The pros and cons of conditional fees and other ways of funding legal fees


The usual way to pay for legal fees in business and property cases is to pay using you own income and/or savings as civil Legal Aid is not available for most business and property disputes. In most (not all) such cases, the loser is ordered to pay the legal costs (or most of the legal costs) of the winner so you might get back what you have spent in the end but, on the other hand, if you lose and have to pay the other side's legal costs as well, that would be a double blow. Sometimes you have to take risks to enforce your rights but it is important, before commencing legal proceedings, to get the opinion of a barrister on the strength of you case and how much of a risk you would be taking.

Most people find that in most business and property disputes there is no realistic alternative to paying with their own money and taking a risk, but, before you decide to do that, you might want to investigate whether some other funding option, such as Legal Aid, might be available. If you do qualify for Legal Aid, or for some other scheme, don't assume that it will be good value but be prepared to ask (preferably in writing) how the scheme works. Legal Aid is a scheme subsidised by general taxation and it might therefore be assumed that it is good value but things are not always so straightforward. Someone who loses their case may be relieved to find that because they are Legally Aided they do not have to pay the other side's costs. Someone who wins their case completely may find that the other side is ordered to pay almost all of their costs so that the Legal Aid fund is paid back in full and that most of the contributions the winner has been paying to the Legal Aid fund are refunded. However someone who wins party, and does less well than an offer made by the other side, may find that not only do they not get their contributions back but that the Legal Aid fund is entitled to a large portion (or even all) of the damages awarded. In this last example, it might be thought that the litigant is, at least, no worse off for having used Legal Aid, but they could be. If you use Legal Aid then you have to use a solicitor as well as a barrister so the total legal costs may be more that if you had paid yourself and gone direct to a barrister. As long as someone else pays in the end that may not matter to you but if the fees end up being deducted from your damages you might be worse off having used Legal Aid. Every case is different but the important thing is to get facts and figures and ask searching questions before you decide how to fund a legal case. This article does not go into every aspect of what are often complicated schemes with pros and cons but is just designed to get you thinking about some of the questions you might want to ask of the provider of any scheme for funding legal fees.

Legal Aid

Legal Aid is a Ministry of Justice funded scheme which pays for a solicitor and barrister to represent you in a case. If you are accused of a serious crime you will qualify for criminal legal aid and criminal legal aid is also available if you are accused of a civil contempt of court (e.g. if it is alleged that you have disobeyed a civil injunction) because you are at risk of being sent to prison.

In other civil cases you might be able to obtain civil legal aid but the availability of civil legal aid has been progressively reduced since it was first introduced in 1949 and relatively few people now qualify. You can use this link as an initial check to see if you might qualify. An advantage of using Legal Aid, if you do qualify, is that it normally protects you from having to pay the other side's costs if you lose the case. However with Legal Aid you do have to make a contribution to your own legal costs. The amount of the contribution you have to make depends on your income and savings, so if you have a low income and few savings your monthly contribution may not be very large but it should also be appreciated that if you win the case and it results in you obtaining or keeping property (e.g. if someone is claiming half your property and you successfully resist that claim) the Legal Aid fund has first claim on the property acquired or preserved to pay off the difference between what you have contributed (and any costs the other side is ordered to pay) and the fees of your barrister and solicitor (which the Legal Aid fund has paid for you). If the property preserved is a house you live in then the Legal Aid fund will normally take a "charge" on the property so that although you don't have to sell it immediately, when you do decide to sell it the Legal Aid fund will be repaid what it is owed out of the proceeds.

So although an advantage of Legal Aid is that you do not have to pay fees up front which you cannot afford you might, in some circumstances, still end up paying the full amount in the end. If you use Legal Aid you have to have a solicitor as well as a barrister because the solicitor is responsible to the Legal Aid fund for administering the scheme (working out and taking contributions for example). In some types of case you need a solicitor anyway (whether you use Legal Aid or not) but if yours is the type of civil case for which a solicitor is not required (e.g. if you yourself can do the administrative work which a solicitor would otherwise do) then to have to engage a solicitor just because you are using Legal Aid increases the costs which you might eventually have to pay. Some people who qualify for Legal Aid actually decide not to use it but to pay a barrister "privately" (i.e. not through the Legal Aid scheme) instead because they calculate that it will be less expensive in the long run, but before deciding not to use Legal Aid, if you qualify, it is important to research the relative costs and think carefully about the pros and cons.

Conditional Fee Agreements

Put simply a conditional fee agreement (CFA) is an agreement between a lawyer and their client that the client will only have to pay the lawyer's fee if the client wins their case. Conditional fee agreements used to be illegal but the law was changed in the 1990s to allow conditional fees subject to certain rules. In 2013, after extensive consultation with the judiciary, the Judge's Council, headed by the Lord Chief Justice, published a Guide to Judicial Conduct which includes a caution (para. 3.18) against part-time judges, who are also practising lawyers, hearing cases where another lawyer they have some link to is representing one of the parties under a conditional fee agreement, since that might create the perception of bias given that the lawyer (or their firm) would stand to gain or lose a considerable sum of money depending on the judge's decision. It is not just that observers of such a situation might be concerned that a judge might deliberately favour one lawyer, but that the judge might be subconsciously influenced. Subconscious influence could go either way: the judge might be subconsciously influenced to decide so that the lawyer receives the conditional fee, or the judge, aware of the risk of subconscious bias, might over-compensate and so be subconsciously influenced in the other direction. Although not specifically mentioned in the Guide, logically the same caution would be appropriate where the lawyer was being paid by insurance since, as explained below, that often involves a CFA between lawyer and insurance company.

In 2016 the president of the Supreme Court, giving the Lord Slynn Memorial Lecture, expressed concern (para. 45) that CFAs might tempt lawyers to behave unethically by failing to give disinterested advice. It should also be mentioned that the traditional way solicitors charge - a rate per hour irrespective of the outcome of the case - might also be thought to potentially work against the client by rewarding inefficiency, but that is a general and obvious risk and arguably in a different category from the very specific temptations which can arise under CFAs.

In the publication A Handbook for Litigants in Person (2013) the authors, His Honour Judge Edward Bailey and other experienced civil judges, say (para 1.5).

Now that Conditional Fee Agreements (CFAs) are legal there are many solicitors willing to bring claims, and sometimes defend claims, on a ‘no win no fee’ basis. This is a sensitive area. It is a difficult subject for the authors of this handbook to comment upon. There are many excellent solicitors who will provide a good service under a CFA. There are also, unfortunately, accounts of solicitors who fall short of a high standard, and who seek to impose too high a success mark-up or who compromise a claim too readily in order to secure a fee...

The Pros of Conditional Fee Agreements

The most obvious advantage for the client is that in the event that the case is lost, they will not have to pay their lawyer the conditional fee (though, depending on the agreement, there may be other fees such as court fees fees which they still have to pay). If the case is won then although the client has to pay the conditional fee the court normally orders their opponent to reimburse them for the court fee and for at least part of the conditional fee. Sometimes the conditional fee agreement provides that if the conditional fee is not recovered in full from the opponent then the client does not have to pay the difference.

The Cons of Conditional Fee Agreements

Under-recovery of costs

A lawyer will only offer a conditional fee agreement if the agreed fee rate, together with their estimate of the chances of success, makes it worthwhile. This normally means that the fee has to be such that in the event of a win only part of the fee will be recovered from the other side and the balance of the fee effectively comes out of the damages (compensation) which the client receives. The court will only order the other side to pay normal and reasonable fees but the lawyer will probably have charged a higher-than-normal fee to reflect the risk of not being paid at all if the case is lost: the difference between the fee charged and the fee recovered comes out of damages.

Barristers instructed direct do not normally do CFAs

Conditional fee agreements are not normally available if the client engages a barrister direct. The reason for this is that, when a barrister is engaged direct, the barrister carries out a series of individual pieces of work as the case proceeds and much administrative work is done by the client themselves with the client only asking the barrister for advice about this administrative work as and when necessary. Much depends on how efficient the client is - e.g. in ensuring deadlines are met - so it is difficult for a barrister to agree to accept the risk of not being paid when it is not only the strength of the case itself but also the efficiency of the client, which will affect the outcome. So if there is to be a conditional fee agreement this means that in practice a solicitor will need to be engaged to manage the litigation and ensure all deadlines are met. Many cases require a solicitor in any event but if the case is one in which a barrister could have been engaged direct and it is purely the fact of the CFA which means that a solicitor is required, that means that the CFA has increased costs and therefore increased the unrecoverable element of costs which effectively comes out of the damages (compensation) recovered.

How CFAs can lead to conflict

It might be thought that what is good for the client will always be good for the solicitor. The solicitor is only paid if the client wins and it might be thought, therefore, that the solicitor perhaps has an incentive to exercise extra skill and care (over and above the ordinary competence which every client is entitled to expect in a non-CFA case) so as to increase the likelihood of a win and the solicitor being paid. But once it is accepted that the likelihood of winning and being paid may positively influence the quality of the service provided it must follow that if the likelihood of winning (in the perception of the solicitor) is reduced, there is at least a theoretical possibility that the reverse might be the case. Sometimes, part way through a case, it becomes apparent that the chances of success are not as high as first thought and then the temptation may be to concentrate on other cases which have a better chance of being won and only do the bare minimum for the case whose likelihood of success is perceived to have diminished.

Many cases do not go all the way to a trial but are settled by agreement between the parties. For example if the client is claiming £100,000 the other side might offer £90,000. The offer will invariably include an offer to pay the client's costs. If someone wins in court the court will normally order the loser to pay the winner's costs. That will not necessarily be 100% of costs because the particular type of case may be subject to fixed recoverable costs where the court rules specify the amount to be allowed. To the extent that costs are not fixed by the rules the court will (unless the parties can agree on the proper figure for costs) "assess" those costs and only order reimbursement of a reasonable and proportionate amount. If an offer is made of, say £90,000 plus costs, the parties could settle on the basis that the court will still determine the amount of costs to be paid but usually it makes sense for the parties to actually agree the amount of costs to be paid at the same time as the amount of damages are agreed so that their settlement agreement covers everything. If the CFA contains a clause limiting the amount of fees which the client has to pay to their solicitor to the amount recovered from the other side, it will undoubtedly also contain a clause giving the solicitor a veto on any settlement under which the costs paid are not acceptable to the solicitor. Say a party offers to settle for £90,000 plus £30,000 costs. If the amount of costs claimed is actually £32,000 then the solicitor may think this a reasonable settlement, and the client may think that an offer of £90,000 against the £100,000 claimed is reasonable. But suppose costs claimed are £50,000. In this case the client may well want to accept the offer but the solicitor may well not if the CFA agreement is of a type where the solicitor bears the risk of unrecovered costs. Or suppose the offer is £60,000 damages (as against £100,000 claimed) plus £45,000 costs (as against £50,000 claimed). In this case the solicitor may want to accept but the client may not.

The Defendant may offer a single figure - e.g. £130,000 inclusive of costs. This can cause great difficulty in a CFA case if the agreement is one where the client is only liable for the conditional fee to the extent that the client is reimbursed by the other side. Of the £130,000, how much is reimbursement of costs and how much is damages? It boils down to a question of how the client and solicitor agree to split the money offered and the potential for dispute between client and solicitor in such a situation is obvious.

Payment of the other side's costs if you lose, and ATE insurance

If you lose you will normally be ordered to pay the other side's costs, whether there is a CFA or not. It is sometimes possible to obtain insurance - called "after the event" (ATE) insurance - against this risk but, even if ATE insurance is obtainable, the premium is likely to be high and the premium is not normally a cost which can be recovered from the other side if you win.

Before 2013 the premium for an ATE policy was included in the costs recovered from the other side in the case of a win and it was possible to obtain "self-financing" ATE insurance where the premium itself was not payable unless there was a win. The fact that ATE premiums are no longer recoverable has reduced the attractiveness of CFAs (because they are no longer cost/risk-free for the client) and today CFAs are in practice mainly confined to two types of case (a) personal injury cases and (b) Employment Tribunal cases, and (c) in theory cases funded by "Before the Event" (BTE) insurance, though this is controversial.

CFAs in personal injury cases

A special rule (called "one-way costs shifting") applies in personal injury claims. A personal injury claim is where you are claiming for bodily injury (or sometimes mental injury but there are restrictions on what counts as a mental "injury"). In personal injury claims the claimant does not normally have to pay the other side's costs even if they lose (there are some exceptional circumstances in which the claimant might be ordered to pay the other side's costs but most solicitors will offer ATE insurance, at moderate cost, to cover that specific relatively small risk). However the defendant normally does have to pay the claimant's costs if the claimant wins. This means that in personal injury cases a CFA can effectively be an almost risk-free way for claimants to litigate - I say almost because, depending on the agreement, you might still have to bear the cost of court fees and experts fees if you lose (and there are, of course, exceptions to the general principle if the claim not only fails but is considered to be exaggerated or otherwise dishonest).

CFAs in Employment Tribunal cases

It most Employment Tribunal claims there is no cost shifting so there is no risk (or very little risk) of the employee bringing the claim being ordered to pay costs. On the other hand if the employee wins there will be no order that the employer pays the employee's costs, so if the employee has a CFA with their solicitors the fees payable to the solicitors on a win will have to come out of the compensation awarded to the employee. For this reason it is generally only where the type of employment claim is relatively simple and/or the compensation likely to be awarded is relatively high that CFAs in employment cases will be viable.

CFAs where there is BTE insurance

"Before the event" (BTE) insurance is a type of legal expenses insurance which gets it name from the fact that it is taken out before any specific legal dispute is in prospect (unlike ATE insurance - see above - which is taken out for a specific known legal claim). If you have BTE insurance in theory this means that you have protection against being ordered to pay the other side's costs if you lose so in theory this should make a CFA viable in many more types of case. But the practice can be very different. Usually the insurance company insists that you use a firm of solicitors on their panel who will do the case on a CFA basis but despite it being on a CFA basis (with no risk of the insurance company having to pay your solicitors' fees) the insurance company counts the "value" of the services provided to you under the CFA towards the limit of cover, so the amount of cover you have against being ordered to pay the other side's costs diminishes as the case proceeds and may well turn out to be insufficient. The potential pitfalls of BTE insurance are explained further below.

Legal Expenses Insurance

Many people have legal expenses insurance (not to be confused with indemnity insurance) which is often included in a house insurance policy, for example. As mentioned above this type of insurance is sometimes called "before the event" (BTE) insurance because it is taken out before any specific legal dispute is in prospect. You would expect the premium for BTE insurance to be a lot less than the premium for ATE insurance because when ATE insurance is taken out a legal claim is highly likely and the risk covered is the risk of losing and being ordered to pay costs. When BTE insurance is taken out, however, no specific legal claim is in prospect so there is much less of a risk of the insurance company having to pay out during the period (usually a year) of insurance. But, even after taking account of this, the premiums charged for BTE insurance are very low - perhaps £15, for cover up to £50,000. This sounds too good to be true and, basically, it is: what is not always realised is that if you claim on your policy what usually happens is that the insurance company, instead of paying a solicitor to represent you, will simply arrange for a firm of solicitors on the insurance company's panel to do the case on a CFA basis. This raises many of the problems referred to above but, in addition, there can be further perverse incentives, caused by the relationship between panel solicitors and insurers, as explained below.

Panel Solicitors

In recent decades insurance companies have sought to get involved in the provision of services where there is a claim. In times past if a car needed to be repaired after an accident the policyholder took it to a local garage of their choice and the insurance company just paid the bill. But more recently insurance companies have established networks of preferred repairers with whom they have struck up advantageous deals. One of the factors giving insurance companies leverage is the closure of many small garages and the presence of new larger entrants in the market. A small local garage generally does not need to advertise and has a constant supply of work from the local area. A large new entrant needs to generate new business quickly. It can do that at a cost by branding, extensive advertising, and using more expensive premises in the retail parts of towns, but if it comes to an agreement with an insurance company it is immediately assured of a constant flow of work without having to invest heavily in such means of generating business. Consequently the insurance company can strike a bargain which takes into account the value to the repairer of its ability to provide a steady stream of work, thus reducing the cost to the insurer of insurance claims.

Not dissimilar factors are at work in the market for legal services. Over the last two decades there has been a trend away from solicitor's firms which had remained at a fairly stable size and saw themselves primarily as practising law, to firms who see themselves as expanding businesses in the legal services market. The Legal Services Act 2007, introduced in Parliament by the Blair government and passed in the first few months of the Brown administration, was symbolic of this change because it introduced, for the first time, the possibility of non-lawyers owning law firms, but the change in outlook was already underway. Partners in many a large city firm often felt more like managers of a business than practising lawyers. Along with this increased commercialisation there has been an increase in the number and size of firms which seek to rely for work mainly on deals made with insurance companies.

The great benefit for solicitors firms who make agreements with insurance companies and are accepted onto an insurance company's "panel" is that they are assured of a steady flow of cases without them having to spend money on advertising or other forms of marketing (such as having expensive offices on the high street). In return for being on the panel the panel solicitors have to agree to take - on a CFA basis - every case referred to them which has chances of success of at least 50%. This is because the insurance policy will state that cover is provided, in defined areas of law, if there is at least a 50% chance of success. Ideally solicitors firms would rather not take on CFA cases unless they have a much higher chance of winning and there may be a temptation to assess cases where the likelihood of success is less than 80% unduly pessimistically at just below 50% so that the firm has a reason for not taking them on as insurance funded. That gives them an opportunity, of course, to suggest that you might like to pay "privately" for their services in some related matter.

Effectively what happens is that panel solicitors "cherry pick". They take on cases which have very good prospects of success (many of which they would probably have been willing to take on a CFA basis anyway even if you had not been referred to them by making a claim on your BTE insurance) and find reasons to turn down the rest. If you don't accept their first refusal and argue about it they may eventually take the case on but then it is not necessarily plain sailing thereafter because the nature of CFAs can tempt solicitors not always to act in your best interests and, in addition, the relationship between the panel solicitors and the insurers can further complicate matters.

The supposed advantage of BTE insurance is that you have insurance protection against being ordered to pay the other side's costs if you lose the case but it has to be borne in mind that the limit of cover is an overall limit which includes the supposed "value" of the legal services being provided by the panel solicitors under the CFA. If the limit of cover is, as it often is, £50,000, and the "value" of the services provided by the panel solicitors so far is £10,000, then the amount left to cover you against being ordered to pay the other side's costs is £40,000. When the "value" of services provided has reached £30,000 then only £20,000 is left to cover you against adverse costs orders, and once the value of services provided gets to £50,000 there is no cover against adverse costs orders. The principle can be illustrated by the following examples:-

1. Panel solicitors provide £49,500 worth of legal services under a CFA and the case is won - likely result: court orders the other side to pay costs so the panel solicitors receive £49,500. Insurance company pays out nil.

2. Panel solicitors provide £49,500 worth of legal services under a CFA and case is lost - likely result: court orders the policyholder to pay other side's costs (let's assume they are £55,000) so the panel solicitors receive nil, insurance company pays out £500, and policyholder must pay £54,500 from their own pocket.

3. Panel solicitors provide £24,500 worth of legal service under a CFA and the case is won - likely result: court orders the other side to pay costs so the panel solicitors receive £24,500. Insurance company pays out nil.

4. Panel solicitors provide £24,500 worth of legal services under a CFA and case is lost - likely result: court orders the policyholder to pay other side's costs (let's assume they are £25,000) so the panel solicitors receive nil, insurance company pays out £25,000, and policyholder does not have to pay anything.

The insurance company decides whether or not a firm of solicitors remains on its panel and so solicitors' firm are keen to keep insurers happy. Apart from receiving premiums, what makes insurance companies happy is not having to pay out too much in claims. For most insurance claims, if the claim is accepted then the insurer will be paying out real money. For example if a claim for flood damage is accepted then the cost of repair/redecoration is paid by the insurance company. Legal expenses insurance is different in that even if a claim is accepted that doesn't necessarily mean that the insurance company will pay out real money and the panel solicitors have an incentive to ensure, so far as possible, that the insurance company does not have to pay very much if anything in real money.

Panel solicitors seeking to keep insurers happy want to avoid (4) above. Outcome (2) is worst from the client's point of view but is fine from the insurance company's point of view. Outcomes (1) and (3) are the best from everyone's point of view but if (1) or (3) cannot be achieved solicitors seeking to keep insurers happy may prefer (2) rather than (4).

The desire to please the insurers can mean that panel solicitors are tempted to press on with a case when it is in the client's interests to discontinue. For example if developments in the case mean that part way through the case the chances of success become less than previously thought, an offer of settlement may be advisable but if a settlement cannot be agreed it may be in the client's interest to discontinue the case - effectively outcome (4). But to please the insurers the panel solicitors may press on with the case so that (4) is avoided and (2) - good for the insurers but not for the client - becomes the most likely outcome.

Of course outcome (2) is not ideal for the panel solicitors because it means that they would have provided about £25,000 worth of additional legal services for nothing, but providing services "worth" £25,000 is a slightly artificial concept based on the charge-out rate of the fee-earners concerned, rather than their cost to the firm which is probably rather less than half their charge-out rate. The true cost may be, say £10,000, and the panel solicitors may prefer to risk losing a further £10,000 than incur the wrath of the insurers if the insurers are forced to pay out £25,000.

In order to get across the general idea I have referred, in the paragraph above, to the "wrath" of insurers forced to pay out £25,000, but in reality the exact relationship between individual panel solicitors and individual insurers is opaque. The contract between them is not publicly available and in any event there may be understood behaviours which are in addition to the words of the contract itself. It might be, for example, that, under the contact between the particular panel solicitors and the particular insurance company, that the panel solicitors actually agree to themselves discharge the insurers' liability to indemnify the policyholder by paying out to the other side the other side's costs when a case is lost. Or it may be that there is no contractual duty to do that but that it is in practice done so as to keep the insurers happy. Or it might be that when the contract between panel solicitors and insurers comes up for renewal that the insurers look at the total amount they have been forced to pay out because of cases lost by the panel solicitors and in effect, in the negotiations, they increase the sum of money, which the panel solicitors are required to pay to remain on the panel, by that amount. But, whatever the exact arrangements, the panel solicitors know that if a case is lost then the amount which has to be paid out (by or in the name of the insurance company) will ultimately be a loss to the panel solicitors either immediately or because of the effect it has on the payments they will have to make upon renewal to remain on the panel.

So, one way or another, any money which the insurers are obliged to pay out, enters into the calculation of loss for the panel solicitors. To illustrate the conflicts which this causes let's assume that we are half way through a case which, if it goes all the way to trial, will have cost, in terms of the claimant's panel solicitors' legal fees £50,000 and will have caused the other side to incur legal fees of £55,000. That is what it will cost if it goes all the way to trial but, so far, the claimant's legal costs are £24,000 and the defendant's legal costs are £27,000. Lets assume the actual cost (what economists call "marginal cost") to the panel solicitors of providing £24,000 worth of legal services is £10,000 (the balance being profit and contribution to fixed overheads). We are half way through the case and developments (e.g. documents which have come to light by being disclosed by the other side) now mean that the likelihood of success is estimated at only 25%. The panel solicitors negotiate with the other side and offer to drop the case on the basis that each side bears its own costs but the other side will not agree so the choice is between formally discontinuing the case - which means that the policyholder will be liable to pay the other side's costs of £27,000, or continuing with the case which will mean that each side's costs will approximately double and the ultimate loser will have to pay the other side's costs. If the case is discontinued then the policyholder will be liable to pay £27,000 to the other side of which £1,000 will have to come out of the policyholder's own pocket and £26,000 which be paid by the insurers/panel solicitors (the policyholder has had £24,000 worth of legal services leaving £26,000 left within the policy limit of £50,000) so given that the chances of winning are estimated at only 25% and that if the case proceeds and the policyholder loses he will have to pay much more than £1,000 then (unless the potential damages to be awarded in the case is so huge that he policyholder wants to take a huge risk) the policyholder will be better off discontinuing.

But the panel solicitors' interests are different. If the case is discontinued then the cost to the panel solicitors is £26,000. If the case continues the outcome is bound to be better from the panel solicitor's /insurers point of view. If the case is won the panel solicitors will gain £50,000 after providing £26,000 "worth" of further legal services which actually cost the solicitors only, say, £11,000 to provide. And even if the case is lost that will only mean the solicitors have lost a further £11,000 which is still much better than losing £26,000. So there is a temptation for solicitors to not act in the client's best interest. The solicitors will not necessarily be consciously putting their own interests before their client. They may be influenced subconsciously so that they convince themselves that the chances of losing are not that bad and that it is in the client's interest, as well as their own, to proceed, their judgment being clouded by their own interest.

So, at the end of the day, the protection, which the legal expenses insurance policy is supposed to provide against the policyholder having to pay the other side's costs, may be largely illusory and, worse, the way the case is run may be distorted, to the policyholder's disadvantage, by the desire of panel solicitors to please insurers and/or the panel solicitors own direct financial interests. This is in addition to the conflicts which can arise under all CFAs as explained above.

Limited scope of cover

Legal expenses insurance often covers a number of areas of law such as contract disputes, bodily injury, property disputes, and employment disputes, which sounds a wide coverage but when the details of cover are looked at in more detail it becomes apparent that there are significant exclusions which may mean that only a relatively small proportion of disputes in the relevant area would be covered.

For example contract disputes about building work may be excluded if they are over £5,000. You might think that at least building disputes under £5,000 are covered but there is often a general limitation in the policy that where the cost of pursuing the case is likely to be more than the damages awarded, the insurers will only pay legal costs up to the value of the likely award, so that if you want to pursue such a case you have to agree to pay the solicitors the difference between total legal costs they charge and the amount of the award (which is the limit on what the insurers will pay). So if £4,900 is being claimed and likely legal costs of making a claim are, say, £10,000, that means that you have to be prepared to pay £5,100. But nearly all building disputes of less than £10,000 are allocated to what is called the Small Claim Track in which the winner is not normally awarded their legal costs. Nobody would pay £5,100 if the most they can get back is £4,900, so in practice, in such a situation, it would never be worthwhile claiming on the policy for building disputes.

In the case of property disputes the policy might cover nuisance and trespass but only where the policyholder has established legal ownership or right to the land which is the subject of the dispute. But if someone blocks your right of way (for example) nearly always the dispute is not about whether it is blocked but about whether you have a right of way over the area of land which has been blocked - i.e. the very matter which has been excluded from cover by the policy.

Cover for cases in tribunals where costs are not usually awarded

In some tribunals - for example cases in Employment Tribunals - the winner is not normally awarded costs and in these cases it is not appropriate for the BTE insurer to arrange for a CFA since that would not provide any mechanism for money to come in from the "outside" to pay the solicitors. In such cases usually the policy will only cover negotiating a settlement - e.g. under ACAS in Employment Tribunal cases - before issue of proceedings and not the issue of proceedings themselves. The insurers will typically pay a fixed sum to the panel solicitors - say £2,000 - for the whole pre-issue negotiations whether negotiations are simple or become protracted.

How can the insurer seek to justify paying only, say £2,000, when the policy limit is, say, £50,000? The theoretical justification is that the panel solicitors have agreed, in return for the £2,000 standard payment, to provide up to £50,000 worth of legal services negotiating a settlement. Of course it will never cost anything like that amount since only negotiations are involved and not the issue of proceedings.

It is a matter of judgement, when trying to negotiate a settlement, when and whether to give up trying to negotiate and proceed with a claim. If the legal expenses insurance only covers negotiations - not the issuing of a claim - then the solicitors will know that if negotiations are not successful you might decide to proceed with a claim and, if so, you might well instruct the same solicitors either on a "private" basis (i.e. paying out of your own pocket) or under a special type of "no win no fee" agreement where the fee is deducted from the award you receive. As the number of hours spent by the solicitors on negotiation increases without a good offer being received, there may come a time when there is a temptation for solicitors to declare that negotiations have got as far as they can so that the next step (if any offer made in not acceptable) is to issue proceedings. It may be that that is an objective judgment uninfluenced by funding considerations but there is at least the possibility that the solicitors might be subconsciously influenced by the thought that no extra payment is being received for each extra hour of work in the negotiation phase, and that the end of negotiations could mean the start of a claim under which the solicitors have at least a chance of being paid further.

The supposed freedom to choose solicitors

It can be seen from the above that some of the perverse incentives arise from the fact that the insurance company is not actually paying out real money (or not paying very much real money) to the panel solicitors but simply has an arrangement whereby panel solicitors will provide services "worth" up to the policy limit, at little or no cost to the insurance company, in return for which panel solicitors are guaranteed a steady flow of work with limited scrutiny of the quality or efficiency of the service provided to the policyholder (because the policyholder cannot take their custom elsewhere). It might help if the client were free to choose their own lawyers, who might not be so beholden to the insurance company, and not be limited to using the panel solicitors - indeed, regulation 6 of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 provides:

“6 (1) Where under a legal expenses insurance contract recourse is had to a lawyer (or other person having such qualifications as may be necessary) to defend, represent or serve the interests of the insured in any inquiry or proceedings, the insured shall be free to choose that lawyer (or other person)."

But, as Lord Justice Jackson pointed out in Review of Litigation Costs: Final Report (2013) - 8.1.3, regulation 6 is interpreted both by BTE insurers and the Financial Ombudsman Service as meaning that the insured has a right to choose his or her lawyer at the moment when proceedings are issued, but not earlier. Lord Justice Jackson goes on to say that by that stage it is not normally practicable for the claimant suddenly to switch lawyers.

The Civil Justice Council published a study on BTE Insurance in 2017 which concluded that, in this respect at least, nothing had changed since 2013.

Pros and Cons

With ordinary CFAs there is (as explained above) a risk of conflict between client and solicitor but if you read the CFA agreement carefully it is at least possible to be alert to these as the case proceeds. With BTE insurance, however, you cannot read the CFA (the CFA is between the panel solicitors and insurers and they will not normally let you see a copy) and there could be additional reasons for conflict outside the CFA itself. Because of the opaqueness it is difficult to assess whether using BTE insurance would be wise or not. It would be unfair to assume that everyone choosing to use their BTE insurance, and therefore a panel solicitor, will inevitably receive a poor service as some people receive a good service and win their case. But can you be sure what will happen in your case if you use BTE insurance? The risk that some solicitors might, in certain circumstances, succumb to the strong temptations inherent in a system which gives solicitors a financial incentive in the way the case is run and its outcome, is something to bear in mind.


The above explanation is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what funding options, and pros and cons, would apply in your own situation. For example I have referred to conditional fee agreements as "no win no fee" but a "no win low fee" agreement would also be a CFA. So please do not rely on the above: it is just an indication of possible sources of legal funding, possible pros and cons, and some of the questions you might want to ask of any potential funding provider.

This page was lasted updated in March 2021. Disclaimer