On the coverage of LEGAL DEFENCE INSURANCE, in cases of free choice and conflict of interest, according to the SUPREME COURT RULING of 14 July 2020, Rapporteur D. Eduardo Baena Ruiz.
In this article we will analyse the judgement handed down by the First Chamber of the Supreme Court on 14 July 2020, which deals with the question of the legal defence cover of the insured, in situations of conflict of interests, and the possible clauses that quantitatively limit this cover.
In this specific case, it was a case of directors’ liability insurance, with an insured sum of 1.2 million euros. The insured was sued by the Co-operative where he was managing director, and it turned out that his insurer was also the insurer of the plaintiff Co-operative, so there was a conflict of interests. For this reason, the manager appointed a lawyer of his own choice. This lawyer’s fees amounted to 121,874.48 euros, which is the sum claimed by the insurer in these proceedings.
It is usual for civil liability insurance to include a guarantee of legal defence, but this guarantee is limited by the insurer, in the event that the insured decides to freely choose his lawyer and solicitor, establishing limits on the amount to be paid.
The limitations of coverage established by the insurer in this case can be a cause of defencelessness if this does not cover the costs of the insured person’s legal expenses.
Specifically, article 74 of the Law of Insurance Contracts (LCS) establishes that, unless otherwise agreed, the insurer will assume the legal management of the claim of the injured party, and will be responsible for the defence costs incurred.
The problem arises if there is the possibility that the insured person can entrust his own defence to another person, or if any of the cases included in Article 74 LCS, such as a conflict of interests, occur.
In these cases, the aforementioned precept establishes that the insurer will be obliged to pay the expenses of the legal direction up to the limit agreed in the policy.
It is precisely this last paragraph that raises the current problem, as the faculty granted to the insured person to choose another lawyer is limited by the amount fixed by the insurer as a maximum limit, and it is very common that the limits of the policy are not sufficient to cover the legal costs.
Therefore, as we will see below, it has been considered that the clause that establishes considerable limits constitutes a limitation of the coverage and is detrimental to the interests of the insured person, contrary to the provisions of Article 3 of the Law of Insurance Contracts, especially if the limits fixed are insufficient.
The Supreme Court has recently resolved this question in several judgements, highlighting, in addition to the one studied, also Judgement number 101/2021, of 24 February.
The grounds set out in the Judgment analysed are applicable to the free appointment of a lawyer provided for in arts. 74 and following of the LCS, referring to legal defence insurance.
The opinion of one of the magistrates, Mr. Vela Torres in his publication of the Manual of papers of the XVI National Congress of the Spanish Association of Lawyers Specialising in Civil Liability and Insurance, should be highlighted, stating that;
‘The most recent case law considers, both in the case of legal defence insurance associated with other types of insurance, and in its own typical type of Legal Defence Insurance, that the clauses which quantitatively limit the amount of cover corresponding to the insured’s defence costs do not have the nature of delimiting the cover, but are limiting the rights of the insured, and therefore, subject in their validity to the requirements of art. 3 LCS. This is expressly stated in STS no. 481/2016, of 14 July’.
In the current judgement dated 14 July, but of 2020, it is concluded ‘that the fixing in the policy of said limit can be qualified, in principle, as a risk delimiting clause, although not categorically, because the circumstances of the case may determine its consideration as limiting the rights of the insured, and even harmful, when limits are fixed which are notoriously insufficient in relation to the amount covered by the liability insurance’.
We also highlight the doctrine of the Court of Justice of the European Union, which in this line admits the possibility of the parties freely agreeing the levels of coverage of legal defence expenses, and the limits to the expenses borne by the insurance companies, but with the following condition:
‘But as long as the insured’s freedom of choice of his legal defence is not emptied of its content. Because the reality is that fixing such a low amount, in the words of the Supreme Court, makes the faculty of free choice -illusory-. Equivalent in practice to having no such freedom of choice’.
‘The Court annulled the aforementioned clause on the grounds that it was harmful, and ordered the insurer to pay the fees incurred for the legal defence. Considering that, in cases such as this one, the appearance of sufficient cover has been created, at the same time as said cover is empty of content.’
The legal defence cover is of great interest in order to comply with the provisions of Art. 74 LCS, but in order for it to be considered as a delimitation of the insured risk by the insurer, in accordance with the premium, and opposable to the insured, it must be of sufficient importance so that it is not qualified as a clause limiting rights, and therefore contrary to the spirit of Art. 3 LCS.
Any other interpretation leaves the legal defence without content, since a small amount of coverage, in practice prevents the exercise of the rights of the insured person.
This interpretation of the SC is relevant, since other positions would go against the principle of good faith and would place the insured in a clearly disadvantageous position with a cover that, in the event of a conflict of interests, or the exercise of the faculty of free appointment of a lawyer, would oblige him to bear most of the costs of the legal defence due to a notorious insufficiency of the amount established in the policy.
Socio -Departamento de Seguros
España y Portugal
BELZUZ ABOGADOS SLP
