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Higher Education institutions face a unique set of challenges when it comes to risk management. Their landscapes of liability encompass a range of risks including health and safety, financial and business stability, discrimination claims and reputational integrity. Clearly it is good practice for universities and colleges to have comprehensive insurance in place to mitigate these risks.

Many insurance policies will include a provision for legal expenses cover in the event of a claim being brought against the institution. Insurance providers will often have a recommended legal services provider or panel of law firms that they encourage or even try to compel the insured to use. The links between the insurer and the law firm can be very close, including sharing a corporate parent. Even without such organisational close ties, it will be in the interests of the insurer to keep legal costs as low as possible.

The cheapest legal remedy to a claim brought against an institution may not always be the wisest choice for the institution when taking a broader view. Very often the interests of the insurer, who pays the legal expenses, and of the insured can diverge.

Consider a hypothetical example involving an institutional client. In an unfortunate event a student at the institution is badly injured. The institution notifies its insurers. The Health and Safety Executive brings a prosecution against the institution. The insurers' legal services provider considers the case and advises the institution to plead guilty; this is the cheapest way of disposing of the claim for the insurers.

The danger comes when such decisions are driven by immediate cost consequences rather than by a proper assessment of the merits of a case. Of course, in some cases a guilty plea will be appropriate on the facts. But where this is not the case, the institution risks substantial reputational damage in the interests of minimising costs for its insurers. Such damage could lead to significant financial loss over the longer term and harm the position of the institution in the academic community. Clearly a plea motivated purely by initial costs considerations represents an unwise business decision.

In addition to a prosecution by the Health and Safety Executive, the institution in this example could also face a civil claim from the injured student. An admission of liability in the Health and Safety prosecution might prejudice the institution's position in the civil action and vice versa. Very often it is therefore appropriate to consider the separate legal actions together to ensure that the institution's position remains consistent throughout and that minimum prejudice is caused in any parallel proceedings. Such situations underline the importance of seeking independent legal advice in circumstances in which the institution feels that the insurer and the insurer's solicitors may not be acting in its best interests. It may be that an independent second opinion is enough to persuade the institution to stick with the insurer's solicitors and be confident that it is getting the right advice. On the other hand, if the independent solicitors advise a more robust course of action, the institution may decide to change horses.

An insured party has the freedom to choose its lawyer under the Insurance Companies (Legal Expenses Insurance) Regulations 1990. This right is also enshrined in case law. However there has been debate within the industry concerning the point at which the insured can choose to instruct a law firm which is not the insurer's preferred choice. Some argue that this right kicks in as soon as the insured requires the services of a law firm; others say that it is later, when a claim is issued against the insured. It may in circumstances such as those described above be in the institution's interests to instruct its alternative law firm of choice as soon as possible; a good law firm would defend its client's right in this respect robustly.

Once the right of the insured to instruct its law firm of choice has been established, the question of legal fees follows. Many insurers will cover legal fees only at the rate charged by their panel firms. In such situations, it could be worth the insured "topping up" this figure from its own funds if necessary in order to obtain advisers with appropriate expertise and independence. In scenarios such as that described above, this could be an investment that more than pays for itself in the years to come.

If you require further information on anything covered in this briefing please contact William Charrington ([email protected]; 020 3375 7171) or Sally Mantell ([email protected]; 020 3375 7131) or your usual contact at the firm on 020 3375 7000.

Further information can also be found on the Higher Education page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2016

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