RIAD’s Position on Legal Expenses Cover of Victims of Road Accidents

Brussels, 2 June 2006

I. General remarks

Within the framework of the 5th Motor Insurance Directive the European Commission is preparing a report which will include answers concerning the coverage of legal expenses of victims of road accidents in the EU. In this context the European Commission examines in which Member States legal expenses of the victims are covered as damage by the Motor Insurance against Third Party Liability (MTPL) of the liable party. Moreover, the Commission wants to investigate which impact the inclusion would have on MTPL in cases where the accident must be regulated outside the home country of the victim. In this context the Commission also examines which part Legal Protection Insurance (LPI) could play as an alternative and if it were sufficiently available for potential victims of road traffic accident.

The aim of the European Commission is to ensure that victims of road accidents, happening abroad, are satisfactorily protected and do not have to suffer unjustified disadvantage when pursuing their rightful claims.

RIAD as international association of Legal Protection Insurers (LPI) would like to take the opportunity to help the Commission with its inquiry and RIAD Members fully support the Commission’s aim to improve the protection of victims of road accidents. In this respect they agree that victims who rightfully pursue their claims must be compensated for the costs incurred by these litigations. Thus, RIAD Members have investigated thoroughly how this can best be achieved and would like to point out the advantages and disadvantages of the possible alternatives.

As a preliminary remark it seems to be useful to distinguish clearly between liability insurance, i.e. MTPL and Legal Protection Insurance. This is necessary for weighing the advantages and disadvantages of possible solutions for improving the situation of victims of road accident abroad. In this context it is important to recognise that MTPL and LPI have diverging aims and mechanisms and serve different interests: liability insurance compensates damages caused by the insured (the liable party) to third parties (the victim). On the contrary, Legal Protection Insurance stands on the side of the victim, its policy holder, provides him with an extensive legal service and takes care of his legal interests. Thus, MTPL and LPI often stand on opposite sides; their objectives are dissimilar and if not kept apart properly might lead to considerable conflicts of the interests of all parties, the victim, the liable party, MTPL and LPI. This should be kept in mind and, thus, the separation between the classes 10 and 17 (MTPL – LPI), as documented in the EU Directives, should be respected.

II. Legal Expenses as Part of the Damage covered by MTPL

The first alternative would be the approach of the European Parliament during the 2nd reading of the 5th MTPL directive to consider litigation costs of the victims as part of the damage which must be compensated by the MTPL insurance of the liable party.

At first sight this seems to be a comprehensive and simple solution which allows the victims to recover their costs and ensures that they, in principle, recuperate the total of their expenses.

However, it is necessary to consider and point out some significant drawbacks and obstacles of this solution which are primarily linked to the fact that the underpinning legal systems, especially the rules governing the reimbursement of costs, must supplement this kind of compensation and must fit.

  1. Firstly, the basic principle to be kept in mind is that litigation costs of the victim are only reimbursed as part of the damage in cases where the victim is successful. If victims were compensated even in case where they pursue dubious claims, litigation would be encouraged and, beyond any doubt, the number of legal actions would increase since victims and their lawyers could abuse this system and would have an incentive to start proceedings without considering the legitimacy of their claims. This means that the predominant factor is the existence of (national) reimbursement rules, taking into account the proportion of winning/ loosing which, apart from Germany, only exists partly in few Member States.
  2. Secondly, as a consequence the liable party and his MTPL, must equally have the possibility to recover their litigation costs if justified. In this respect, the Belgian Constitutional Court has recently decided that a system which only institutes the compensation of costs for one party, i.e. the victim, is unjust, results in disequilibrium and thus is contrary to the rule of equal treatment. Consequently, the introduction of compensatory rights exclusively for one party of a legal dispute could be unjust if the underlying legal system does not include a general rule for the compensation of costs which also anticipates the situation that the liable party is successful. Moreover, this system can only function if litigation costs are predictable and can roughly be calculated in advance. A possible solution could be fixing the amount to be compensated for lawyers’ or court fees.
  3. Thirdly, in order to prevent the increase of in-court disputes it must be assured that costs for out-of-court resolutions are covered as well. If this were not the case victims and their lawyers would immediately have to initiate court proceedings in order to be compensated. The obvious consequence would be that litigation costs in total and the burden on the legal systems would considerably increase.
  4. Fourthly, it should be noted that victims can have false expectation regarding the amount/ percentage or sort of legal expenses covered as part of the damage. This can be the case if certain costs are legally not considered proportionate, reasonable and/ or necessary. E.g. the victim immediately consults a lawyer without first contacting the liable party. If the other party agrees to settle the case instantly without further disputes the lawyer’s fee could be considered an unnecessary cost or disproportionate if the value of the claim were very low. Moreover, if the victim is only partially compensated due to contributory negligence he also may find himself left with unpredicted expenditures.
  5. Fifthly, victims cannot be certain whether they are reimbursed until their case is definitely concluded. They must fear to pay the total costs on their own if loosing or to get even involved in succeeding debates and disputes about the amount to be compensated.

III. Legal Expenses as Part of the Cover of LPI

The second alternative is that legal expenses of victims of road accidents are covered by their own LPI which is taken out on a voluntary basis.

We would like to draw attention to the fact that LPI, especially with regard to road accidents, is actually available in most Member States at very low costs (e.g. in Belgium 90% of the population is covered). As specialists in this field of business RIAD Members offer victims of road accidents their expertise and support them in pursuing their claims. Moreover, thanks to the bundling of knowledge and skills LPI are in a position to often allow settling disputes amicably by out-of-court means and, thus, help preventing unnecessary proceedings and reducing overall costs. Accordingly, RIAD Members already contribute to a large extent to the welfare of their customers who are victims of road accidents. LPI concluded by the victim on a voluntary basis always support full coverage and therefore avoid any gaps as described above. This solution has substantial advantages.

  1. Contrary to the first alternative, LPI insured victims run no financial risk and they are compensated by LPI regardless of the applicable national law. Right from the beginning of a case the policy holder can rely on the fact to get paid all legal expenses regardless of the outcome of the case, i.e. also if it turns out that pursuing his claim is unsuccessful or if recovery costs must be paid to the successful opponent or if the applicable law does neither foresee recovery depending on the proportionality of costs nor the coverage of out-of-court costs. As a consequence, victims can pursue their rights without fearing to get involved in unpredicted expenses since they are compensated notwithstanding the applicable national law and notwithstanding the outcome of the proceedings.
  2. The victim as policy holder can choose himself whom he wants as partner at his side. Thus, he can decide the quality of the services, its price, the scope, the cover and the specific features of the contract.
  3. LPI fully support their customers and provide extensive and comprehensive services. This includes the provision of first legal information or advice without extra costs, the supply of an expert opinion to evaluate the incurred damages, an all-embracing protection of their customers’ interests and the compensation for possible expenses. RIAD Members would like to stress that LPI guarantees that the interests of the victims must be pursued independently of the interests of the liable party’s MTPL according to the rules of the EU-Directive on Legal Expenses Insurance and, thus, facilitate access to justice and law.

IV. Conclusions

RIAD Members support the European Commission’s goal to improve the protection of victims of road accidents abroad and agree that those victims who rightfully pursue their claims against the liable party must not carry the additional burden of paying the costs of these litigations.

Regarding the features and difficulties of different possible options, RIAD Members see that an approach would be to consider litigation costs of victims of road accidents as part of their damage to be compensated by the MTPL of the liable party.

However, as shown above, extending only the definition of the damage of the victim does not and cannot provide a satisfactory solution and can even be misleading and deceptive for the victim. The functioning of such a compensatory system is complex and depends on a multitude of prerequisites which differ from Member State to Member State. A selective intervention on a European level would distort the equilibrium and fitting together of national rules.

Therefore, RIAD Members currently see LPI concluded on a voluntary basis as the only comprehensive and satisfactory solution to meet the interests of victims of road accidents abroad. It is not perceptible how a satisfactory harmonisation could be brought about. Quite the opposite, harmonisation would inevitably leave many gaps due to regulations of the national laws, would open new areas of inconsistencies and would deceive expectations of the consumers. Therefore, we beg the European Commission to scrutinise and appraise the answers to the questionnaires thoroughly and to take into account that the public consultation contains some misleading questions and translations which will probably adulterate conclusions drawn from the answers.