What Is Legal Expense Insurance?
Legal expense insurance is a form of protection you can tap to shield your small business or yourself from the various legal expenses you incur if you need to hire and retain a lawyer whether you are being sued, need legal advice, or if you wish to pursue legal action against another business or individual.
There are two types of legal expense insurance available in Canada:
- Before-the-event (BTE) insurance. As the insured (that’s you), BTE legal expense coverage is designed to cover unanticipated events that unfold. It covers your legal costs, disbursements, court costs, and adverse costs (the opposing side’s legal expenses if you’re ordered to pay them). It usually covers legal matters such as employment, contract, and taxation disputes, if your business licence is suspended or cancelled, and property-related issues if you pursue a claim against someone else for damages or trespassing.
- After-the-event (ATE) insurance. ATE legal expense coverage is designed to cover you after filing a claim. If, as a plaintiff, you lose a case or if you’re awarded less than what a defendant’s settlement offer is, ATE pays for disbursement for your lawyer and any adverse costs you’re ordered to pay.
BTE legal expense insurance is more common in our country, according to the Insurance Institute of Canada. But ATE legal expense coverage is also worthwhile – you may wish to purchase it when you agree to hire a lawyer to pursue a case. Without it, you’re on the hook to pay your legal fees and possibly the defendant’s expenses if you go to trial and lose. Talk to a Zensurance licensed broker to determine which option suits your needs best.
6 Reasons Why Your Small Business Needs Legal Expense Insurance
Here are six reasons to why you should consider adding legal expense insurance to your policy:
1. Lawsuits are wildly expensive
Defending your business in a single lawsuit through the litigation process and a trial costs $10,000 at a minimum. It’s more likely to cost over $25,000 for a two-day trial, and the price tag increases dramatically after that.
Moreover, the cost of a lawyer’s hourly fees varies by their experience level. For example, the Law Society of Ontario’s fee schedule shows that a senior counsellor’s hourly rate with more than 20 years of experience is $350 per hour. On the low end, it’s $165 per hour to hire counsel with less than one year of experience since being called to the bar.
If you initiate a lawsuit, it can cost as much as $5,000 for an attorney to prepare and deliver a statement of claim and responding to the defendant’s documents equals up to another $5,000. If your case proceeds to trial, it’ll likely add $5,000 to $15,000 to your legal bill.
2. You are not immune to being sued
Data from Statistics Canada (StatsCan) shows civil court cases decreased by 21% in 2020-2021 compared to 2019-2020, but there were still nearly 700,000 cases that went to trial last year. That decrease is because of the stay-at-home orders issued by provincial governments at the height of the COVID-19 pandemic. StatsCan defines a civil court case as disputes between people or organizations. It’s estimated half of all civil lawsuits are brought against small business owners.
3. Common business transactions
Aside from the risk of third-party lawsuits, think about a few common business transactions any small business owner may need a lawyer to complete. For instance, the average cost of hiring a lawyer in Ontario to help with securing a financing agreement is $3,680. In Western Canada, the average cost is $5,897, according to Canadian Lawyer’s 2021 Legal Fees Survey.
4. Managing employee disputes
Should a disgruntled employee take you to court in a labour dispute, the average national cost for a litigation claim or defence up to mediation or trial is $16,573. It’ll cost you $19,000 if you’re in Ontario, and ranges between $18,000 and $185,000 if you’re in Western Canada, Canadian Lawyer’s data shows.
Furthermore, whether settling an employee-related dispute out of court or losing a case in court, it can run into hundreds of thousands of dollars. For example, one decision in 2018 by the Ontario Superior Court awarded more than $500,000 to the plaintiff against their former employer.
5. Client contract arguments
Contract disputes or disagreements between small businesses or self-employed professionals and their clients are not uncommon. It’s estimated close to 60% of contract disputes lead to lawsuits. And though you may think professional liability insurance, also known as errors and omissions (E&O) insurance, would cover you in such a predicament, that isn’t always the case.
For instance, suppose you’re a professional photographer hired by a couple to take photos and videos of their wedding. You sign a contract with the couple months in advance outlining what services you will provide and your fee, which they pay upfront. Everything’s signed, sealed, and ready to go. However, three days before your client’s big day, a family member becomes seriously ill and is hospitalized. You need to cancel your contract with the client to be with your family member, and although you recommend them to another photographer, the couple decides to sue you for breach of contract.
6. Debt recovery
Even if you do excellent work, meet all deadlines, and deliver the products or services you were hired to as expected and on budget, there are no guarantees your client will pay you in a timely fashion. Most will, but sometimes they don’t, even after you send them a few reminders.
Waiting beyond an acceptable amount of time to be paid for your work makes managing your business’s cash flow challenging. Not getting paid at all is far worse. Legal expense coverage provides you with financial support to go after a client for failing to pay you what you’re owed (which is an otherwise time-consuming, costly, and frustrating experience).
Getting Legal Expense Coverage Is a Wise Move
We inhabit an unpredictable world. Any small business, self-employed professional, or contractor could be sued or may require legal counsel for a wide range of reasons. Having legal expense insurance makes it affordable to get the representation you need while continuing to run your business. Adding this type of coverage to your policy is a smart choice for any business owner or independent professional.