Legal expense insurance helps fund the costs of typically expensive legal fees when you find yourself in a lawsuit. It ensures you don’t have to go into debt while facing legal action.
But there are two different types of this insurance. So, we’ll walk you through the differences and give you a general overview of legal expense insurance policies here.
What Is Legal Expense Insurance?
Legal expense insurance (otherwise known as LEI) is a product designed to cover you against legal costs in disputes. It gives you access to legal advice, ensures you are legally represented, and covers the cost of the legal fees.
The charges paid for under these policies vary (as we’ll discuss later), but they generally include pleadings, investigations, discovery, pre-trial mediation and arbitration, appeals, and settlement.
You can get legal expense insurance as an individual and as a business. It’s important to note that the policies cover plaintiffs and defendants in civil cases.
The Two Types of Legal Expense Insurance
There are two types of legal expense insurance to be aware of — before the event and after the event.
Before the Event (BTE) Insurance
Before the event insurance covers unexpected legal events that occur. In other words, you purchase it just in case something happens (like most types of insurance).
You can buy this type of legal expense insurance as a business or an individual. Generally speaking, the commercial BTE insurance buyers are small to medium companies that don’t have an in-house legal team.
As long as your BTE policy covers the case type, all expenses are paid, regardless of whether you’re pursuing or defending legal action. Typically, the fees covered are as follows:
- Court costs
- Your lawyer’s fees
- Disbursements
- Your opposition’s legal costs if the court orders you to pay them (called adverse costs)
After the Event (ATE) Insurance
As the name suggests, after the event insurance protects you in circumstances where a claim has already taken place. Essentially, it protects you if you lose the case.
If you lose, your after the event insurance policy pays the following:
- Adverse costs you’re ordered to pay by the court
- Disbursements your lawyer incurs in dealing with the action
If you win the case, you’ll usually gain damages and costs. When that occurs, the damages received pay for the disbursements.
What Does Legal Expense Insurance Cover?
Legal expense insurance policies cover lawyer costs, court fees, report fees, and expert witness fees for a variety of situations. Specifically, it offers the following protection:
- Statutory License Protection — In the event your business license is revoked, altered, suspended, or cancelled, you can obtain legal representation to rectify the situation.
- Tax Protection — If you wish to appeal a decision made by the Canada Revenue Agency or you’re audited, you can access legal advice through your policy.
- Bodily Injury — This part of the policy covers the legal fees involved if you decide to make a claim against a third party for causing bodily harm to you or an employee.
- Property Protection — You can get coverage for legal costs to go through legal action against a third party who damaged your property. It also covers trespass and nuisance.
- Employment Dispute — If an employee or a previous employee files a lawsuit against you, the employment dispute policy clause allows you to gain legal advice and defence.
- Auto Contract Disputes — With this part of the policy, you’re covered for legal fees associated with buying or selling your vehicle. It also includes the legal fees involved with disputing the amount due under an auto lease.
- Non-Auto Contract Disputes and Debt Recovery — If a supplier or a client breaches the contract or fails to pay you, this policy section covers all the legal fees.
- Access to Legal Helpline — With most legal expense insurance policies, you can receive legal assistance at any time via a phone call.
With that said, it’s worth noting that not all legal expense insurance covers are made the same. When you use our team at LiabilityCover, we’ll ensure we connect you with licensed brokers that have the coverage options you need.
A Deep Dive Into The Cases Covered by ATE Insurance
It probably comes as no shock that ATE insurance doesn’t cover as many case types as BTE insurance. In fact, the former is typically available solely for contingency cases where the lawyer has a vested interest in the proceedings. Why? Because the insurer is effectively underwriting the lawyer’s judgment. After all, lawyers don’t put the time into cases with a low chance of success.
The most common ATE insurance is for personal injury cases. However, some insurers make it very clear that medical malpractice is not included (despite the fact that some deem it as a form of personal injury). Experts suggest the reason for the exclusion is that the CMPA (Canadian Medical Practitioners Association) massively defends the members as otherwise, it risks the reputation of the hospital and doctor.
Other civil litigation cases covered under after the event insurance include:
- Class actions
- Complex, one-off commercial litigation cases
- Mass torts
Let’s Look at Claims Examples
To better understand legal expense insurance, take a look at these examples:
Example 1
You analysis a large financial company’s security system. They aren’t pleased with the outcome and do not pay your $25,000 payment.
Call the helpline and access an experienced lawyer to solve this through insurance. They recover $20,000, and your legal fees are covered.
Example 2
The Canadian Revenue Agency audits your axes and contests business expenses. You get a $33,000 tax bill.
You call the legal helpline, get a tax lawyer and appeal. You win, and you save the $10,000 fees.
What Doesn’t Legal Expense Insurance Cover?
Like any insurance policy, legal expense insurance plans vary from provider to provider and even policy to policy. But in general, there are several things it won’t help with, such as:
- Problems that started before you purchased the policy (applies to before the event insurance coverage)
- Claims where the probability of success (i.e., reasonable prospects) is estimated to be less than 51%
- Inquiries into the status of your insurance claim
- Draft letters
- Any case-specific research
- Legal or contractual document reviews
- Determination of insurance claims
- Any legal costs you pay prior to the acceptance of the claim
- Other policy-specific exclusions written inside the agreement
What Does “Reasonable Prospects” Mean?
We mentioned that legal expense insurance doesn’t cover “claims where the reasonable prospects of success are less than 51%.” So, let’s take a look at what that actually means.
The Canadian judicial system recognizes reasonable prospects as a concept. It’s used in legal expense insurance to figure out the validity of your claim from a legal point of view. Ultimately, it helps avoid unnecessary action.
No one benefits from pursuing a case where the chance of success is low to none. Your lawyer must agree that you’ll come out the other side of the claim successfully in civil cases.
However, the reasonable prospects can change as the case progresses. For instance, there could be zero reasonable prospects when the claim starts. But as evidence comes out, the probability of success increases and your cover resumes.
How Much Does Legal Expense Insurance Cost?
The average legal expense insurance costs roughly $200 per annum. During the application for the policy, you must answer questions about your business which ensures you get the coverage you need.
When insurers calculate the cost for your specific policy, they consider many factors, including the following:
- Your industry and the services you offer
- Your annual and forecasted revenue
- Any prior legal problems you were involved in
The type of legal expense insurance you take out also changes the price, as you’ll discover below.
The Cost of Before the Event Insurance
Legal fees are expensive and can increase fairly rapidly. Because of that, BTE insurance coverage limits usually start from $100,000 and cap at $200,000. Although, higher ranges exist.
The premium cost depends on whether you purchase the policy as a standalone deal or as part of a different policy and the coverage limit you choose. These days, insurers deem small businesses purchasing standalone policies as riskier. So, you should expect to pay between $1,000 and $1,200 for $200,000 worth of coverage.
The Cost of After the Event Insurance
After the event insurance works on the personal injury business model. The premium, therefore, is contingent on the success of the lawsuit.
There are two main things to know about ATE premiums:
- They are deferred until the action has concluded.
- They are only paid if you win the lawsuit.
If you lose the case, your insurer waives the premium payment and pays the adverse costs and disbursements if applicable. The rationale behind this is that you don’t pay any money upfront when you visit a personal injury lawyer. Not to mention they advertise that you only pay if you win, so you’re not expecting to part with any money until the end of the case.
Generally, you’ll pay up to a $2,000 premium for $100,000 of coverage. However, it’s not uncommon to find coverage worth up to hundreds of thousands for intricate cases like class-action suits.
Who Needs Legal Expense Insurance?
Legal expense insurance applies to everyone, from multinational enterprises to private people.
There aren’t many people who could monetarily survive a serious lawsuit. Even if you win the claim against you, there isn’t a guarantee stipulating the other party has to pay for your legal fees. If you lose the claim, you may be liable to pay both your legal fees as well as the other party’s fees.
Granted, private citizens aren’t as susceptible to lawsuits as businesses, regardless of their size. Larger corporations will almost always have enough money to protect themselves. However, the likelihood of smaller businesses suffering from insolvency during a lawsuit is quite high.
With all that in mind, if you run a small to medium business, legal expense insurance can help give you adequate representation and negate the worry of losing money throughout a case.
The Types of Businesses Requiring Legal Expense Insurance
The majority of businesses can benefit from taking out legal expense insurance, including the following:
- Sole proprietorships
- Small to medium business enterprises (SME)
- Associations
- Partnerships
- Corporations
- Institutions
- Clubs and groups like sports clubs
Why Choose LiabilityCover?
No matter who you are or what kind of business you run, legal fees are always a threat. Whether it’s civil suits, family law, or class action, legal processes and the charges that come with them are neither fast nor inexpensive. And you could potentially lose thousands upon thousands — money you may not have in the bank to begin with.
But fear not, our team of expert individuals can help connect you seamlessly to a legal expense insurance broker specializing in your industry. All you need to do is give us a call or fill in the simple application form on our site to get started.
We make it simple and wallet-friendly to find the perfect insurance policies for you and your business.
Frequently Asked Questions
Can You Buy a Standalone Legal Expense Policy?
Yes, it’s a separate policy that aids you in navigating legal issues. We recommend combining this insurance policy with the following:
- Errors and omissions insurance
- Directors and officers insurance
- Commercial general liability insurance
The four policies together should effectively and comprehensively provide legal support during a lawsuit.
Is Legal Expense Insurance a Legal Requirement in Canada?
No, you don’t need legal expense insurance to run your business in Canada. However, it can save you a tremendous amount of time and money in the long run by purchasing a policy.
What Happens If Your Legal Costs Exceed the Policy’s Indemnity Limit?
Your policy’s indemnity limit is the maximum dollar amount of legal fees that your insurer will cover for a single claim. Sometimes, it’s written as the maximum dollar amount for the annual policy timeframe.
If you incur any legal fees beyond the indemnity limit, you must stump up the cost. Your insurer should notify you if it appears that your legal costs may exceed the limit.
