JOURNAL OF LAW AND SOCIETY

VOLUME 30, NUMBER 1, MARCH 2003

ISSN: 0263-323X, pp. 3148

Alternatives to Public Provision: The Role of Legal Expenses

Insurance in Broadening Access to Justice: The German
Experience

Matthias Kilian*

The literature suggests that the main barriers to justice1 range from a
general lack of knowledge about legal rights, and the related prevalent
use of technical language within justice systems2 (which has led to
commentators describing law as a leviathan 3), to a vague fear of
the unknown.4 In Germany the principal barrier is thought to be the
problem of funding legal services.5 Empirical research indicates that
the question of whether or not to consult a lawyer is primarily one of
cost,6 although over one-third of potential clients have little idea about
lawyers fees.7 To find ways to surmount this barrier is therefore of
paramount importance for a modern society. In broad terms, there are
three potential attitudes to legal costs: reliance on ones own
resources; hope for third party assistance (such as legal aid or pro

* Universitat zu Koln, Rechtswissenschaftliche Fakultat, Albertus-Magnus-

Platz, 50923 Cologne, Germany
The author would like to thank Pascoe Pleasence for many helpful comments and
assistance in producing a full English text.
1 For the German discussion, see G. Baumgartel, Gleicher Zugang zum Recht fur alle
(1976); K. Lindemann and P. Trenk-Hinterberger, Beratungshilfegesetz Gesetz uber
Rechtsberatung und Vertretung fur Burger mit geringem Einkommen (1987) 8; E.
Fechner, Kostenrisiko und Rechtswegsperre steht der Rechtsweg offen? (1969)
Juristenzeitung 349.
2 K. Redeker, Burger und Anwalt im Spannungsfeld von Sozialstaat und Rechtsstaat
(1971) Neue Juristische Wochenschrift 1153, at 1158, estimates that more than half of
the German population is unable to understand the meaning of most laws.
3 R. D. Sabel, Zur Frage des Verhaltnisses zwischen Bevolkerung und Organen der
Rechtspflege (1987) 381.
4 id., at p. 382.
5 R. Wettmann and K. Jungjohann, Inanspruchnahme anwaltlicher Leistungen
Anwaltsblatt, Supplement, March 1987, 18.
6 Wettmann and Jungjohann, op. cit., n. 5.
7 See, in general, K. Muller Zur Problematik des Prozekostenrisikos im Zivilproze
(1987) Juristische Rundschau 1; A. Mummler, Beschrankung des Proze-
kostenrisikos (1971) Das juristische Buro 1.

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350 Main Street, Malden, MA 02148, USA
 bono); and insurance. This article concentrates on the last of these
three options, comparing, in particular, the systems in Germany and
England and Wales.

THE CONCEPT OF LEGAL EXPENSES INSURANCE

Although the purpose of legal expenses insurance (LEI) is to provide

protection against the costs of bringing or defending legal action necessary to
resolve a dispute, LEI policies come in many forms, not necessarily limited
to litigation insurance. They can include any kind of legal assistance,
including advice lines.8 The first country in which LEI products were offered
was France as early as 1905.9 In the wake of rising numbers of automobile
accidents, LEI became increasingly popular on the continent.10 Germanys
first LEI company, began trading in 1928.11 In the United Kingdom, legal
expenses insurance is a relatively new form of insurance cover, having only
been available since 1974.12 Indeed, until 1967, when the crime and tort of
maintenance was abolished13 LEI was unlawful. Even given its relatively
late introduction, set against the example of the continent, the development
of LEI in England is slow.14

8 For some LEI providers, legal advice lines generate a significant proportion of their
business. In the UK, the advice line service can be sold at a very small additional cost
(for example 20p1) on top of the LEI premium on a group scheme basis. Sales may
be, for example, to an employer for employees, or a Trade Union. In 1996 there were
620,000 calls to advice lines. This represents an increase of over 160 per cent on the
number in 1990 (data provided by the Association of British Insurers).
9 M. Kilian, Determinanten des europaischen Rechtsschutzversicherungsmarktes
(1998) Zeitschrift fur die gesamte Versicherungswissenschaft 23.
10 A.E. Holdsworth, Legal Protection Insurance The Experience In England in Legal
Protection Insurance, eds. W. Pfennigstorf and A. M. Schwartz (1986) at 14.
11 Precursors of LEI have been known in Germany since the nineteenth century when
trade unions, interest groups or societies began providing or financing legal services
for their members. The first society founded for the sole purpose of supporting its
members in legal disputes was a society of shipping companies founded in 1901.
12 Holdsworth, op. cit., n. 10, at p. 14. For England, it has been observed that compared
to the continent there was much less demand for LEI as there were fewer accidents
and more cars insured for accidental damage risks.
13 Criminal Law Act 1967, ss. 14, 15, which arose from the Law Commission,
Proposals for Reform of the law relating to maintenance and champerty, Law
Commission Report No. 7 (22 November 1966).
14 Prais blames a number of reasons: the existence of a comprehensive legal aid system,
insurers difficulties in controlling the quality and cost of legal services, and the right
of litigants to appear in person, especially in the small claims court; see V. Prais, The
Future of Legal Expenses Insurance (1996) The Litigator 212; V. Prais, A Question
of Insurance (1999) New Law J. 1372.

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1. Before-the-event versus after-the-event

An important distinction must be made between before-the-event insurances

and after-the-event insurances. Before-the-event policies, like any other
insurance, cover the consequences of events that have not yet occurred. In
contrast, after-the-event (ATE) policies cover future legal expenses in a case
where a dispute has already occurred. The character of ATE insurance means
it is likely to be available only where the chances of winning a case are high.
Otherwise an insurer may not make sufficient recovery to ensure profit.
Also, as there is a substantially greater risk that the costs insured against will
be incurred, compared to before-the-event insurance, the cost of after-the-
event insurance is high.15
Although the perception is different, the vast majority of LEI policies in
England are of the before-the-event type.16 Only a very small, albeit
growing, part of the market is sold after-the-event, mostly in conjunction
with conditional fee agreements (CFAs).17 Although solicitors own fees are
not payable in lost CFA cases, clients are still potentially liable for other
costs (for example, disbursements), and it is these that are covered by after-
the-event LEI policies.18 After-the-event insurance also makes sense without
conditional fee agreements, and a variety of products have been created for
those seeking insurance where there is, for whatever reason, no CFA
agreement in place. These policies may cover, for example the fees of a
clients own solicitor (which will consequently not be increased if the case is
won), any disbursements, and the other parties costs in the event that a case
is lost.19

2. Stand-alone versus add-on

Another important distinction must be made between stand-alone and add-

on policies. AEI insurance is by definition a stand-alone product, that is, a
policy that is not sold in conjunction with or on top of any other insurance
product. The English market is dominated by add-on policies. This is due

15 For a discussion of after-the-event-insurance, see A. Walters and J. Peysner, Event-

Triggered Financing Of Civil Claims: Lawyers, Insurers And The Common Law
(1999) 8 Nottingham Law J. 1, at 8.
16 See Secretariat permanent des RIAD, Les Britanniques face a la protection juridique
(1992) 21 Lassurance defense en Europe 2.
17 See Walters and Peysner, op. cit., n. 15; R. White and R. Atkinson, Personal Injury
Litigation, Conditional Fees And After-The-Event Insurance (2000) 19 Civil Justice
Q. 118.
18 For a discussion of speculative funding under a cost-shifting regime, see R. White,
Contingent Fees (1978) 41 Modern Law Rev. 286, at 296; White and Atkinson, id.,
at p. 120. Walters and Peysner, id., at p. 7; A. Walters, Making The System Judge-
Proof (2000) 6 Litigation Funding 8.
19 See A. Dekany, Covering Litigation Costs (1998) 13 Financial Times Business Law
Europe 11.

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to the structure of the market, with uninsured loss recovery (ULR) forming
the most significant part of the LEI market. ULR involves pursuing
uninsured losses from a motor accident in which the insured is involved but
not at fault. It generally covers damage to the vehicle, hiring replacement
vehicles, loss of use, and so on. ULR comes on top of ordinary motor
insurance. Sometimes it is included, other times it involves a small
additional premium (525).
The second most significant segment is personal non-motor policies,
usually sold as additional cover on top of general household contents
insurance policies. Again, it may involve a small additional premium (10
15). The major areas of cover in personal non-motor policies are personal
injury claims (except as a car driver), employment disputes, consumer
disputes and property disputes. Stand-alone, before-the-event policies are
rarer. At the end of the 1990s, the Association of British Insurers (ABI) was
aware of only one personal stand-alone product on the United Kingdom
market offered for around 210 per year.20
Interestingly, the major market for stand-alone before-the-event policies
in England is a market which does not really exist in Germany. A lot of
commercial policies (that is, not sold to individuals) are sold on a stand-
alone basis in England. Commercial policies cover areas such as
employment, property and contract disputes, data protection, tax, and so
on. They are the third and final major component of the English legal
expenses insurance market, accounting for a third of gross premiums.
In stark contrast to England, the German market is dominated by stand-
alone before-the-event insurance policies. The average German LEI policy
does not cover all areas of law, but follows a modular concept with the
policy holder free to mix her policy according to personal needs. So, for
example, a policy may cover employment law, property law, and
contract law.

3. Provision of services versus provision of funds

Most indemnity insurances indemnify against the insured risk by providing

funds to fix the problem. Insurers do not repair cars or fix damage to a roof,
although they could if they wished.21 Insurers instead bargain hard with
providers to reduce costs, or create panels whose members agree to defined
cost levels. In the case of LEI, these basic rules do not apply. Firstly, legal

20 Cover is expressed to be in respect of fees, expenses, and disbursements in

connection with any legal proceedings. However, there is an excess of 10 per cent
and some exclusions, the most significant being matrimonial proceedings; Prais, op.
cit. (1999), n. 14, p. 1372.
21 The so-called Naturalleistungsprinzip is not incompatible with the concept of
insurance; see W. Harbauer, Rechtsschutzversicherung Kommentar zu den
Allgemeinen Bedingungen fur die Rechtsschutzversicherung (ARB 75 und ARB 94)
(6th edn., 1998) s. 1, para. 4.

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expenses insurers need to employ legally-trained personnel for in-house
work,22 meaning that they already have an infrastructure on which they can
rely to provide some services to policy holders. Second, legal expenses
insurers usually have little bargaining power when negotiating with lawyers
over the cost of their services, as in almost all jurisdictions lawyers are
bound to minimum fees which do not allow undercutting competitors. Third,
employed in-house lawyers in the insurance industry earn relatively low
salaries compared to fee-earning lawyers in private practice. Employees
draw their salary while lawyers, as Shakespeare observed, dream of fees.23
Unsurprisingly, legal expenses insurers would prefer to provide as many
services as possible in-house. However, the extent to which they can do that
is, as will be explained later, limited by European and national law.

4. Voluntary versus compulsory insurance

As with every insurance, there is a question whether or not LEI should be

compulsory. In most countries, some sort of compulsory insurance exists, be
it health insurance, motor insurance or a state-controlled pension scheme
based on insurance principles. Unsurprisingly, the idea of a compulsory LEI
has been raised from time to time. However, legal risks have not been
regarded as serious enough, in personal or economic terms, to introduce
compulsory LEI in either England and Germany.24

COMPETING FUNDING CONCEPTS

The rationale of legal expenses insurance is the same as for every insurance:
For a certain premium, the individual shifts her risk to a third party better
able to bear it. The third party need not, though, always be a traditional
insurance company.

1. Third-party funding (legal factoring)

A concept that has become more prominent in the past decade is litigation
financed by legal factoring. The underlying principle of legal factoring and
LEI is the same risk-shifting and operations are superficially similar. A
litigation financier provides funds for litigation and bears the economic risk

22 They mainly deal with insurance contract issues, that is, assessing whether or not the
insured can invoke her policy and the insurer has to fund litigation under the terms of
the insurance contract.
23 Romeo and Juliet, Act 1, Scene 4, ll. 713.
24 Compare R. Moorhead, Funding Legal Services: New Lawyers, New Money (1996)
The Litigator 272, at 273. Also, see F. Baur, Prozekostenrisiko, Grundgesetz und
Rechtsschutzversicherung (1973) Versicherungsrecht 110, and Baumgartel, op. cit.,
n. 1, p. 139 (especially fn. 140 for further references).

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of an unsuccessful outcome. However, with factoring, the financiers reward
is a stake in a clients claim (that is, a percentage of monies recovered,
sometimes as high as 50 per cent). For lawyers, such a form of remuneration,
usually referred to as a contingent fee in the common law world and a
quota litis in the civil law world, is deemed unlawful and unethical both in
Germany and England.25 For non-lawyers, however, no such reservations are
made. Legal factoring is also only available where an opponent has a good
credit standing and for substantial claims (which must involve realizable
property). Because LEI is potentially available in a far broader range of areas
of law, and as it need not impinge on any damages, it is generally the more
attractive option for a client. Legal factoring is usually a last resort for those
who would otherwise be unable to take a matter to court because they do not
have insurance cover or sufficient personal resources, and do not qualify for
legal aid. Experience from Germany, where the first litigation financiers
offered their services in 1998, shows that uptake of the product has been very
slow.26 It is only attractive for areas where no insurance cover can be
obtained, for example, for disputes arising from construction law or for
commercial disputes (as there is no commercial legal expenses insurance
available in Germany).

2. Speculative funding

The mechanisms of LEI and speculative funding are similar and can be
complementary. Some American authors explain the absence of a developed
system of LEI in the United States27 by describing lawyers who

25 Not in the United States, of course, where contingent fees are in wide-spread use. For
a discussion of contingent fees see American Law Institute (ALI), Restatement of the
Law Governing Lawyers (2000) s. 47b; F.B. MacKinnon, Contingent Fees For Legal
Services (1964); J.A. Laufer, Contingent Percentage Fees For Legal Services (1983)
16 Akron Law Rev. 747; R. Rasor, Contingent Fees And Domestic Law (1991) 7 J.
Am. Academy of Matrimonial Lawyers 43; A. Wennihan, Lets Put The Contingency
Back in the Contingency Fee (1996) 49 Southern Methodist University Law Rev.
1640; S. Jay, The Dilemma of Attorney Contingent Fees (1989) 2 Georgetown J. of
Legal Ethics 813.
26 A. Schiller, Rechtsschutzversicherungen und alternative Prozefinanzierungen
(2001) Anwaltsblatt 544; C. Rollmann, FORIS finanziert Prozesse (1999)
Mitteilungen der Bundesrechtsanwaltskammer 203.
27 Legal service plans (LSP), which enjoy some popularity in the United States, follow
different principles to LEI. First of all, they do not insure against a pecuniary loss as
such, but merely allow a plan member to receive limited funding, defined by a certain
number of lawyers working hours. Although LEI policies include caps, they are in
principle designed to fund a case whatever this may cost. Secondly, unlike LEI
policies, LSP tend to focus on non-forensic legal expenses by funding a (very limited)
amount of consultation time (between 1 and 2.5 hours). Litigation is usually funded
for defendants only, with a cap at 50 hours under a popular LSP. Thirdly, unlike an
insurance, LSPs do not require an external event, defined as the insured event, to
invoke the policy. Finally, most LSPs are not open to the public, but set up as

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predominantly work on a contingency fee basis as small insurance
companies.28 A lawyer can indeed insure her client against the risk of
having to pay her by agreeing to work on a no win, no fee basis: the
corresponding premium for that risk-assumption is an increased fee, either in
the form of an uplifted ordinary fee or in the form of a share in the award
which results in a higher than ordinary remuneration. However, LEI is
generally the more comprehensive product. In jurisdictions following the
English cost-shifting rule, the potential cost risk does not include only a
clients own costs, but also her opponents. The risk of liability for
opponents expenses is not covered by a speculative fee. This is a reason
why AEI was introduced in England, to make good this deficit.

THE GERMAN LEGAL EXPENSES INSURANCE INDUSTRY

1. Basic principles of legal expenses insurance in Germany

As noted, LEI in Germany is based on a modular concept. There is no

comprehensive policy available that would cover everything29 and even if
a policy covers a certain area of law, some risks cannot be insured (for
example, costs arising from wilful crimes).30 Policies also do not cover
abstract legal advice; coverage is strictly limited to once an insured event has
occurred.31 Also, there is a standard three-month exclusion period from the
date the insurance contract is signed (although some exceptions exist, most
notably for liability in tort).
In Germany, an LEI clients case is not dealt with by in-house lawyers, as
this would be unlawful. Monopoly rights for lawyers limit an insurance
companys involvement in a case to declaring coverage for the case and
paying resulting costs.32 Clients are also guaranteed the freedom to choose

employee benefit trusts or as plans for trade union members. For a discussion on
LSPs, compare R. Abel, American Lawyers (1989) 136; D. Molvig, Group Prepaid
Legal Service Plans (1999) 72(6) Wisconsin Lawyer 10. For an example, see R.P.
Hallauer, The Shreveport Experiment In Prepaid Legal Services (1973) 2 J. of Legal
Studies 223.
28 Compare L. Brickman, Contingent Fees Without Contingencies (1989) 37 UCLA
Law Rev. 29, at 44; J. Fleming, The American Tort Process (1988) 198; H.
Drummonds, The Law and Ethics of Percentage Contingent Fees in Oregon (1993)
72 Oregon Law Rev. 859, at 874.
29 The most comprehensive packages cost some =C250 per annum, but as premiums have
risen in past years significantly, insurance companies find it more and more difficult
to sell comprehensive packages.
30 For a detailed list, see H. van Buhren, Das rechtsschutzversicherte Mandat (1998)
52 Monatsschrift fur Deutsches Recht 745, at 746.
31 For a discussion on what the event insured is, compare id, at p. 748.
32 A. Heinsen, Rechtsbesorgung durch Rechtsschutz-Versicherer (1997) Versiche-
rungswirtschaft 833.

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their own lawyer. They are not restricted to choosing lawyers from a panel of
the insurance company or to a lawyer who has been named by the insurance
company (s.17(1) ARB 2000). If a legal dispute is covered, the insurance
company will pay lawyers fees according to the scale of fees (but not a
higher one), court fees, fees for expert witnesses, bail and costs for
compulsory execution. If the case is lost, the policy also covers the party/
party costs. Most policies now carry an excess of up to =C150 for each case
funded,33 partly to influence the insureds attitude towards making a claim.
The insurance companies reserve the (seldomly enforced)34 right to
terminate the insurance contract if the insured makes two claims within
twelve months.

2. The German LEI market

Per annum, German insurers earn approx. =C2.8 billion in LEI premiums from
issuing 25 million LEI policies.35 It is estimated that some 42 per cent of all
households are covered by LEI.36 For German insurers, this leaves potential
for further growth as, for comparison, 65 per cent of all households have a
general liability insurance and 75 per cent a household insurance. One of the
obstacles insurers face when marketing their policies is that consumer
associations do not give LEI a high priority and strongly recommend that
other policies be purchased first.37 This has been exacerbated by recent
reforms to the German pension system and national health system, which
have led to health and life insurance becoming more important than before,
with people more likely to be willing to spend money on such policies. LEI
is, though, only a relatively small branch of the insurance industry even in
Germany, accounting for only around 6 per cent of premiums (compared to
46 per cent for automobiles). Nevertheless, German LEI policies provide
funding for 3.6 million cases each year (at an average of =C540 per case).38 In

33 For an additional premium of =C5075 the excess can be waived.

34 Most insurance companies will only consider a termination of contract after the fifth
or sixth claim and may even then make exceptions: W. Hempfing, Rechtsschutz-
versicherung (1987) para. 248.
35 Approximately fifty insurance companies offer LEI in Germany. For historical
reasons, almost all sell only LEI policies. Before EU legislation in 1987, it was
strictly forbidden for German insurers to offer other policies which carried the risk of
a conflict of interest.
36 Figure 3 below.
37 Compare the website of the Bund der Versicherten, the association of insurance policy
holders; <www.bundderversicherten.de/Versicherungsarten/Rechtsschutz.htm> (last
visited 25 July 2002).
38 2.7 per cent social security, 3.7 per cent family/succession (only advice covered), 13.3
per cent landlord and tenant, 15 per cent employment law, 19 per cent contract/
property, 22 per cent tort, 22.6 per cent penal (mostly traffic). While coverage for
employment law only has a 15 per cent share, it accounts for 30 per cent of all fees
paid by LEI companies.

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so doing, LEI provides more than =C1.5 billion in lawyers fees (C
= 15,000 per
lawyer)39 each year. This represents 25 per cent of all fees earned by
lawyers.40

3. Market conditions

(a) Size
The biggest problem when establishing LEI is adverse selection; those taking
out LEI are more likely to be litigious. To be feasible, LEI requires the
pooling of many loss exposures into classes (classes of business) which
include some people who will be less litigious to off-set the bigger risk
resulting from those who are more so.41 Although adverse selection
problems could be avoided by adding on LEI policies to other types of
insurance with a well-balanced risk-pool, this makes it difficult to establish
LEI as a widely recognized, stand-alone product. It has been observed, for
example, that although statistically 17 million people in the United Kingdom
are covered to some extent by a LEI policy, few are aware of the fact, as the
policy is hidden in another insurance policy.42 Other mechanisms that can
also counterbalance risk-adverse selection can be introduced with less
disadvantage (for example, excesses, minimum claim levels, reduced
coverage), but these are less effective and again make policies less attractive
for the consumer.
Adverse selection is the reason why the LEI market in England has
changed substantially since the mid-1970s.43 In England, stand-alone
policies have been phased out by insurance companies troubled by adverse
selection.44 Although adverse selection is the reason why German legal
expenses insurers have stopped insuring the higher risks arising from
contractual disputes of professionals or companies,45 adverse selection is not
generally a problem in Germany given that it has the largest market for LEI

39 Based on the number of admittted lawyers (105,000) in the year in question (2000).
Of those, quite a large number do not work in private practice or are in fact retired. H.
van Buhren, Rechtsschutz-Versicherung Partner der Anwaltschaft (1991)
Anwaltsblatt 501, at 504, estimates that at the most 50 per cent of all lawyers deal
with LEI companies. This would bring the annual income from fees paid by LEI
companies up to =C30,000 for each lawyer.
40 Annual reports of the Chairman of the German Insurance Companies Associations
(GDV) Working Group on LEI, Andreas Schiller, published annually in
Versicherungswirtschaft (VW). See for example (2000) Versicherungswirtschaft
1332; (1999) Versicherungswirtschaft 106; (1998) Versicherungswirtschaft 962.
41 F. Outreville, Theory and Practice of Insurance (1998) 132.
42 Prais, op. cit. (1999), n. 14, p. 1372.
43 See Prais, op. cit. (1996), n. 14, p. 212.
44 id.
45 See Harbauer, op. cit., n. 21, s. 4, para. 42; Schiller, op. cit. (2000), n. 40, p. 1332, at
p. 1334; K. Sperling and G. Bauer, Aktuelle Fragen der Rechtsschutzversicherung
(1988) 97.

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policies world-wide. In 2000, roughly 26 million policies were issued for a
population of 82 million.
The comparison with the premium income of legal expenses insurers in
other European countries in 1996 (latest comparative data available) in Table
1 shows the strength of the German market. The data explains that Germany,
with a population of 82 million, generated almost twice as much premium
income as the nine other countries, with a combined population three times
as high, taken together. Based on premium income, therefore, market
penetration in Germany is six times higher than in the rest of Europe.46 This
market penetration guarantees a very well balanced risk pool where the
problem of risk-adverse selection has long been overcome.

Table 1. LEI insurance industry in Europe in 199647

Country Premium income Premium income GDP per capita
(population in m.) (in ) per capita (in )

Austria (7.950) 199,000,000 25.03 10,956

Belgium (10.000) 147,296,000 14.73 11,407
Germany (81.087) 1,927,000,000 23.76 10,634
France (57.840) 263,000,000 4.55 11,730
Greece (10.564) 6,806,000 0.65 5,736
Italy (58.138) 66,000,000 1.14 10,763
Netherlands (15.368) 148,935,000 9.69 11,085
Portugal (10.524) 2,652,000 0.26 5,607
Switzerland (7.040) 97,893,000 13.90 13,728
United Kingdom (58.135) 100,000,000 1.72 10,892

The prevalence of LEI in Germany cannot easily be explained by

Germans spending more money on insurance than those in other countries.
They spend slightly more money on non-life insurance premiums
(US$913.50) than Britons (US$741.50),48 but Britons spend around twice

46 The per capita premium income in Austria, which is the highest in Europe (but only
slightly higher than in Germany), can be explained by the similarities of the Austrian
and the German jurisdictions. The market conditions (fee regulation, cost rules,
insurance law, and so on) are, for historical reasons, similar to those in Germany. It
can be assumed that the slightly higher premium income results from the smaller
Austrian risk pool.
47 Data from 1996 sample of Council of European Insurers (CEA), published in
Germany by Gesamtverband der Deutschen Versicherungswirtschaft (GDV); United
Kingdom data from Prais, op. cit. (1996), n. 14, p. 214. Numbers should be treated
with some care. Figures converted from national currencies into as of 30 June 1996.
GDP data is from 1993/94, population figures from 199396 time bracket, depending
on last census.
48 Source GDV, id.

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as much on life insurances,49 thus allowing the assumption that prioritization
is different, but not the general attitude towards insurance.
A comparison of the overall insurance markets in the EU demonstrates
this even more so. The largest overall market for private insurance in the EU
is the United Kingdom. With only 75 per cent of the population of Germany,
the overall insurance market in the United Kingdom is 50 per cent larger
than in Germany.50 With 16 per cent of the EU population, the United
Kingdom generates 29 per cent of EU-wide premium income.
Another interesting comparison is between the markets for LEI policies
and corresponding national legal aid budgets. It is evident that it takes away
much pressure from state funds if citizens do not rely on third-party funding
by the public purse, but insure themselves against the risk of being forced to
fund legal services. In Germany, the importance of LEI is reflected by the
fact that the German population spends around eight times as much on LEI
as the sixteen federal German states spend on legal aid. As Table 2 shows,
this is very different from the situation in, say, the United Kingdom.

Table 2. Expenditure on overall insurance premium income in the EU

Country per capita LEI premium per capita gvmt. spending
income (1996) on legal aid (2000)
Austria 25 =C 3 =C
Belgium 14 =C 2.5 =C
United Kingdom 1.72 =C 49/40 =C 51
Germany 24 =C 4.3 =C
France 4.5 =C 4 =C

While the German population spent almost eight times as much on LEI
insurances than the government spent on legal aid, in England and Wales the
government spent twenty-eight times as much per capita on legal aid than its
people spent on LEI premiums, highlighting the suggestion that a well-
developed LEI market takes away much pressure from the public purse.
From the above it can be seen that the requirement of insurance theory
that there should be large number of independent, homogeneous loss
exposures is fulfilled in Germany because of the well-balanced risk-pool that
has developed over decades.

49 Source GDV, Statistisches Taschenbuch der Versicherungswirtschaft (2001) chart 70.

50 Source GDV, op. cit., n. 47.
51 Data for England and Wales/Scotland.

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(b) Calculation
A further condition of the success of LEI is the ability to determine the exact
nature of the loss exposure involved.52 For a legal expenses insurer this is not
easy, as in the absence of fee regulation, legal costs are not certain or
transparent. This is especially so in England, where, consequently, one of the
greatest obstacles to establishing LEI in the 1970s was unpredictability of
costs. If legal costs (particularly lawyers fees) are regulated, even if only for
cost-shifting, an insurer has a good guideline for ultimate risk.53 If costs are
unregulated and based on fee-for-service, then transparency and calculation
is near impossible.54
German insurers readily admit that their home success has greatly
depended on formal fee regulation. They pay fees according to the scale in
the Federal Law on Lawyers Remuneration, the Bundesrechtsanwalts-
gebuhrenordnung (BRAGO), a scale linked to the monetary value of a
dispute.55 They therefore always know in advance that if a sum x is at stake,
the maximum cost exposure is y. For example, if a personal injury case goes
to court and damages of =C50,000 are claimed, no matter what happens in the
course of litigation, how long it takes, how complicated it turns out to be,
how much effort the lawyer will have to put into the case, the maximum fee
the insurer will have to pay is =C4,184 plus 16 per cent VAT and =C20 for
disbursements. This certainty also means insurers do not need to built up
sizeable loss reserves to cover exceptional cases. The German (and Austrian)
market is, though, somewhat unique in this regard.
The German system of fee regulation does not impinge on freedom of
contract. A client may agree to a higher remuneration. For cost-shifting
purposes, however, the BRAGO scale is binding. Also, it may not be
undercut, so legal expenses insurers must also pay according to the BRAGO.
So, theoretically, although a lawyer can ask for higher fees from a client, this
is extremely unlikely where she is covered by LEI. Thus, the widespread use
of LEI has to some extent led to a de facto binding character for the
BRAGO.56

52 Outreville, op. cit., n. 44, p. 132.

53 Prais has concluded that the English legal system needs substantial reform in this
direction before LEI can greatly increase: Prais, op. cit. (1996), n. 14, at p. 214.
54 Again, insurance strategies can mitigate unknown risk. For example, caps on claims
could be introduced although it would be a delicate strategic move as most consumers
expect full cover in all but exceptional cases.
55 An English language description of the fee system can be found at <www.brak.de/
seiten/pdf/GebO-Englisch %20in%20EuromitAnlagen> (last visited July 25, 2002).
56 The concept of the BRAGO is based on the swings and roundabouts principle, that
is, an assumption that an occasional big case will cross-subsidize run-of-the-mill
cases. For example, a straightforward =C500,000 case involving little work generates
an income of up to =C11,984. In reality, however, lawyers dealing with run-of-the-
mill cases rarely work on big cases, as the market for legal services is segregated.
Also, see Landgericht Bremen (1998) Versicherungsrecht 974.

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(c) Cost control
To make LEI viable in relation to a problematic risk-pool, insurers see tight
cost control and cost reduction as the only solution.57 This is most effectively
achieved through in-house, salaried lawyers. Thus, in most European
countries, legal expenses insurers try to bring as much work in-house as
possible, and fight for their right to do so.58 In Germany, however, as noted
above, lawyers enjoy monopoly rights to the extent that legal expenses
insurers cannot provide any in-house services.59 Consequently, LEI is not
available to the commercial and professional community there.60 German
insurers, however, are lobbying against the comprehensive monopoly rights
of German lawyers. Moves in that direction, though, are limited by the
European Directive on Legal Expenses Insurance, which reserves policy
holders rights of free choice of counsel for contentious proceedings.61

LEGAL EXPENSES INSURANCE WHY SO ATTRACTIVE?

To understand better why LEI plays such an important role in Germany, it is

necessary to consider other means of obtaining access to justice. The
availability of the most important of these (speculative funding, legal aid,
pro bono work and the use of inexpensive services by non-lawyers) differs
markedly in Germany from England and the common law world.
Legal aid, granted only subject to a stringent means test, is only available
for a small portion of the German population. While the means test is applied
leniently, it still excludes the great majority of people, and those who are
eligible face possible contributions.62 Legal aid is in any event less attractive
than LEI in Germany, as the cost-shifting principles are unaffected by its
grant. A party supported by legal aid who loses her claim is liable for her
opponents costs; only her lawyers fees and court are covered by legal aid.
The cost-risk is therefore significant.63 Consequently, for all areas of law
which are covered by LEI, legal aid is of little importance. The main area not
traditionally covered by LEI is family law and so it is no surprise that almost
80 per cent of legal aid is spent on family cases, with coverage in around 50

57 See Schiller, op. cit. (2000), n. 40, p. 1334.

58 In 2000, this problem was the subject of the bi-annual conference of the Association
of International Legal Expenses Insurers held in Brussels; see (2000) Versicherungs-
wirtschaft 1818.
59 See Bundesgerichtshof (BGH), (1961) Versicherungsrecht 543 (Supreme Court).
60 It is available to some extent for disputes between employers and employees; see, for
details, Harbauer, op. cit., n. 21, s. 4, para. 21.
61 Directive 87/344/EC; official reporter EC Nr. L 185, 4 July 1987, 77.
62 For details see M. Kilian, Legal Aid And Access To Justice In Germany in The
Challenge Of The New Century, eds. D. Fleming and A. Paterson (2001) 13, 17.
63 For a discussion of the different alternatives how to reduce the cost risk in the German
system of civil litigation, see Mummler, op. cit., n. 7.

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per cent of cases.64 Legal aid expenditure in other civil law areas, though, is
very low when compared to English standards.
While most European jurisdictions allow speculative funding (although
prohibit US-style contingency fees), all forms of output-based remuneration
are prohibited in Germany. In Germany there is therefore no distinction
between contingent fees, conditional fees, and success fees. The Legal
Profession Act (BRAO s. 49b II) declares any contract void under which
either remuneration or the amount payable to a lawyer depends on case
outcome. This lack of speculative funding, however, is not regarded as a
problem in the context of equal access to justice, as most tort litigation for
which speculative fees are of great importance in other countries is covered
by LEI policies. Also, for those areas of law in which LEI is not available
family law and criminal law legal aid is available.65
Lawyers in Germany enjoy monopoly rights not only for representation in
court, but also for out of court work.66 The rationale of the monopoly is
threefold; to guarantee a high quality standard for the consumer, a high level
of protection for the client (which is only possible if the legal adviser is
bound by strict professional rules), and the existence of a free and
independent profession. However, these monopoly rights are often criticized,
as they not only prevent commercial legal advice by non-lawyers, but also
voluntary and altruistic legal services provided by non-lawyers.
Consequently, neither non-commercial organizations, nor fully-trained
individuals who are not admitted to the bar, nor self-help groups, nor legal
clinics can provide legal services in Germany.67 So, for the German
population, it is almost impossible to obtain low- or no-cost legal advice by
non-lawyers, thus again making LEI more essential than elsewhere.
A further option in most legal systems is pro bono publico. American or
Australian lawyers68 are expected to provide some such services. In
Germany, the Legal Profession Act (Bundesrechtsanwaltsordnung BRAO)
requires lawyers to charge minimum fees for their services (BRAO s. 49b I)

64 In the year 2000, Germanys second largest insurer ARAG offered an additional
module to its stand-alone LEI policy for the first time which covers family law (with
some restrictions).
65 Funding family law and criminal law cases by way of speculative fees is prohibited in
almost all countries.
66 Some minor exceptions exist for incidental legal services.
67 RBerG Art. 1 s. 3 Nr. 9 contains the only noteworthy exemption clause for state-run
consumer advice bureaux which may give legal advice to consumers for matters of
consumer law.
68 Compare, for the United States, the Marrero Committee Report, Final Report to the
Chief Justice of the State of New York (1990), published in (1991) 19 Hofstra Law
Rev. 755. For Australia, R. West, What makes a successful pro bono scheme?
(2000) 38(9) Law Society J. 60; A. Durbach, Pro Bono Challenging the
Definitions (2000) 38(9) Law Society J. 64; E. Wentworth, Pro Bono Should
commercial conflict of intererst be a barrier to work pro bono? (2000) 38(9) Law
Society J. 68.

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according to the scale of fees for all work in court proceedings.69 This
statutory obligation makes pro bono work more or less impossible in
practice. Fees can only be rescinded after the lawyer-client relationship has
ended. The only formal exemption relates to services for family members
and employees.70

LEGAL EXPENSES INSURANCE AND SOCIETY

It has been asserted by many that LEI leads to a more litigious society.71 For
example, a number of German judges have complained that LEI policy
holders tend to go to court with weaker cases than those without cover. This
complaint has some logical foundation. If policy holders pay substantial
premiums over time, they may be more ready to take action when the
possibility arises, so as to bring about some return. Some lawyers have argued
that this need not be a bad thing, suggesting that LEI clients see their lawyer
at a much earlier stage than self-funding clients, so allowing speedier dispute
resolution at a time when matters are less complex.72 Nevertheless, evidence
suggests that more than three-quarters of German lawyers shared the view
that LEI stimulates litigation.73 Even so, it may be argued that the rule of law
mandates that disputes are resolved rather than swept under the carpet on the
basis of expense.74 However, it can also be argued that even legally justified
small claims should not be encouraged to be taken to the courts, as in doing
so they may place a substantial burden on the public purse.

69 Undercutting the statutory fees used to be prohibited also for out-of court work, this
literally making hourly fees (billing) impossible. This changed in 1994. If billing
results in undercutting the BRAGO scale, the prohibition in BRAO s. 49b I does not
apply, but the the lawyer must charge a reasonable fee for services and cannot provide
them on a nominal basis (see BRAGO s. 3 V 2).
70 The rationale of BRAO s. 49b I is twofold: Firstly, it intends to prevent cut-throat
price competition between the members of the profession at the expense of the quality
of work, therefore serving the legal system as a whole. Secondly, in a system of two-
way cost-shifting, undercutting of the scale of fees would result in a de facto output-
based remuneration as in the event of a victorious litigation, the winning party could
demand the statutory lawyers fees as client/client costs.
71 See van Buhren, op. cit., n. 30; H. van Buhren, Rechtsschutzversicherungen +
Anwaltsschwemme = Prozessflut? (1993) Zeitschrift fur Schadensrecht 145; E.
Blankenburg, Rechtsschutzversicherungen und Geschaftsanfall der Gerichte (1990)
Deutsches Autorecht 1; E. Blankenburg, Rechtsschutzversicherung als alternative
zur sozialen Rechtshilfe (1994) Zeitschrift fur Rechtspolitik 294.
72 W. Jagodzinski et al., Rechtschutzversicherung und Streitverhalten (1993) Neue
Juristische Wochenschrift 2769, at 2775 (the academics who carried out the research).
73 R. Wasilewski, Streitverhutung durch Rechtsanwalte (1990) 83.
74 See K. Redeker, Burger und Anwalt im Spannungsfeld von Sozialstaat und
Rechtsstaat (1973) Anwaltsblatt 225, at 231: Recht, dessen Verwirklichung an
Kostenrisiken scheitert, ist verlorenes Recht. Es steht auf der Verlustliste des sozialen
Rechtsstaates.

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 As a consequence of general concern, the German Department of Justice
funded comprehensive research into this matter in the mid-1990s, and
estimated that LEI was responsible for between 4 and 8 per cent of additional
litigation.75 However, it was suggested that, although these additional claims
would otherwise not have been brought, they could nonetheless be justified.
Interestingly, almost all of the additional litigation appeared to relate to
parking offences involving relatively small fines; matters which would
ordinarily be ignored on a cost-benefit basis.76 LEI policy holders therefore
seemed more likely to go to court over relatively trivial, albeit justified,
grievances. In relation to other matters, there was little indication of
increased claims. As a result of these findings coverage for parking offences
has since been excluded from policies.77
Two simple mechanisms guarantee that small numbers of small claims
arise from LEI. Firstly, lawyers fees are paid according to the scale of fees,
and remuneration for lawyers taking on small claims is generally well below
production costs. Thus, some lawyers will ask for an additional negotiated
top-up fee which will not be met by an LEI policy. Second, most insurance
policies incorporate an excess, which guarantees that an insured only invokes
the policy if a reasonable sum is involved. Consequently, LEI is unlikely to
promote many small claims, although the possibility remains that it may
promote more frivolous ones. However, additional safeguards counter this
latter possibility. For example, LEI support should only be provided where
there is a reasonable chances of success, and empirical data suggests this is
the case. In civil cases, policy holders are successful in 61 out of 100 cases,
while non-insured parties can enjoy a similarly defined success in 63 out of
100 cases78 a difference that can probably be explained by the fact LEI
policy holders tend to be less willing to settle. In conclusion, therefore, it
does not appear that the research undertaken in Germany shows LEI to be
responsible for a more litigious society. Interestingly, in the light of this
research, this criticism now rarely surfaces in Germany.
There can be little doubt that a well-developed LEI market can improve
access to justice. Those who hold LEI insurance need not worry about costs
when a covered legal dispute arises. However, any complete discussion of
access to justice must consider those with limited means.
To determine whether the widespread use of LEI improves access to
justice for those on lower incomes, it is insightful to investigate the
distribution of LEI policies by income group. This can also be compared
with that for other insurance types, to better understand to what extent
prioritization has an effect on LEI coverage for the less well-off.

75 For a summary of this research, see Jagodzinski et al., op. cit., n. 72, at p. 2769; A.
Braun, Strukturanalyse der Rechtspflege (1994) Mitteilungen der Bundesrechtsan-
waltskammer 6.
76 Braun, id., at p. 10.
77 Heinsen, op. cit., n. 32.
78 Braun, op. cit., n. 75, at p. 11.

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Table 3. Holders of Insurance Policies by Income Group (Germany)80
Income (DM) population LEI PLI PAI LI HI
1 DM = 0.51 =C 1464 yrs

All 50,887,485 21,490,898 26,232,283 15,633,893 7,094,329 33,169,411

= 100% = 42.23% = 51.55% = 30.72% = 13.94% = 65.18%
Below 2,000 3,494,919 674,443 1,470,590 567,952 233,266 2,058,826
= 6.9% = 3.1% = 5.6% = 3.6% = 3.3% = 6.2%

2,000 to 2,999 7,839,766 2,586,210 3,899,599 1,713,998 775,863 5,223,130

= 15.4% 12.0% = 14.9% = 11.0% = 10.9% = 15.7%
3,000 to 3,999 11,394,537 4,477,693 5,877,289 3,372,215 1,582,152 7,804,269
= 22.4% = 20.8% = 22.4% = 21.6% = 22.3% = 23.5%
4,000 to 4,999 11,673,442 5,273,840 6,024,348 3,965,522 1,734,282 7,702,849
= 22.9% = 24.5% = 23.0% = 25.4% = 24.5% = 23.2%
5,000 to 5,999 6,120,697 3,012,174 3,296,150 2,195,743 826,573 3,788,037
= 12.0% = 14.0% = 12.6% = 14.0% = 11.6% = 11.4%
Over 6,000 10,365,124 5,461,467 5,664,307 3,823,534 1,942,193 6,597,371
= 20.4% = 25.4% = 21.6% = 24.5% = 27.4% = 19.9%

PLI = personal liability insurance, PAI = personal accident insurance, LI = risk life insurance, HI =
household insurance

Table 3 shows that those within lower income brackets tend to have less
insurance cover than those within higher brackets.79 However, it also reveals
that the lower-income population (those who are most likely to qualify for
legal aid) do not give LEI the same a priority as others. While the
distribution of private liability and household policies more or less reflect the
overall income structure of the population, LEI is taken out far less often by
those with little income. If this were true for countries with a developed legal
aid system, it might therefore be difficult to argue that voluntary LEI could
provide a replacement for legal aid, as those who would no longer qualify for
legal aid would be least likely to purchase insurance.
It is difficult to determine to what extent the legal aid safety net
discourages the purchase of LEI policies amongst those on low incomes.
However, it seems unlikely that decision by those with low incomes not to
take out insurance cover is primarily based on their knowledge that legal aid

79 The chart only includes types of insurance that are typical risk insurance products
(thus excluding non-risk life insurance) purchased voluntarily (thus excluding vehicle
insurance) as stand-alone products.
80 Data taken from the Marken-Profile 9/Stern (2001) empirical research study carried
out by MMA, IFAK, and Ipsos. The study is based on a sample of 10,035 Germans
aged between 14 and 64 (resulting in a multiplication factor of 5.071) and was carried
out in early 2001. The pattern is similar to that indicated by research into what
products those without insurance cover intend to purchase over the next three years.

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might be obtained if necessary. There is little public awareness in Germany
about legal aid. Also, as noted above, legal aid and LEI work differently in
Germany, with legal aid not covering an opponents costs.81
From the above it is clear that LEI grows and prospers best in a certain
legal and economic environment; an environment that exists in Germany.
The size of the risk-pool and the calculability of risk, combined with the
prohibition of speculative funding, legal services programmes, and pro bono
work make the German market highly suited to LEI. As a funding concept,
LEI is therefore an attractive alternative to speculative funding or legal aid.
However, to translate the success of LEI in Germany to other countries
(notably the United Kingdom) might prove difficult, as the legal and
economic environment in Germany is perhaps unique. LEI could, though,
nevertheless provide a useful (if not central) additional means to provide
access to justice elsewhere.

81 For details, see Kilian, op. cit., n. 62.

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