2 Personal injury claims and referral
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
Number of casualties
in road accidents
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
6. Around 70% of motor insurance personal injury
claims arise from whiplash injuries,
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 imaginationundiagnosable except
by third-rate doctors in the pay of the claims management companies
or personal injury lawyers".
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.
Paul Evans, the CEO of AXA UK, described whiplash as "medically
unprovable" and said:
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".
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.
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".
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.
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.
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.
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".
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".
12. The Legal Services Board has provided new
guidance on the transparency of referral fees for the legal regulators
to implement. 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.
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.
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.
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:
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".
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.
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
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.
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".
Mr Evans denied that this occurred.
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".
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
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.
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".
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
Taken from Road Casualties Great Britain, annual reports
published by the DfT. Back
CMI first report, paragraph 16. Back
HC Deb, 13 Sep 11, cc897. Back
Ev 23 paragraph 35. Back
For example Ev 25 and see CMI first report paragraphs 24-25. Back
Qq 16, 18. Back
Referral fees, referral arrangements and fee sharing: Decision
Document, Legal Services Board, May 2011, chapter 1, paragraphs
8 to 14. Back
ibid, pp 10-15. Back
Government reply, p3. Back
See HC Deb, 1 Nov 11, c824. Back
HC Deb, 1 Nov 11, c830. Back
Qq 18-19. Back
Q6 and see Qq 58-60 for the Minister's response on this point. Back
Referral fees and the theft of personal data: evidence from
the Information Commissioner, Justice Committee, Ninth Report,
Session 2010-12, HC 1473, especially paragraphs 10-14. Back