To sue or not to sue – why legal expenses insurance is becoming a necessity
Australia is the second most litigious country in the world, according to numerous sources. Only in the United States are more lawsuits brought. While this dubious achievement relates mainly to the number of personal injury lawsuits and the number of class actions, there is a general uptick in the number of Australians willing to head to court to pursue their rights or resolve disputes.
Australian Bureau of Statistics data indicates that approximately 4,500 commercial litigation cases were initiated in FY23.
Personal injury claims are one of the key risks many Australian businesses face. ‘Slips, trips and falls’ claims are made by both employees and the public, which is why workers compensation insurance is compulsory and why many businesses take out public and products liability (PPL) cover (for some professions, PPL is mandatory and forms part of the licence to operate).
But there are a myriad of risks facing businesses, beyond liability for personal injury or loss.
As a result, a business may need insurance against a range of other liabilities.
A business liability refers to the legal responsibility a business has for debts or obligations arising from its operations. Depending on the business, these liabilities could relate to professional advice given, employment practices, data privacy, financial obligations or legal matters among many others. This is where liability insurances step in.
Liability insurance is designed to protect individuals and businesses from financial loss arising from claims made against them. It addresses allegations of negligence, misconduct, or failures related to the policyholder’s activities. Various liability covers are available including professional indemnity (PI), employment practices liability (EPL), cyber, D&O and statutory liability. Your EBM Account Manager can discuss the cover options available to address the liability risks your business may be exposed to.
Liability exposures can result in legal action against the business. And legal action means legal representation is likely to be required, and this means legal expenses will be incurred.
Liability insurance policies protect the business from costs/damages that it may be asked to pay by customers, suppliers, employees or the general public. The purpose of liability insurance is to cover legal costs, judgments, and settlements that may arise from liability claims. While liability policies have a legal expenses component, the legal costs covered are limited to defending the liability claim against the business. In this respect, any legal costs not directly related to defending the liability claim are not included.
Take, for example, EPL insurance. The policy covers damages and defence costs in the event of actions taken by employees relating to alleged breaches of employment law (e.g. wrongful dismissal, discrimination, sexual harassment). It would not cover the legal costs associated with seeking advice in relation to an employment matter. To illustrate: a female employee advises that they are pregnant. The business terminates the woman’s employment and is taken to court for breaching employment law. The costs associated with defending the action would be covered (e.g. lawyer fees, compensation payout, statutory fines). However, if the employer sought legal advice in relation to the pregnant woman and what the business was required to do, for example, asked if they were required to reduce her hours or change tasks performed, before taking any action, these costs would usually not be covered by the EPL policy, even though the advice may have reduced the risk of a claim needing to be made. Liability policies are generally triggered by, and respond to, an insured event occurring – they do not cover proactive or mitigating actions taken to reduce the risk of the event occurring.
However, if the business had legal expenses insurance, the cost of the legal advice they sought prior to taking any action in respect to their pregnant employee would be covered.
What is legal expenses insurance?
Legal expenses insurance (LEI) covers the costs associated with legal disputes, providing financial protection for businesses when legal action is necessary. LEI is designed to help cover the costs of business-related legal action, whether the policyholder is pursuing a claim or defending against one.
An LEI policy will reimburse claims for disputes or legal proceedings within Australia, provided the claim is reported during the coverage period and relates to activities within the scope of the business. It covers a range of legal expenses, including seeking legal advice, court and tribunal costs, lawyer fees and any other expenses associated with legal proceedings.
Unlimited legal advice
Statistics show demand for legal advice is on the rise. There was a 7.5% increase in demand for legal services in 2024, compared to 2023, according to the Thomson Reuters Institute’s 2024 Australia: State of the Legal Market Report. The report also noted there was a 12.6% increase in related legal fees.
A key benefit of LEI, is that policyholders can access legal advice (often unlimited) through a law firm. The nature of the legal advice available through LEI policies is not restricted to a specific insurance dispute but can encompass any legal matter relevant to the business (however, advice is limited to business-related matters and usually cannot include any personal matters such as family issues or private disputes).
While there is no guarantee that taking advice would keep the policyholder from entering into a dispute and ending up in court, it could reduce the risk. In the pregnant employee scenario, if the employer had taken legal advice and ascertained their legal position, they may not have terminated the employee’s contract and, therefore, may not have been taken to court for breaching employment law and would have avoided a fine.
“It would be too far-fetched for me to suggest that having legal advice will stop you from getting into a dispute,” said Mark Waters, Senior Underwriter for Legal Solutions at SCOR Syndicate 2015.
“But what it does do is make sure that when you do get into a dispute, if you’ve come from a position of strength whereby you’ve been advised correctly along the way, actually your claims are probably more likely to be winnable and defendable.”
What is covered by LEI?
In addition to covering legal expenses not included under liability insurance, a legal expenses policy covers costs associated with non-liability-related matters. This means LEI can cover legal costs related to day-to-day business risks which are not necessarily liability related.
LEI can cover a wide range of business-related legal matters including:
- Employment disputes (e.g. Fair Work claim defence)
- Contract disputes (pursuit and defence of contractual disputes with customers, suppliers and contractors)
- Consumer disputes
- Criminal defence and WHS investigations (appeals against notices under WHS Acts, OH&S Acts, ACCC and similar legislation)
- Debt collection
- Property and goods disputes
- ATO and tax audit (costs in responding to an audit or review by the Australian Taxation Office)
- Supply of goods and services (pursuit and defence of alleged breach of contract for supply of goods/services)
- Statutory licence protection (appeals against suspensions, revocations, alterations or refusal to renew statutory operations licences)
- Landlord-tenant property disputes (costs incurred during commercial lease disputes)
- Third-party damage to goods or premises (costs incurred pursuing a third-party for damage to premises or goods/machinery)
- Restrictive covenants (costs incurred during dispute with a former employee for breach of a written employment contract)
- Privacy Act data protection disputes
- Identity theft claims.
What is not covered by LEI?
Common exclusions to most policies would include:
- Pre-existing disputes (i.e. legal issue began before the policy was taken out)
- Deliberate (intentional wrong-doing), fraudulent or criminal acts by the policyholder
- Matrimonial or family disputes (family law matters)
- Mis-selling or mismanagement of financial services by the policyholder
- Directors and/or shareholder disputes
- Disputes involving certain contract types (e.g. credit, insurance, building, motor vehicle)
- Franchise agreements
- Employment contracts other than restraint clauses
- Traffic offences and driving licences
- Non-payment of rent, tenancy renewals or property purchases
- Industry-wide changes to statutory operating licensing requirements.
It should be noted that LEI policies do not usually cover the cost of fines and penalties imposed by regulatory bodies. Even if legal representation is covered, the policies generally exclude coverage for any fines, penalties, or damages imposed by a court – instead, the focus is on covering the legal costs associated with defending against claims and disputes. In addition, LEI is unlikely to cover all the possible legal expenditure a business might face, for example it will not cover the cost of legal work required when acquiring another company (which is not insurable under any type of policy).
Beyond defence – pursuing legal action
An important aspect to LEI is that it not only covers legal costs associated with defending a claim, but also in pursuing action.
“One of the unique elements of a legal expenses policy is that unlike a liability policy, legal expenses cover doesn’t just sit back and wait for something to happen,” said Mr Waters.
“You can use it effectively like a sword and a shield because it provides both pursuit and defence in certain areas of the policy.” Mr Waters explained one of the most common areas was in respect to contractual disputes: “Somebody owes us money. What do I do about it? And how do I get it back?”
Mr Waters notes LEI gives clients the ability to do something, such as go after the person who owes them money, they might not do or which they certainly would have to fund themselves. LEI allows the policyholder to do the “going after bit” as it pays the legal costs incurred.
Complements liability covers
While businesses should ensure they have appropriate insurance cover for core business and liability risks (including workers compensation, PPL, cyber, management liability), LEI can provide supplementary and additional coverage in certain areas.
LEI is not a substitute for other insurances but can fill the gaps left open by those policies when they only cover damages.
As an example, an LEI policy could complement a cyber policy. While the cyber policy will likely cover the legal expenses incurred following a cyber incident, the LEI policy could cover the costs of getting advice in respect to legal matters prior to an incident occurring. An LEI policyholder could seek legal advice about their obligations in respect to complying with privacy laws, which may enable them to ensure they have the right policies and protections in place to help mitigate the risk and also ensure they are aware of their responsibilities when it comes to privacy/data breaches (such as mandatory reporting). Whereas the policyholder may be able to look to their cyber insurance to cover legal costs (such as fines or litigation from the impacted individual) if they suffer a data breach which exposes private information.
Talk to your broker
As legal risks become more complex and the risks expand from an economic perspective, LEI is fast becoming a business necessity and a key risk-mitigating tool. Legal disputes have the ability to derail a business financially. With LEI, businesses can protect themselves against unforeseen legal costs associated with employment disputes, contractual issues, and regulatory investigations among others. A policy affords a business the financial protection it needs to operate with confidence, and both defend and pursue its rights. Talk to your EBM Account Manager about legal expenses insurance. You can also listen in to our podcast featuring Mark Waters.
Snapshot
Disputes and SMEs: It has been estimated that, each year, one in three SMEs experience a legal issue. Small businesses face an estimated $100 billion in disputes annually, according to the Australian Small Business and Family Enterprise Ombudsman. It has been reported that over 70% of small business disputes are settled out of court – not because the business was wrong, but because they could not afford the fight.
