2 Personal injury claims and referral
14. In summarising its reasons for the recent increase
in the cost of motor insurance, the British Insurance Brokers'
Association (BIBA) put:
the increase in the propensity to claim, the increase
in the amounts awarded, the impact of claims management companies
and the increases in the number of whiplash claims.
at the top of the list. 
The AA told us that "the effect of increasing numbers and
costs of personal injury claims has increased insurers' costs
by at least 30% per annum" in recent years.
Most other witnesses identified personal injury claims as one
of, if not the, main driver of higher premiums.
Table 1: Number of motor insurance injury claims notified to the Compensation Recovery Unit
15. Table 1 shows that the number of personal injury
claims relating to motor accidents increased by over 70% in the
latter half of the last decade.
The number of personal injury claims now far outstrips the number
of accidents: several people, including both drivers and both
sets of passengers, can make claims in relation to a single accident
but it is unsurprising from these figures that concerns have been
expressed about the scale of fraud in this area.
16. Around 70% of motor insurance personal injury
claims arise from whiplash injuries.
Witnesses were divided as to whether these were always genuine.
RBS Insurance suggested that many whiplash claims were fraudulent
and Nick Starling of the Association of British Insurers argued
that people were tempted to claim whiplash injuries because "it
is a soft tissue injury. There is no physiological evidence, as
I understand it, that you've got that injury".
A favourable comparison was drawn with Germany, where fewer claims
for whiplash injuries are allowed by the courts.
David Powell of the Lloyd's Market Association explained why it
was difficult for insurance firms to challenge claims, given that
they were based on a doctor's certificate.
However, John Spencer of the Motor Accident Solicitors Society
(MASS) contested "the inference that a whiplash injury is
not an injury".
17. Several witnesses said that the average amount
awarded to personal injury claimants was increasing rapidly: the
ABI suggested that average awards were increasing by 20% per annum.
Our attention was also drawn to the very high awards made in relation
to severe injuries, particularly to young people.
The Association of Personal Injury Lawyers (APIL) cautioned against
measures which would cap or reduce awards, arguing that awards
in the UK were "too low in any event".
The ABI disagreed with this view and cautioned against a reduction
in the discount rate applied to lump-sum payments which could
lead to higher payouts.
Why has the number of personal
injury claims increased?
18. Mark Boleat and the Claims Standards Council
attributed the rise in the number of personal injury claims to
the introduction of conditional fee arrangements (otherwise known
as 'no win, no fee') and a number of subsequent reforms.
These changes would appear to account for the significant and
continuing growth in the number of claims. The Claims Standards
Council said that the introduction of conditional fee arrangements
had led to the establishment of claims management firms, which
"promoted themselves to consumers offering advice to people
wishing to make a claim and referring them on to a solicitor".
19. We heard criticism of claims management firms
for generating personal injury claims, particularly as a result
of "aggressive" marketing techniques.
David Brown of the Institute and Faculty of Actuaries said that
there were specific parts of the country, particularly north west
England, Yorkshire and the north east, where claims management
firms are particularly active and have generated "at least
half" of the total number of claims in those areas.
He observed that personal injury claims were significantly lower
in Scotland, where claims management companies do not operate
because of differences in the legal regime.
20. Mark Boleat defended claims management firms,
arguing that they had "contributed to access to justice"
and that enabling people to claim compensation for injuries they
had suffered was no bad thing.
The Claims Standards Council said that there were "only very
small pockets of abuse" in the sector following the introduction
of self-regulation in 2006. It pointed out that "every part
of the sector operates claims management activity" including
law firms and "insurance brokers using telesales services
to secure personal injury clients".
National Accident Helpline "strongly oppose[d] the view that
the main cause of the increase in personal injury claims from
2005-10 is advertising of claims management companies and TV advertising".
21. The possibility of incurring legal costs will
have dissuaded some people injured in motor accidents before conditional
fee arrangements were brought in from claiming compensation for
their injuries. The provision
of wider access to justice is to be welcomed, but it has come
at a cost. Motor insurance premiums must now pay for compensation
for personal injuries and legal costs on a far greater scale than
22. Lord Justice Jackson's review of civil litigation
funding and costs recommended that conditional fee arrangement
success fees should no longer be recoverable from the losing party
in any case. The Government is currently consulting on this proposal.
This issue has ramifications which extend well beyond the scope
of this Report. In our view,
the Government should ensure that arrangements exist to enable
people injured in a motor accident to claim compensation, regardless
of their income. However, wider access to justice should not provide
an opportunity for people to make fraudulent claims for compensation
for non-existent or pre-existing aches and pains.
We return to this issue below.
Legal costs and referral fees
23. According to the ABI, some 10% of motor insurance
premiums pay for the legal costs associated with personal injury
claims and the average legal cost associated with a claim (£2,100)
is almost as great as the average amount paid to the claimant
complained of "disproportionate fees"
but this was disputed by MASS which said that insurers were involved
in agreeing the legal costs' regime in 2003 and 2010.
In oral evidence, Mr Spencer argued that the average legal cost
per claim had decreased in recent years.
APIL cited evidence that "legal costs as a percentage of
total payouts by insurers have remained constant at 30 per cent
for many years".
A web-based portal for processing smaller claims of under £10,000
was introduced in 2010: witnesses could not agree on whether or
not it had yet proved beneficial in reducing costs.
The ABI said it was encouraging claimants "to go direct to
the company insuring the driver who caused the accident and get
[their] redress through them" but this practice was not supported
by APIL, who feared that claimants might be "under-compensated",
or National Accident Helpline, which suggested that this practice
had led to an increase in claims.
24. Over 40% of personal injury lawyers pay referral
fees to receive work from insurers or claims management firms.
Fees range on average from £200 to £1,000 per referral
and there can be several referrals in relation to a single insurance
claim. Fees may be
paid and received by insurance firms, vehicle repairers, rescue
truck drivers, credit hire firms,
claims and accident management firms, law firms and medical experts.
Swiftcover.com sent us evidence that some police forces charge
fees for collecting vehicles which are unfit to drive following
an accident. ABP
Club, which represents vehicle repairers said "innocent policyholders
are often 'encouraged' by their own insurer to pursue a claim
as their insurer will gain financially from this in the form of
a referral fee from the lawyer they pass the case to." It
referred to this practice as a "great merry-go-round with
each insurer gaining at the cost of another insurer".
Insurers Aviva said that solicitors' marketing costs, including
referral fees, can now total as much as 40% of their base costs,
which are reclaimable under conditional fee arrangements.
John Spencer of MASS said "there are large amounts of insurance
company income deriving from the very referral fees that are complained
25. Mark Boleat argued strongly that referral fees
were a form of marketing cost and did not add to overall costs
in the insurance industry.
APIL said "there are no circumstances of which we are aware
which would result in referral fees generating an increase in
26. Referral fees are another aspect of the Jackson
review of litigation costs: he recommended abolition or capping.
Witnesses were divided over what to do about referral fees, some
agreeing with Jackson, at least in part,
and others arguing that he had got it completely wrong.
Laurence Beck of the Claims Standards Council said "some
of the intentions [of the Jackson recommendations] are very good
but I think most of the good that will come out of Jackson happens
already to be in place".
It was suggested that if referral fees were outlawed claims management
firms would buy up solicitors' practices.
27. The Legal Services Board's study of referral
fees thoroughly examined the case for and against the payment
of such fees by solicitors, including the impact on costs and
the independence of legal advice. It accepted the view of its
consumer panel that there was not sufficient detriment to consumers
to merit a ban on such fees but there were concerns about transparency.
The panel concluded that transparency "alerts consumers to
the possibility of conflict, counters pressure selling, encourages
consumers to compare prices to find the best deal and helps regulators
to monitor the market".
28. In our view, consumers are largely unaware of
how much money moves around the insurance industry when they make
a claim, particularly if they were not at fault for the accident.
We suspect consumers are often confused about why their insurer
insists that they use a specific vehicle repairer or solicitor
and about whether they are entitled to make their own choice.
The Legal Services Board has made recommendations about the transparency
of referral fee arrangements in the legal sector which we consider
should form the basis for a transparency regime throughout the
motor insurance market. Insurers
should publish on their websites a list of the firms with which
they have referral arrangements, an indication of the level of
the fees paid, and a clear explanation of how referral arrangements
work and their purpose. Policy holders should be sent this information
with their insurance documents. When claims are made, insurers
should make it clear to claimants that they need not use the solicitor,
vehicle repairer or credit hire firm which is recommended by the
insurer. We look to the insurance industry to implement a more
transparent regime for referral fees by the end of next year and
to the Government to step in, with legislation if necessary, if
the industry is unwilling or unable to agree on this.
29. Witnesses mentioned the different approaches
to dealing with personal injury claims arising from motor accidents
in Scotland and Germany, which have different legal jurisdictions.
In some jurisdictions, including in certain parts of Canada, motor
insurance is provided on a 'no fault' basis, whereby each party
claims against their own insurer for their own losses irrespective
of who was responsible for the accident which led to the claim.
There is evidence that switching to no fault insurance can reduce
personal injury claims and, therefore, premiums.
We put this suggestion to the Department which described it as
"interesting" but said "it is always difficult
to compare legal systems in different jurisdictions".
30. Another issue we explored was whether it would
be preferable for drivers, rather than vehicles, to be insured.
This would prevent 'fronting', for example. The Minister said
"that is a lot easier said than done" and would require
legislative change. He pointed out that some firms were now offering
family policies, with named drivers keeping separate no claims
discounts. We also
received evidence arguing for motorists to be held more strictly
liable for injuries caused to cyclists and pedestrians.
31. It would seem that a number of countries have
taken steps to restrain the number of personal injury claims in
relation to motor insurance, for example by changing the nature
of the insurance system or making other legal adjustments. Although
we accept the Minister's point that not all of these changes will
be applicable to the UK, because of differing legal regimes,
we would be surprised if the UK had nothing to learn from international
experience. We recommend
that the Department sponsor a research project on international
experience in restraining the number of personal injury claims
relating to motor insurance, with the aim of publishing a discussion
paper on this issue during 2012 outlining possible options for
30 Ev 72 paragraph 4.2. Back
Ev 62 paragraph 2.4.6 and also see Ev 43 paragraph 6, Ev 44 section
2 and Q35. Back
For example Qq92,174,Ev 43 paragraph 6, Ev 57 paragraph 6.1, and
Ev w8. But see Qq 232-34 for a different perspective. Back
Insurers and other compensation providers are required to provide
details of personal injury claims to the Department for Work and
Pensions' Compensation Recovery Unit. See Ev w28, paragraph 12
and Richard Lewis, Annette Morris and Ken Oliphant, Tort personal
injury claims statistics: Is there a compensation culture in the
United Kingdom?,(2006) 14 Torts Law Journal, pp158-75. Back
Ev 52 paragraph 3.14. Back
Ev w20. Back
Ev 64 paragraph 5.3.3, Ev w19 paragraph 24, Qq 16, 106. Back
Q180 and Ev w35 paragraph 4.2.1. Back
Ev 51 paragraph 3.4 and Ev 69 paragraph 2.2. Back
Ev 74 and Ev w14. Back
Ev 83 paragraph 20. Back
Ev 53-54. Back
Q122, Ev 86-87 and annex C to the appendix to the memorandum from
the Institute and Faculty of Actuaries, which is available in
the Parliamentary Archives. Back
Ev 86. Back
Ev 43 paragraph 8, Ev 50 paragraph 2.5, Ev 61 paragraph 2.4.1,
Ev 69 paragraph 2.3, Ev w11, Ev w17-19 paragraphs 8 and 19 and
Ev w36 section 5. Back
Q14, Ev w18 paragraph 12 and Ev w35 paragraph 4.2.1. Back
Ev 83 paragraph 4; see also Ev 87 and Qq 177 and 240. Back
Ev 87. Back
Ev w28 paragraph 11. Back
Government Response to Jackson, section 2.1. Back
Ev 50-51 paragraphs 2.4, 3.7. Saga said that legal costs accounted
for 20% of premiums, see Ev w18 paragraph 17. Also see Ev 47-48
paragraphs 2.14 and 2.17 and Q12. Back
Ev 50-51 paragraphs 2.4, 3.7. Back
Ev 81 paragraph 6. Back
Qq107, 231, Ev 72 paragraph 3.13, Ev 82 paragraph 11, Ev 88 and
Ev w10. Back
Ev 81 paragraph 8. Back
Ev w28 paragraph 18. Back
Referral Arrangements, Legal Services Consumer Panel, May
2010 (hereafter LSCP) p13. Back
Ibid, para 1.3 and p14 andsee Qq217 and 219. Back
which supply drivers with a replacement vehicle. Back
LSCP p15. Back
Ev w35 section 4.1. Back
also see Ev 45, 47 on the credit hire market, paragraphs 1.5 and
2.8 to 2.12. Back
Ev w24-25 paragraph 1.2. Back
Qq 98, 117. Back
Qq 148-154 and Ev 83 paragraphs 4 and 5. Back
Ev 82 paragraph 13 and Qq 225-26, 230. Back
Review of Civil Litigation Costs: Final Reports, Lord Justice
Jackson, Dec 09, chapter 20. Back
Q179, Ev 46 paragraph 1.6, Ev 72 paragraph 3.13, Ev w10-11 and
Ev w31-32 section 10. Back
Ev 83 paragraphs 19-20, Ev 88, Qq 191, 252-53. Back
LSCP, chapter 9. Back
LSCP, paragraph 8.23. Back
Ev 45 section 4 and annex E to the appendix to the memorandum
from the Institute and Faculty of Actuaries, which is available
in the Parliamentary Archives and Ev w19 paragraph 24. Premiums
are capped in some jurisdictions, see for example "The Impact
of Rate Regulation on Claims Evidence from Massachussets, Automobiles
Insurance", R. A. Dering and S. Tennnyson, Casualty Actuarial
Society, 2008 Discussion Paper Program. Back
"The Influence of Motor Vehicle Legislation on Injury Claim
Incidence", M. Lemstra and W. P. Olszynski, Canadian Journal
of Public Health, Jan - Feb 2005, Vol. 96, No. 1, pp65-68. Back
Ev 88 and Q217. The Royal Commission on Civil Liabilities and
Compensation for Personal Injury recommended in 1978 a switch
to a no fault compensation scheme for people injured in road accidents
funded by increased petrol duty, but its recommendations were
not accepted by the Government - Command 7054 and the then Prime
Minister's statement to the House, 14 March 1978. Back
Ev w37-39 paragraphs 11-29 and Ev w39-40. Back