What Is Business Legal Expense Insurance – LEI?
Business legal expense insurance (LEI), is a form of legal protection insurance (LPI). LEI coverage protects a company from the cost of defending itself in the event someone brings a lawsuit against them. It is designed to protect against costs stemming from lawsuits brought by third parties, but may also cover costs associated with lawsuits that the insured pursues against others. These costs may include fees for lawyers, witness expenses, court fees, or even the cost to hire expert witnesses.
LEI is typically utilized in large corporations but is essential for any size of business which has the risk of exposure lawsuits or to offset the expense of when they need to bring suit against a client. Commercial legal expense insurance (CLEI) is a similar type of legal expense insurance geared toward small-to-medium sized companies. LEI may sometimes cover legal costs related to a company's intellectual property and brand protection.
- Business legal expense insurance provides coverage for the cost of lawsuits brought by third parties.
- Costs related to lawsuits that the insured pursues against others may sometimes be included with LEI.
- There are two types of LEI policies—before and after the event, with the latter being more expensive as it allows for coverage after the lawsuit has started.
Who Needs Business Legal Expense Insurance?
All businesses have exposure to lawsuits, but some are more vulnerable than others. Headlines hit news feeds daily about suits brought against manufacturers and doctors, and any company or independent contractor may find themselves facing the headache of a lawsuit.
Money managers and financial advisors may purchase legal expense insurance to protect themselves from clients who believe that the business has lost them money. Business legal expense insurance is likely to be bought by larger companies which face a real threat of lawsuits, such as wrongful termination claims and financial audits.
LEI is usually reserved for larger companies, generally covering IP and brand-related lawsuits, while CLEI is something small- and medium-sized businesses take advantage of.
What Expenses Does LEI Cover?
There are two primary structures for business legal expense coverage. These structures are before the event (BTE) and after the event (ATE).
- BTE covers expenses arising in the future. This option provides coverage, like a standard insurance policy, with the insured paying premiums based on its risk profile.
- ATE policies handle lawsuits after the action has begun. This coverage is more expensive because proceedings are underway and expenses are inevitable.
Before purchasing legal expense insurance, a business should examine its current insurance coverage to determine which risks are fully covered and identify areas where there is a gap in coverage. BTE insurance is more widely available because an insurer may consider the applicant less risky. The amount of the premium for this type of protection depends on the line of business and the risks most likely to be faced by that business. Certain types of policies may also cover routine legal advice and legal costs surrounding the protection of trademarks and copyrighted material.
LEI is said to have been first introduced in 1911 when France’s ACO offered such insurance to cover members' fines.
Real World Example
For example, a client may claim that their financial advisor did not advise them of worsening economic conditions and that they, the client, could have avoided this loss. If the advisory company’s liability insurance does not cover legal expenses, the company may consider purchasing legal expense insurance.