The Financial Services Authority has ordered legal expenses insurers to prove to the regulator that they comply with European law that gives policyholders certain rights to choose their own solicitor.

The FSA’s insurance sector director Ken Hogg warned insurers that, in light of a European Court of Justice ruling in September 2009, policy terms that ‘detract from, or qualify in any way, the freedom to choose a lawyer’ might be illegal.

Hogg has given insurers until 30 September to tell the FSA what they have done to ensure that the terms of their LEI policies comply with the law.

At present, insurers often require LEI policyholders seeking to make a claim to instruct solicitors from a panel chosen by the insurer. These panel firms will usually pay referral fees to the insurer, or undertake work at reduced rates, in exchange for receiving the cases.

The ECJ ruled in Eschig in September 2009 that a legal expenses insurer cannot insist that its policyholders use its panel solicitors rather than a solicitor of their own choice.

However, Hogg said in his letter that, under European law, there are exceptions to this general rule.

Philippa Luscombe, clinical negligence partner at London firm Penningtons, said that a test case in the English courts might be necessary to determine whether Eschig should be interpreted as not allowing exceptions.

Hogg said in his letter: ‘The ECJ ruling in Eschig made it clear that any provisions of a contract that detract from, or qualify in any way, the freedom to choose a lawyer, will not be compliant with [European law]. The FSA is obliged to ensure that the regulations are applied effectively and that customers are treated fairly.’