mean that businesses can get bogged down when dealing with disputes and may be tempted to take 'short cuts' if not properly advised.

5. Legal costs - using employment contract as an example, tribunal proceeding terms state that winning a case at tribunal does not mean that the employer escapes incurring legal costs, as these are not usually recoverable from the losing side.

What are clients exposing themselves to by not having the cover?
CLE cover is not a panacea in respect of every unwanted or unforeseen business cost. However, companies who do not have commercial legal expenses cover are exposing themselves to several different risks. These include:

  • Increased legal costs - every company has an exposure to legal fees incurred as part of the 'running costs' associated with the world of commerce. Although CLE insurance cannot provide a complete solution to the problem of business litigation, it can go some way to providing assurance that unforeseen events will have less chance of proving catastrophic to a business.
  • Uncertainty - every business needs to know that it can predict its costs with some degree of certainty. However efficient a business is, it is nearly impossible to forecast all eventualities, and in turn the potential costs these eventualities could bring.
  • Although CLE cover cannot totally mitigate this exposure, it can provide an invaluable 'balance sheet protection' that is needed when forecasting future cost associated with running a business. This is due to the fact that it is impractical to set aside funds for every eventuality that may arise.

    CLE provides a safety net in respect of these unmitigated exposures, which in turn provides a level of confidence that can enable a business to accurately plan its business year.

  • Productivity - time spent dealing with these matters is time not spent maximising the potential of the business.

  • Complexity - professional litigation is a complicated business and for the majority of businesses would prove to be a minefield. CLE products will normally provide access to a legally qualified resource to aid with understanding and addressing these issues.
  • CLE insurance has a poor reputation due to claims being repudiated, especially in relation to employment disputes. How can this be improved?

    The high repudiation rate for commercial employment claims is probably down to the fact that employers who are subject to a claim have not followed the correct procedures - either as required by legislation and/or by the insurers terms, conditions and exclusions.

    Employers must fully recognise the importance of compliance with employment legislation as well as the consequences of non-compliance.

    Most policies will have a condition written in to them stating that the employer must have issued all necessary documentation to an employee as required by legislation - a contract of employment, for example.

    Employment tribunals will usually find in the favour of the employee in instances where the employer has not followed the legally required course of action. Insurers may also make it a condition of the policy that the employer must follow all advice provided by them once a claim has been initiated; in this instance, the insurer is attempting to ensure that any claim retains good prospects of success.

    From the employer's perspective, although satisfying these conditions does not guarantee a successfully defended claim, it does mean that they will be less likely to suffer a failure due to procedural or administrative factors.

    What impact is employment legislation having on SME business?
    Most SMEs simply do not have the resources to keep up with the increase in employment legislation being introduced both by parliament and the EU without assistance of some kind. Changes to legislation, such as discrimination, workers pay rights and working hours, mean that the SME faces an increased burden - both operationally and financially in regard to employment issues.

    Increasingly, to ensure that they are as up to date as possible with any new legislation, SMEs depend on the advice and services offered by employment and health and safety specialists when developing and implementing employment policies and procedures. Protective insurance cover is also proving more and more popular.

    Will the policy provide legislative advice that they would otherwise incur costs for through their own solicitor?
    Absolutely. Although a client may have the retained services of a solicitor this can often cost thousands of pounds per year. Although there is an insurance premium to be paid in respect of CLE, there is still a great difference to a solicitor's retainer fee. A client could spend £500 on the cover for the year, or face up to £5,000 legal expenses per case (the equivalent of £300 per hour).

    Most CLE products include access to a legal advice line; this is usually provided as part of the policy cover, and advice can be given on any business related legal matter. Customers can use this service without penalty as many times as is required and the CLE premium should not be affected.

    When should an incident be reported - for instance, an unfair dismissal claim?
    This depends on the type of claim. For most heads of cover, the time to report a possible claim is the time that the policyholder first becomes aware of any event, cause or circumstance that may give rise to a claim.

    However, employment claims are slightly different; it is usually a condition of the employment cover provided under commercial legal expense policies that the policyholder must follow with due diligence the advice provided by the insurer's legal advice line in every stage of an employment dispute.

    This effectively means that a possible employment claim is reported immediately - even if no Employment Tribunal 1 (ET1) form is received by the policyholder. This is due to the fact that commercial employment cover usually provides for negotiated settlements. The insurer needs to be fully aware of all of the circumstances surrounding an event of this type.

    The event usually only becomes a claim when the policyholder first receives an ET1 form from the claimant. If the policyholder receives an ET1 but has not accepted or followed the advice given by the insurer's legal advice line the claim may be repudiated.

    Contract disputes cover seems too restricted. As it only covers disputes in relation to contracts negotiated after the policy was taken out, what about protecting businesses for contracts before CLE cover was arranged?
    This restriction is in place to protect the insurer from claims where there may have been a pre-existing problem with a contract and insurance has been taken out solely for the purpose of initiating a claim.

    It is worth pointing out however that not all commercial legal expenses policies have such a restriction in place - using ACLP's Commercial Plus policy as an example, the only restriction in respect of timelines is that the policy excludes contract claims in respect of disputes that arise within the first three months of the first period of insurance.

    This is designed to prevent a company from taking out cover and claiming against the policy for an event they knew about prior to the inception of the policy.

    It must also be pointed out that this exclusion will often not apply if the policyholder had an equivalent uninterrupted commercial legal expenses cover for contract disputes in effect prior to the inception of the policy. IT

    ' Steve McQuaid is an underwriter for Allianz Cornhill Legal Protection

    Thanks to Lampier Insurance Brokers, Bristol, and all other brokers who submitted questions