ARAG Legal Expenses Insurance Company Limited · DRN-6134841

The complaint Mr S complains that ARAG Legal Expenses Insurance Company Limited (ARAG) has unreasonably deducted the cost of an assessment from the policy indemnity when he made a claim on a legal expenses insurance policy. What happened Mr S holds a legal expenses insurance policy with ARAG. He made a claim, seeking cover for his expenses in proceedings related to an employment dispute. The details of his proceedings are of limited relevance to my decision, which relates to the policy indemnity and whether costs incurred should be deducted from this. The policy has an indemnity limit of £100,000, meaning this is the most ARAG will pay for his legal expenses. During the claim, ARAG asked solicitors to assess whether Mr S’ claim had reasonable prospects of success. The solicitors confirmed that Mr S’ claim did have such prospects. ARAG agreed to continue covering the expenses, but deducted the cost of that assessment from the policy indemnity. Mr S complained to ARAG about this, as he thought the cost should be met by ARAG outside of the policy indemnity. When it rejected his complaint, he referred it to our service. Our investigator agreed with Mr S, and didn’t think the cost of the prospect assessment should be deducted from the policy indemnity. ARAG disagreed with this, as it says the assessment is not only beneficial to it as the insurer but also to Mr S, and the policy terms and conditions say that all legal costs fall within the indemnity. Mr S agreed with the principle that the assessment cost should be separate from the indemnity limit, but believed ARAG should be asked to pay compensation for the distress caused to him. Our investigator didn’t think ARAG should pay compensation. As no agreement could be reached, the matter has come to me to make a final decision. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. In light of the responses to both parties to our investigator’s opinion, it seems there are two things I need to decide: • Whether the cost of the prospects assessment requested by ARAG should be deducted from the policy indemnity limit. • If not, whether ARAG should be required to pay compensation to Mr S for this error. It’s clear that I should initially address the first question – as if no error has been made, then

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it follows that ARAG wouldn’t be liable to pay compensation to Mr S. I’m aware there may be a perception that the question of whether the cost of the prospects assessment should be included in the policy indemnity limit is, to a certain degree, moot. After all, the policy has an indemnity limit of £100,000, a significant sum. However, legal proceedings can be very costly, and so Mr S wants to be in a position where he knows what indemnity amount is potentially available to pursue the claim – and doesn’t want this cost to reduce that amount. The terms and conditions, in common with many legal expenses insurance policies, requires that a claim has “reasonable prospects” of success – in other words, a 51% or greater likelihood of success. Those types of conditions aren’t inherently unfair or overly onerous, as it wouldn’t be reasonable to expect an insurer to fund a legal action that is unlikely to be successful. Mr S’ claim isn’t about whether it’s reasonable for ARAG to rely on that condition, but rather whether the cost of obtaining the necessary assessment should form part of the policy indemnity. The terms and conditions say: “We will pay an appointed representative, on your behalf, costs and expenses incurred following an insured incident, provided that: a. the most we will pay for all claims resulting from one or more event arising at the same time or from the same originating cause is £100,000” “Costs and Expenses” are defined as: a. All reasonable and necessary costs chargeable by the appointed representative and agreed by us in accordance with the DAS Standard Terms of Appointment. b. The costs incurred by opponents in civil cases if you have been ordered to pay them, or you pay them with our agreement.” I note, and agree with, ARAG’s suggestion that an assessment of the prospects of success gives a benefit to both the insurer and policyholder. However, simply because it has some benefit to Mr S, I don’t think it necessarily follows that the cost should be deducted from the policy indemnity. The prospects assessment allows Mr S to establish the legal position of his proposed claim, and the likelihood of success. Critically, however, ARAG establishes whether it should be liable for Mr S’ legal expenses. Put simply, cover for the claim couldn’t be properly assessed without that assessment. On that basis, I think that the cost of an initial prospects assessment should be considered both a legal expense in the broad sense that it is an expense charged by a legal professional, but also a claims administration cost in that it is required in order to assess cover. Typically, an insurer’s costs in administering and assessing a claim wouldn’t be deducted from a policy indemnity limit for legal expenses. For these reasons, I don’t think it’s fair for ARAG to deduct the cost of the initial prospects assessment from the policy indemnity available for Mr S’ claim. I’m conscious that as a claim progresses, it may be necessary for further prospects assessments to be obtained. In saying that an initial assessment shouldn’t be deducted from the policy indemnity, that isn’t to say that the cost of subsequent assessments couldn’t reasonably be deducted. The context in which such an assessment was required, and the reasons for this, would need to be taken into consideration. I can’t make a comment on what may or may not happen as the claim progresses.

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Mr S has outlined that he believes ARAG should be required to pay compensation for the distress and inconvenience caused by ARAG saying the cost of the assessment would be deducted from the policy indemnity. He suggested an amount of £200 would be fair. Mr S hasn’t suffered a financial loss here, as the indemnity limit hadn’t been exhausted, requiring him to incur costs which would otherwise have been covered by ARAG. I also can’t identify any meaningful impact on Mr S by ARAG’s action. He hasn’t, for example, lost out on representation or suffered any detriment to his claim. The only inconvenience I can identify is to Mr S in disputing this matter, including by referral to our service. I understand that disputing something which I’m not finding in his favour would be time consuming, and he may consider that ARAG could have avoided this by agreeing with his position from the outset. However, as I’ve outlined above, Mr S has had the benefit of the prospects assessment which sets out the legal basis for his claim and the likelihood of success. He also now gains the benefit that the cost of that legal advice isn’t deducted from the policy indemnity. I don’t believe that the level of inconvenience here means that any compensation should be paid by ARAG. My final decision I uphold Mr S’ complaint. In order to put things right, ARAG Legal Expenses Insurance Company Limited must exclude the cost of the initial prospects assessment carried out from the policy indemnity limit. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr S to accept or reject my decision before 16 April 2026. Ben Williams Ombudsman

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