House of Commons - Cost of motor insurance: follow up

Cost of motor insurance: follow up - Transport Committee Contents

2 Personal injury claims and referral fees

5. As the tables below show, the number of personal injury claims arising from road traffic accidents is continuing to grow, despite there being fewer casualties from such accidents.Number of motor insurance injury claims notified to the Compensation Recovery Unit[8]

2000-05 average 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

395,735 466,097 518,821 551,905 625,072 674,997 790,999

Number of casualties in road accidents[9]

2000-04 average 2005 2006 2007 2008 2009 2010

301,529 271,017 258,404 247,780 230,905 222,146 208,648

There is widespread agreement that better access to justice, particularly arising from the legalisation of 'no win, no fee' arrangements, has been the main driver for this increase. Many of these claims are undoubtedly genuine. Some are fraudulent, such as 'cash for crash' scams involving staged accidents. The genuineness of others, particularly some claims for whiplash injuries, is hotly contested. In this chapter we discuss proposals for changing the law on claims for whiplash; referral fees; and data protection issues.

Whiplash

6. Around 70% of motor insurance personal injury claims arise from whiplash injuries,[10] for which there will often be no objective evidence. Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers".[11] In his ten minute rule bill, Mr Straw has proposed that compensation for whiplash should only be paid where "clear objective evidence of real injury" is provided.[12] Paul Evans, the CEO of AXA UK, described whiplash as "medically unprovable" and said:[13]

Because it is my responsibility to defend a claim as an insurer, I have no defence because I can't prove that it does not exist any more than a customer can prove that it can exist, and therefore it is a very easy claim.

On the other hand, Andrew Dismore of the Access to Justice Action Group said that there was new evidence of an organic cause for whiplash and that it could be diagnosed by a test. He argued that "if the insurers think whiplash does not exist at low velocity, test it in court".[14] The Motor Accident Solicitors Society (MASS) mentioned research which concluded that "a change of velocity of 2.5 mph was sufficient to cause symptoms" associated with whiplash.[15]

7. Jonathan Djanogly MP, Parliamentary Under-Secretary of State for Justice, described whiplash as a "complicated area". He argued that Government proposals to limit the recoverability by claimants of the success fees charged by solicitors to take on 'no win, no fee' cases as well as the premiums for insurance against losing such cases would "suck money out of the market" and reduce the number of whiplash claims. He also suggested that insurers had "been induced to settle too easily" and that with a more "balanced suing mechanism" whiplash claims would be defended more vigorously: "from a governmental point of view … we encourage them to do so".[16]

8. Where someone can demonstrate that they have suffered an injury, including whiplash, as a result of a road traffic accident for which they were not fully liable they should be able to claim and receive compensation. However, in relation to whiplash, we are not convinced that a diagnosis unsupported by any further evidence of injury or personal inconvenience arising from the injury should be sufficient for a claim to be settled. In our view, the bar to receiving compensation in whiplash cases should be raised. If this were possible by means of an insurer taking a case to court and establishing new case law we suspect this would already have happened. We note the Government's argument that its legal reforms should reduce the money in the system and encourage insurers to defend claims more vigorously. If the number of whiplash claims does not fall significantly once these changes are implemented there would in our view be a strong case to consider primary legislation to require objective evidence of a whiplash injury, or of the injury having a significant effect on the claimant's life, before compensation was paid.

Referral fees

9. We described in our earlier report the 'merry-go-round' of referral fees paid to secure business relating to an insurance claim. As we noted in our previous report, there are sharply divided views on these fees. While some witnesses described them as a form of marketing cost, which had no impact on premiums, others suggested that referral fees were a symptom of excess costs in the market which had contributed to rising premiums.[17]

10. Since our previous report was published some insurers, including AXA UK, have chosen not to accept referral fees. Mr Evans described the fees as "immoral" because they reflected inflated fees for solicitors and the ease of securing compensation for whiplash.[18] He confirmed, however, that AXA UK continued to receive referral fees from credit hire firms, although it preferred to arrange a bilateral agreement not to use credit hire and, as a result, "last year we referred only 4,700 people into a credit hire situation for an average fee of £300".[19]

11. We recommended that there should be more transparency about the connections between insurers and solicitors (and other firms involved with motor accidents) and that, when claims are made, insurers should make it clear to claimants that they need not use the solicitor, credit hire firm or vehicle repairer recommended by the insurer. At that time, the Government was awaiting advice from the Legal Services Board on whether or not legal referral fees should be banned, following the recommendation in favour of a ban from Lord Justice Jackson in his review of civil litigation costs. The Board decided against a ban, recommending instead more transparency and oversight of any detriment to consumers arising from referral fees by the various legal regulators. It was particularly concerned about the uncertainty caused by the imminent introduction of 'alternative business structures' in the legal services market, whereby people without legal qualifications will be able to offer legal services, and the possibility of a ban creating "perverse incentives which lead to more harmful behaviour, such as the payment of 'under the counter' inducement fees".[20]

12. The Legal Services Board has provided new guidance on the transparency of referral fees for the legal regulators to implement.[21] It will review the impact of the guidance in 2013-14. The Government told us that it awaited the response to the guidance of the regulators and the insurance industry.[22] Although we welcome the Legal Services Board's new guidance on the transparency of referral fees, it does not go far enough. Firstly, it relates to fees paid by solicitors but leaves untouched the fees paid by others involved with motor insurance claims, such as garages and credit hire firms. Secondly, we are disappointed that the Government has not given a stronger signal that more transparency is necessary. We recommend that this is done, for example by Ministers setting out the information they think insurers should provide to consumers and drawing attention to examples of good practice. Thirdly, we are disappointed that the insurers, who have complained about the dysfunctionality of the current system, have not done more to improve it. Our recommendation about transparency was met with silence from the insurers, which perhaps tells its own story.

13. The Government announced its decision to ban referral fees in personal injury cases on 9 September. Legislation to achieve this, added into the Legal Aid, Sentencing and Punishment of Offenders Bill, was debated in the House of Commons on 1 November.

14. Although primarily focused on referral fees paid in relation to personal injury claims, the Government has also provided for the receipt of referral fees to be prohibited, something which could apply to all types of referral fee.[23] Various questions were raised in the House about the new legislation, including how it might apply in relation to alternative business structures, how referral fees would be defined, and when a ban would be implemented. Under the legislation the payment or receipt of referral fees would be a regulatory offence.[24]

15. One of the points made in the debate was that a ban on referral fees might be ineffective if the legal costs associated with personal injury claims from motor accidents under £10,000 are not also reduced. Mr Straw said:[25]

I believe there is now widespread agreement that the current fee, of at least £1,200 for claims under £10,000, is at least twice as high as it should be. It is leading to lawyers advertising as two firms at the end of my street in Blackburn do: they have great banners across their windows saying, "Bring your claim in here, we'll pay you up to £650 in cash for it." They can do that and still make a profit out of the £1,200, because the actual costs of running the portal [for low value claims] are about £100.

John Spencer of MASS pointed out that the fixed fees were agreed by the insurers as well as the claimant solicitors' organisations. He was concerned that cutting the fees "might reduce down the level of service that people receive".[26]

16. Mr Djanogly told us that reducing the fixed fees was being considered: "You are right that we cannot get insurance premiums down, for instance, or it would be hard, without sorting out the fixed costs as well … We have initiated that process." However, this would require negotiation with the solicitors' organisations which did not necessarily accept that the fees were too high.[27]

17. Legislation to ban referral fees is now in the House of Lords and can be expected to reach the statute book by the Spring. Implementation will come later, perhaps much later, and will depend on how the regulators approach questions such as the definition of 'referral fee'. In the meantime, the introduction of alternative business structures could transform the market for legal services and render this debate largely redundant. Despite these doubts, we note the swift action taken by the Government to tackle this issue and make two recommendations. Firstly, once the Bill is enacted, we call on the Government to prioritise the implementation of what was new clause 20 in the Commons, Regulation by the FSA, which could prohibit insurers from receiving referral fees across the board rather than only in relation to legal action.

18. Secondly, one way to help reduce premiums may be to consider whether the legal costs of low value claims processed using the pre-action protocol and online portal are reasonable. We recommend that the Government review how the protocol and portal have operated since they were introduced last year, looking in particular at how the fixed costs associated with the protocol relate to the actual cost of the work involved and whether use of the protocol acts as an incentive for insurers to concede claims which ought to be defended. This review should be conducted and its results published within six months.

Data protection

19. A final aspect of this issue concerns claimants' personal data. Mr Dismore said that in taking out or renewing an insurance policy customers were "authorising the insurer concerned to basically sell my data to anybody they wanted … the claims management companies cannot get that information from anywhere else other than insurers".[28] Mr Evans denied that this occurred.[29] Mr Straw said that there were "clear breaches of data protection and Ofcom rules, not necessarily in respect of insurance companies but by other parties here".[30] Concerns have also been raised about cold calling and text messaging, which seek to persuade people into making personal injury claims for accidents and injuries which are often long forgotten. Mr Dismore said these communications came from unregulated marketing companies.[31]

20. Our sister committee, the Justice Committee, heard oral evidence from the Information Commissioner in September who argued that "even in cases where insurance companies had a clause in the small print of policies giving them permission to pass data to lawyers the practice might still not be legal". The Committee said it was "struck by the range of illegal behaviour that referral fees can reward, from individuals stealing data to companies with contracts or practices which breach the Data Protection Act" and recommended that stricter penalties under the Data Protection Act which were agreed by Parliament in 2008 should now be implemented.[32]

21. Mr Evans described the "poor, innocent victim" of a road traffic accident as "a profit centre and a very valuable commodity that everyone wants to get their hands on to sell to the solicitor".[33] We would go further than this. Any claimant on a motor insurance policy is a valuable commodity to a whole range of firms, keen to offer legal assistance, vehicle hire or vehicle repair. As soon as a claim is made, claimants are bombarded with calls from such firms and it has to be questioned whether claimants have properly consented to this and understand who is calling them and for what purpose. We agree with the Information Commissioner and the Justice Committee that this loose, potentially illegal, attitude to data protection is driven by the endemic nature of referral fees. We recommend that the Government send a clear message to the insurance industry that it expects the data protection legislation to be fully respected and we echo the recommendation of the Justice Committee that the stricter penalties for breaching the Act, passed by Parliament in 2008, should be brought into force.

22. We also call on the Government to initiate an investigation of cold calling intended to generate personal injury claims, with a view to examining the legal and regulatory options for curtailing this activity.

8 See CMI first report, p9, table 1 and latest Compensation Recovery Unit performance statistics at http://www.dwp.gov.uk/other-specialists/compensation-recovery-unit/performance-and-statistics/performance-statistics/. Back

9 Taken from Road Casualties Great Britain, annual reports published by the DfT. Back

10 CMI first report, paragraph 16. Back

11 HC Deb, 13 Sep 11, cc897. Back

12 Ibid. Back

13 Q15. Back

14 Q20. Back

15 Ev 23 paragraph 35. Back

16 Q64. Back

17 For example Ev 25 and see CMI first report paragraphs 24-25. Back

18 Q15. Back

19 Qq 16, 18. Back