Running a business today means navigating an increasingly complex legal landscape. Whether you’re employing staff, trading with suppliers or dealing with customers, legal issues can emerge unexpectedly – even when you’ve done everything right. This is where insurance can provide invaluable support. Legal Expenses Insurance (LEI) is designed to help businesses manage and fund the legal costs associated with defending or pursuing certain legal matters that arise in the course of normal business operations.
Please be aware that the information below is intended to give a generalised overview of this type of policy – all policies differ so it is important to understand the specific policy wordings you are considering before you make a decision to purchase. Equally, it is possible that your core commercial insurance policy, for example, your Commercial Combined policy, provides some level of Legal Expenses cover – though this is often not as comprehensive or beneficial as a dedicated Legal Expenses policy.
Your broker should be able to help you explore and understand the cover available to you and how it might support your business in the event of a claim.
What is Legal Expenses Insurance (LEI)?
The purpose of this insurance is to cover the cost of lawyers, representation costs and tribunal preparation costs, helping you to defend or pursue small to medium legal issues that arise in normal business operations.
This cover is there to protect the company itself and ultimately is triggered when there is a claim you need to defend or want to pursue. It is important to note that Legal Expenses Insurance policies typically include a Prospect of Success Clause* on both defence and pursuit claims.
Examples of areas of cover:
- Employment disputes
- Contract disputes
- Property protection (e.g. issues with landlords, trespass)
- Debt recovery
- Tax protection (HMRC investigations)
- Access to legal helplines
Covering the Gaps: When Standard Business Insurance Doesn’t Go Far Enough
Most commercial insurance policies in the UK – such as public liability, employers’ liability, or property insurance – are designed to cover losses such as compensation payments or physical damage. However, they typically do not cover the legal costs associated with pursuing a non-insured loss; for example, if your business needs to defend against an employment tribunal claim, your standard insurance won’t usually pay for the legal representation involved. This is where Legal Expenses Insurance can help.
If a customer or supplier takes legal action against the business, you will need to defend it, regardless of whether you have done anything wrong. The cost of legal defence can escalate quickly, which is where having Legal Expenses Insurance in place can prove invaluable.
Similarly, if you need to take action against a supplier for breaching a contract, the associated legal costs are unlikely to fall under a standard policy, but Legal Expenses Insurance can cover the cost of taking action for a valid claim.
Legal Expenses Insurance can also support the recovery of uninsured losses. These might include policy excesses or losses not covered under a commercial policy – Legal Expenses Insurance could support you in recovering those costs from the responsible party. For example, if a vehicle of yours is damaged by a third party and is out of action, you may need to hire another vehicle to carry out your business whilst it is being repaired; if your policy doesn’t provide cover for hire costs, you may wish to pursue the third party for these. Equally, if your property is damaged by a third party, whilst your property insurance would likely cover the repair, you would likely have an excess to pay; again, this is something you may wish to pursue the third party for. You can read more about how the pursuit of uninsured losses can be covered under such policies in our “How Legal Expenses can assist when it comes to Uninsured Losses” blog post.
Having Legal Expenses Insurance in place helps ensure these legal expenses don’t become unexpected drains on your cash flow.
Peace of Mind When Legal Disputes Arise
A legal dispute doesn’t just have the potential to drain finances; it consumes time and creates stress. Legal Expenses Insurance policies often include access to legal helplines, offering expert guidance before issues escalate. Being able to speak to a specialist early on can help you avoid missteps and resolve matters informally, before they become formal claims.
In those cases where formal action is necessary, policies provide access to experienced legal professionals representing your interests, ensuring that your case is managed appropriately from start to finish. With Legal Expenses Insurance, you should also benefit from legal privilege; this means conversations between you and the legal representation under the policy are entirely confidential, allowing you to speak openly and confidently when working through the legal process.
Legal Expenses Insurance: A Smart, Affordable Risk Management Tool
Compared to the potential cost of an uninsured legal dispute, Legal Expenses Insurance is relatively inexpensive. It is a cost-effective way to strengthen your overall risk management strategy and protect your business against unpredictable but potentially damaging legal situations.
Alternative Provisions for Covering Legal Disputes
Whilst Legal Expenses Insurance provides a comprehensive avenue for protecting legal disputes, there are other ways in which you may look to cover these.
Many commercial insurance policies, such as Commercial Combined (or your equivalent), include some element of legal expenses protection or at least the option to add it on. Depending on your exposure and risk attitude, you may decide this low-level cover is enough for your business.
Equally, insurance products such as Management Liability Insurance (Directors & Officers) can be beneficial; these policies focus on protecting decision-makers’ personal assets if they are pursed personally for actions taken in the course of running their business, covering compensation claims as well as legal costs; consider an allegation of wrongdoing or regulatory action being made against you or, again, a dispute that you want to pursue. Some Management Liability policies may have an extension available which provides basic cover similar to that available under traditional Legal Expenses.
Specialist Advice on Managing Legal Disputes
We would be delighted to assist you in understanding how Legal Expenses Insurance can support your business in managing your legal risks. We can also help you review any policies you already have in place, to ensure you are not duplicating cover unnecessarily.
If you’d like to discuss your business’s insurance protection, please do not hesitate to contact our team on 01653 609151 or at commercial@mcclarroninsurance.com.
*Prospect of Success Clause – The prospect of success clause dictates that you must have a 51% chance or greater of being successful in your case in order for the policy to react.
