Legal Insurance Research Paper

(a) securing compensation for the loss, damage or injury suffered by the insured person, by settlement out of court or through civil or criminal proceedings,

(b) defending or representing the insured person in civil, criminal, administrative or other proceedings or in respect of any claim made against him.’

The expressions Prepaid Legal Service and Group Legal Plan, which are used in the USA, illustrate the particular economic context and judicial functions of the service in this country. In Asian and African countries, legal insurance is practically unknown.

2. Development And Actual Situation

Although the origins of legal insurance can be found in the nineteenth century, it grew into an economically and politically relevant insurance branch in Western Europe only after World War II, albeit with regional differences. In Great Britain, for example, until 1967 it was forbidden and punishable to financially support another party in litigation if one had no personal interest in the outcome of the trial (‘champerty’). Thus, the first legal insurance policy entered the British market as late as 1974. The spread of legal insurance has since been hindered by the high costs of litigation in Great Britain and the resulting low tendency of the general population to go to court (Prais 1995, p. 433). The French have also shown little interest in legal insurance policies. Legal insurance has, in contrast, achieved its greatest importance in German-speaking countries. In 1989 average per capita spending on legal insurance was 23.5 ECU in Germany, 10.8 ECU in Switzerland, and 17.4 ECU in Austria. Other countries follow at some distance. Average spending in Belgium was 8.9 ECU, in the Netherlands 5.3 ECU, in France 1.7 ECU, and in Great Britain a mere 1.1 ECU per capita (Blankenburg 1994, p. 295). Since 1989 this branch of insurance has expanded rapidly in all above-mentioned countries, although at different rates. In 1997 the total revenues from legal insurance amounted in Germany to 2.44 billion ECU, or an average 28.4 ECU spent per capita. Swiss revenues reached a level of 17.16 ECU, Austria 30.6 ECU, Belgium 18.9 ECU, the Netherlands 11.9 ECU, and France 5.8 ECU (Comite Europeen des Assurances 1999). Over 50 percent of all German households are covered by at least one legal insurance policy.

Several factors are responsible for the different development of legal insurance coverage in European countries. Most important is the difference in national systems of calculating legal counseling and court costs, in particular because contingency fees for lawyers are illegal in many countries. In calculating the risks of this type of insurance, the insurance company must be able to estimate the future costs of counsel and litigation. The German method of calculating legal counseling fees for both parties according to the sum in dispute (including legal counseling, paid by the party that loses the case), facilitates these estimates.

3. Types Of Insurance

Insurance for motoring and traffic accidents has been the main factor behind the expansion. The second important field for legal insurance is family insurance, which covers claims arising out of the private sphere of the insured party, his or her spouse, and underaged children. The most common insurance package includes protection from claims arising out of diverse types of contracts, social insurance, and defense in criminal and misdemeanor cases. It is often combined with automobile and traffic insurance. Generally excluded are counseling for legal matters concerning divorce and inheritance, as well as for the stipulation of contract such as real estate purchases and testaments, since the latter are deliberately chosen legal interactions. In this sense, the insurers remain true to the concept of insurance as protection from unattended and unforeseeable risks.

A third field of legal insurance offers commercial legal protection, a policy for businesses and professionals. The coverage includes labor litigation for the employer on the one side, defense in misdemeanor cases and criminal procedures on the other. Some cover taxation matters as well. Generally, coverage also includes insurance for the company’s motorized vehicles.

Legal insurance for real estate matters or for commercial leasing are often offered as special policies. A further policy insures farmers.

Legal insurance policies are offered both by specialized companies and by normal insurance companies, for which it is only one, often minor, business area. In some countries, legal counseling is offered by employees of the insurance company, who may not necessarily have legal training; in others the insured party is given complete freedom in the choice of attorney. In Germany, legal counseling by a lawyer is mandatory. Insurance companies allow free choice of attorney, but may offer recommendations. The EU directive 87/344/EWG has brought a certain degree of standardization to Europe, regulating conflicts between insured and insurer and protecting freedom in the choice of legal counsel.

4. The Situation In The United States

The American prepaid legal ser ices began as a service offered by trade unions and professional groups to their members. These organizations employ attorneys, who advise members not only on labor law, but on all types of legal matters, and represent them in court. This service was suppressed in several states until the US Supreme Court ruled in 1971 that the fundamental constitutional right of ‘meaningful access to the courts’ would be denied ‘if courts could deny associations of workers or others the means of enabling their members to meet the cost of legal representation’ (US Transportations Union vs. State Bar of Michigan, 401 US 576 (1971), 585).

The steady development of welfare policies then led to a liberalization of laws regarding legal counsel. Labor unions, employers’ associations, and the American Bar Association agreed that legal protection can legally be the subject of a wage settlement. Since this agreement, many funds have been established and financed by workers, unions, and employers. These funds are favorably taxed for nonprofit-organizations, which usually do not cooperate with commercial insurance companies (Pfennigstorf and Schwartz 1986, p. 52). The most common type is the ‘group legal service plan,’ which covers workers in a particular branch and is financed substantially by the employers.

Through these legal service plans, workers and their families have gained access to legal counseling and, when necessary, to legal support in court. The services extend to all types of legal matters including consultations with and financing of counsel in private concerns (such as real-estate transactions, rental contract, divorce proceedings, and the writing of testaments). These funds thus cover legal counsel needs which are excluded from the European legal insurance policies.

The differences are due to the noncommercial character and socially motivated goals of the US programs. These intend to raise the awareness of legal rights, especially in a population with modest financial means, and to offer them the possibility of asserting these rights (Pfennigstorf and Schwartz 1986, p. 47). In order to control the costs and the quality of the rendered legal services, prepaid legal service plans offer counseling only through their own employees, who may be attorneys bound by exclusive contract but in many cases have little or no official legal training. Alternative dispute regulation (ADR) is one very important field of action for these plans.

With this background, commercial legal insurance has only developed slowly. A few insurance companies succeeded with special programs such as consultation by telephone or a limited number of hours of legal consultation (Pfennigstorf and Schwartz 1986). Since the premium must be relatively low to attract clients, legal insurance tends not to be a profitable commercial venture in the US.

5. Consequences And The Success Of Legal Insurance

The effects of the expansion of legal insurance have been considered primarily from two perspectives. For some, the growing number of covered persons is itself a success, since ideally everyone, including the financially weaker members of a population, should have access to legal counseling and protection. Others focus on the readiness to litigate, which is facilitated by legal insurance, and the growing burden placed on the courts.

This conflict forms the basis of many discussions of legal insurance in sociological literature and in the public arena, especially in Germany. While most agree that equal access to the courts is a fundamental right under the rule of law, there is also a consensus that unnecessary litigation should be avoided. Critics of legal insurance claim that insured parties will be more likely to use the courts to pursue their rights or presumed rights, since their own financial risks have been minimized, in order to profit from their insurance coverage and the paid premium. Attorneys are purported to recommend more often that a client go to court if that client is insured. This not only increases the growing numbers of lawsuits but also the financial opportunities for the legal professions.

Rational choice theorists argue that legal insurance results in a ‘torrent of lawsuits,’ ‘wasting a huge amount of resources,’ and thereby leads to an ‘inefficient allocation in civil law procedures’ (Adams 1981, p. 125, 1986). According to this analysis, legal insurance must necessarily lead to an increase in the number of lawsuits, since there is no force to counter this expansion. Attorneys have no economic interest in reducing the costs and numbers of lawsuits, since this directly affects their income. Insurance companies are also interested in an increase in lawsuits, since this expands their markets, providing, of course, that they can pass the increase in costs on to their policy holders. Courts, on the other hand, are obliged by law to accept and to decide on every claim and have therefore no means of controlling the number of cases. Meanwhile, the general population seems to react to the increasing complexity of social relationships and the legal system by looking to legal insurance policies as a form of protection against possible future lawsuits (Blankenburg 1994).

Empirical research has, in contrast, shown that legal insurance has caused only a mild increase in lawsuits in Germany (Blankenburg and Fiedler 1981, Jagodzinski et al. 1994). Insured plaintiffs litigate only 5–10 percent more often and more persistently than uninsured plaintiffs. In some fields of litigation, the difference is even smaller. Considerable differences of 10 percent to 27 percent between the two groups have been observed only in the contestation of traffic misdemeanors. In these particular cases, the insured tend to be less successful than the uninsured, since insured plaintiffs are more willing to go to court in less promising cases or to claim excessive sums which can not be awarded by the court (Jagodzinski et al. 1994, p. 141).

These empirical studies show that it is incorrect to assume that a ‘torrent of lawsuits’ have been caused by legal insurance. Legal insurance does not lead to a significant amount of abuse or negative developments. The research suggests that attorneys adequately differentiate between founded and unfounded claims before beginning litigation. Statistics show that when insured plaintiffs litigate more persistently than uninsured plaintiffs, they tend to achieve favorable verdicts (Jagodzinski et al. 1994, p. 143).

Legal insurance has had a definite financial effect on the legal profession, particularly in Germany, where 70 percent of the turnover goes to attorneys. Every attorney received an average of 44,000 DM from legal insurance in 1989. In other countries, it has proved to be far less important for the bar (Blankenburg 1994).

According to Blankenburg, different national regulations concerning legal counseling are the main reason for these discrepancies. While only lawyers are allowed to give legal advice in Germany, insurance companies in the Netherlands rely on the less expensive alternative of legal counseling through company employees. Attorneys are only consulted in complicated cases. The existing competition for clients between legal insurance and lawyers has led to a downward trend in legal counseling fees in this country, and has also resulted in lower premiums for the insurance policies. In Germany, legal insurance counseling and services quickly become unaffordable for the financially weak members of the population. For this reason, legal insurance has not replaced state financed legal aid programs (Blankenburg 1994, p. 296). This observation is also true for GB (Prais 1995, p. 444).

As these discussions show, the effects of legal insurance are varied. It is useful to protect clients’ rights but tends to become more and more expensive, since neither lawyers nor the insurance companies have an interest in limiting the costs of legal counseling. As long as there is no effective competition on the market, premiums will continually rise. In this respect, the US system of prepaid legal services is more economical, but it also closes the market for commercial legal insurance, thereby hindering competition. According to European experiences, such a system of legal counseling tends in the long run to increase costs, as long as there is no counteracting force.

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