December 2019


Legal expenses cover expands access to justice?

by Resolve Editor, Kate Tilley

Legal expenses insurance could be a way to increase access to justice, Justice Rebecca Ellis told the NZILA conference.

Justice Ellis, who sits on New Zealand’s High Court, said self-represented litigants were in the courts every week. Some were vexatious or distrusted lawyers but, for the majority, cost was the driver. While judges were supposed to be impartial, at times they had to intervene to assist self-represented litigants.

Justice Ellis said the increase in self-representation was “the canary in the access to justice coal mine”. While self-represented litigants had the “courage, tenacity and sheer bloody-mindedness” to take their own cases to court, many others did not and so were unable to access the justice system.

Legal Aid had a low threshold, so a huge proportion of the population did not qualify.

Justice Ellis said she was not advocating legal expenses insurance (LEI) and it was no panacea for Legal Aid’s deficiencies, but it was “a complementary measure for those whose taxes pay for Legal Aid but have no access to it”.

Some insurers offered stand-alone policies to cover expenses incurred in defending civil litigation. However, she knew of only one NZ example of a pursuit LEI policy –  one that covered a policyholder to initiate civil proceedings against someone else – and it was offered on a limited basis.

Three of seven countries ahead of NZ in a 2019 World Justice Project survey that ranked countries’ according to perceptions of the rule of law – Sweden, Germany and the Netherlands – had some form of LEI.      

Internationally, LEI was not a new concept. Justice Ellis said it was first introduced in France in 1905 and became available in Germany in 1928, but was not introduced to the UK until 1974.

The German LEI market was significant. In 2003, a German academic recorded that 42% of households had LEI. German insurers issued about 25 million policies a year and earned about €2.8 billion in premiums.

About 50 insurers offered LEI in Germany and policies funded 3.6 million cases a year at an average of €540 a case. LEI provided more than €1.5 billion in lawyers’ fees annually, ie 25% of all fees earned by lawyers nationwide.

By contrast with countries like the UK, the German market was dominated by stand-alone LEI policies. 

Justice Ellis said there were contextual issues in Germany:

• Legal Aid expenditure was low and granted subject to stringent means tests. About 80% of Legal Aid was spent on family law, which was not covered by LEI.
• Speculative funding or output-based remuneration fees were prohibited so, were it not for LEI, the prohibition would potentially be significant in access to justice terms, particularly for tort litigation.
• The Legal Profession Act required lawyers to charge minimum fees for their services, so true pro bono work was not only unexpected but not permitted.
• German lawyers enjoyed a monopoly on legal work, a monopoly not limited to court work, where self-representation was not permitted.

“So, for the German population, it is not possibly to obtain low or no-cost legal advice by non-lawyers. LEI therefore becomes virtually essential in access to justice terms,” Justice Ellis said.

However, despite the relative popularity and affordability of LEI in Germany, the uptake of private LEI was largely consistent with and reflective of income distribution.

“For that reason alone, private LEI cannot be thought of as a potential substitute for Legal Aid,” she said.

“There are also issues of adverse selection. Those who pose a high risk of needing legal services disproportionately seek and obtain cover, and moral hazard. Once an insured has cover, it may give them an incentive to engage in vexatious or speculative litigation.”

Several German judges had observed that LEI policyholders tended to go to court with weaker cases than those without cover.

The statistics showed an increase in litigation over the last few years but access to civil justice could not be made more readily available without expecting more cases. LEI was advantageous in terms of consulting lawyers early and quicker claim resolution. 

“In NZ, the conditions for widespread or significant adoption of private LEI do not exist – or not yet anyway,” Justice Ellis said.

“Commentators have observed that in any country, a significant increase in the uptake of private LEI is unlikely to occur without state intervention. On the supply side, intervention may be required to ensure a sizable, well-diversified risk forum.

“On the demand side, the need for state intervention may arise because of consumer resistance due to an inability of most people to accept the reality of the risk and the size of it. There are also issues of complexity and cost.”

Justice Ellis said her aim was to consider the challenges faced about access to justice.

“Most require thought, imagination and a real and concrete commitment to the rule of law which is more important now than it ever has been in my lifetime,” she said.

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Resolve is the official publication of the Australian Insurance Law Association and
the New Zealand Insurance Law Association.