Transport CommitteeWritten evidence from the Ministry of Justice (WL 55)

Executive Summary

1. This Memorandum provides the Ministry of Justice’s written evidence to the Transport Select Committee’s inquiry, announced on 15 March 2013, into reducing the number and costs of whiplash claims. This evidence informed the Government’s consultation paper “Reducing the number and costs of whiplash claims” published in December 2012. The Government intends to take account of the recommendations of the Committee’s inquiry before publishing its response to consultation.

2. Fraudulent, exaggerated and unnecessary insurance claims place a significant financial burden on each and every motorist. The Government is determined to reduce the number of such claims as part of its general strategy of supporting reductions in the cost of living and the cost of insurance premiums.

3. Government figures show that between 2006 and 2011 the number of reported road traffic accidents fell by 20%. Over the same period, there was a 60% rise in road traffic accident personal injury claims. 201213 figures show a small decrease in the number of whiplash claims and the Government is committed to working with stakeholders to continue this trend. Whiplash injuries have been estimated by the industry to account for nearly £2 billion of compensation payments a year, equivalent to 20% of the typical car insurance premium.

4. The Prime Minister held an insurance summit on 14 February 2012 to discuss the increasing cost of motor insurance premiums with the insurance industry. Between December 2012 and March 2013, the Ministry of Justice consulted on specific measures to reduce the number and costs of whiplash claims. The consultation considered two main areas for potential change: first, moving to independent medical panels, appointed or accredited by the court, to improve the diagnosis of whiplash injuries. Secondly, options for the level at which the Small Claims track threshold should be set for road traffic accident related whiplash claims and all road traffic accident personal injury claims to help ensure that we have the right incentives to challenge fraudulent or exaggerated claims.

5. In a wider context, the Government has also introduced, from 1 April 2013, substantial reforms to civil litigation funding and costs in the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act 2012, which take forward Lord Justice Jackson’s recommendations. These changes to conditional fee agreements and the banning the payment and receipt of referral fees in personal injury cases will make a significant difference to the costs involved in civil litigation and the current culture of claims.

6. The Government expects the insurance companies to act on the commitment they made at the Prime Minister’s summit in February 2012 to pass on to consumers and businesses industry estimated savings of approximately £1.5-£2 billion that could come from the reforms on both legal fees and future changes to whiplash claims.

7. The Government welcomes the Transport Committee’s inquiry into whiplash. It looks forward to hearing the Committee’s recommendations and the ideas of other interested parties to put alongside the Government’s proposals for reducing the number and cost of whiplash claims.

Is the Government correct in describing Great Britain as the “whiplash capital of the world”?

8. Available data indicates that whiplash claims are more prevalent in the UK than other European countries, although there have been no worldwide studies completed in this area. A European study from 20041 suggests that the UK recorded a high proportion of motor claims with bodily injuries compared with most other European countries (around 17% compared to around 9% in France) and of these claims the highest proportion related to cervical trauma (broadly whiplash)—around 76% in the UK compared with around 30% in Spain and around just 3% in France. See table 1 below:

9. As stated previously, government figures show that between 2006 and 2011 the number of reported personal injury road traffic accidents fell by around 20%. Over a similar period (200607 to 201112), there was around a 60% rise in road traffic accident personal injury claims. In 201213 there was a small fall (of around 1%) in the number of claims compared to 201112.

10. Both Government and insurance industry figures also indicate that the majority of all road traffic accident personal injury claims are for whiplash injuries. Although, in 201213 the overall number of motor claims where injuries were described as whiplash fell to around 480,000 from around 540,000 in the previous year.

Is it correct to say that the costs of whiplash claims add £90 to the average premium and, if so, what proportion of this additional cost is due to “exaggerated, misrepresented or fabricated” claims?

11. Data published by the Association of British Insurers (ABI) estimates that the current total cost to the insurance industry of whiplash claims to be around £2 billion per year in compensation and legal fees. This compares to a cost to the industry of around £700 million in 2003. The ABI estimates that fraudulent motor claims worth £441 million were detected by the industry in 2011. According to industry figures the level of undetected fraud is currently considered to cost the industry around £1 billion a year.

12. In individual terms, there are a number of factors unique to each customer which affects the final car insurance premium he or she pays. The ABI estimates that on average approximately 20% of the cost of an average car insurance premium relates to the cost to the industry of dealing with whiplash claims. On the ABI figures, this equates to approximately £90 per car insurance premium (the average cost of a car insurance premium in 2011 being £440).

13. It is not possible to quantify what proportion of this cost relates to genuine, fraudulent, exaggerated or unnecessary personal injury claims. The statistics indicate the possible extent of the issue with rising whiplash claims. For example, there has been an increase in the number of claims per accident in recent years, and insurance industry data previously showed that there were around 2.7 claims for whiplash damages made for every accident reported. The above data suggests that this figure may now be above 3 claims per accident.

14. The total cost of dealing with a personal injury claim is generally calculated by combining the damages awarded with the legal costs and other additional costs such as vehicle repair or credit hire. Various sources suggest that that the average claim is around £2,5002, and there is evidence that suggests the majority of claims are less than £5,0003. According to the ABI 2012 key facts brief, the average cost of dealing with a claim is £4,527.

15. The cost of litigation in relation to these claims appears to be high relative to the compensation paid. An ABI report indicates that in motor claims of less than £5,000, for every £1 paid in compensation around 88p is paid to claimant lawyers4.

16. These figures in this section have been provided by members of the insurance industry and have not been verified by the Government. They should be considered indicative only.

Are the proposals put forward by the Government, in relation to medical evidence of whiplash and incentives to challenge fraudulent or exaggerated claims likely to reduce motor insurance premiums and, if so, to what extent?

17. Whiplash is a complex issue and a range of actions from all stakeholders will be required for significant impact to be made on the number of current claims being made.

18. There is currently a societal problem with consumers believing that making a claim for compensation where none is necessary is acceptable because “everyone is doing it”. However, insurance fraud is not a victimless crime; every fraudulent and exaggerated insurance claim that goes unchallenged means the premium of each motorist increases.

19. Concerns have been raised that the current system for claiming for whiplash injuries following a road traffic accident can encourage less meritorious claims. The increase in claims has had a significant impact with all drivers having to face unnecessary higher motor insurance premiums

20. The Ministry of Justice consultation document sought views on the creation a specialist accredited medical panel for whiplash injuries and on whether to increase the small claims threshold for personal injury claims arising from road traffic accidents from £1,000 to £5,000.

21. The Government is of the view that small value whiplash claims can be relatively straightforward and that the cheaper, simpler Small Claims track is a more suitable venue for them than the more expensive Fast track. Raising the threshold for personal injury claims from £1,000 to £5,000 would allow the majority of whiplash claims to be heard in the Small Claims court rather than the Fast track. The purpose of the Small Claims track is to provide an informal and low cost route for litigants to resolve disputes in a simple, straightforward way that is accessible and proportionate to value of the claim.

22. It would also allow defendants to challenge unnecessary or exaggerated claims in a more cost effective way than before. It will act as a deterrent to such claims if insurers challenge the level of damages being claimed rather than offering to settle for costs reasons, in a court track where claimants are responsible for paying their own legal costs (unlike the Fast track, parties cannot recover costs from the losing side).

23. It is not possible to quantify the number of claims that would be discouraged through improvements to the medical assessment process or through changes to the small claims threshold for personal injury claims. It is also unclear how the wider changes to the civil litigation landscape will affect case volumes and costs. The Government believes, however, that the reforms to civil litigation costs and the proposals in the recent consultation will have a significant impact on the costs incurred by insurers in personal injury claims. As a result, the Government expects legal costs to fall and insurers should to start passing on those savings to their customers through lower premiums.

What is the likely impact of the proposals on access to justice for claimants who are genuinely injured

24. The Government is committed to preserving access to justice for the genuinely injured. But that does not mean allowing exaggerated, misrepresented or fabricated claims to go unchallenged.

25. The question of raising the small claims threshold for damages for personal injury claims was last looked at in 2007, when strong arguments were made for raising the limit to address high legal costs. Respondents to the consultation also raised concerns that raising the limit would have an adverse effect on access to justice. The final decision taken at the time was not to raise the limit but to take forward proposals to improve and streamline the claims process itself. This led to the current pre-action protocol and portal scheme. However, with the continuing rise in whiplash claims since then, and the impact these are having on the cost of motor insurance premiums, we believe the time is right to revisit this issue alongside the wider changes taking place in the civil litigation landscape.

26. Improving standards and the way medical assessments are handled are beneficial to all involved in personal injury work. Stakeholder sessions with representatives from the claimant, defendant and medical sectors indicated broad areas of agreement from all parties around the area of independent medical accreditation. We do not believe these or the Governments other proposals on whether the Small Claims threshold for personal injury claims should be increased will compromise access to justice for claimants.

27. The Government recognises that there are risks in such proposals. Some genuinely injured parties may be discouraged from claiming or from challenging a potentially low offer to settle. There is also a potential problem of “inequality of arms”. Claims for injury following a road traffic accident will usually be brought by an individual seeking compensation for alleged injury from a defendant (usually an insurer). Given the limits on cost recovery, the claimant is more likely to be self-represented under the Small Claims track than the Fast track. Whilst the Small Claims track is designed with facilitating access to justice by self-represented litigants at its core, there is a risk that claims will not be presented with equal skill as the defendant may have legal representation.

28. However, the purpose of the Small Claims track has always been to provide an informal and low cost route for litigants in person to resolve disputes in a simple, straightforward way that is accessible and proportionate to value of their claim. The judiciary has a responsibility to ensure that self represented litigants are not at a disadvantage and understand what is required of them and when. In addition, no win no fee conditional fee arrangements will still be available for those with genuine injuries.

29. Significant advice and support is provided to self-represented litigants, including by Her Majesty’s Courts and Tribunals Service. The Civil Justice Council has produced new guidance on how to bring a small claim for litigants in person, which is free to download from the Judiciary website (http://www.judiciary.gov.uk/about-the-judiciary/advisory-bodies/cjc). Many people also have included in their insurance policy “legal expenses” cover, a form of before the event (BTE) insurance cover. Following the implementation of the Government’s reforms to civil litigation and costs, we expect a number of new innovative BTE insurance products to be developed for this market.

Are there other steps which the Government should be taking to reduce the cost of motor insurance?

30. We welcome the Transport Committee’s call for ideas on what more Government can do to reduce the cost of motor insurance premiums. However whilst Government can set the framework, including the legislative boundaries within which lawyers and others work, it can only do so much. It is for others, for individuals and lawyers, claimants and defendants to also step up to the plate with innovative ideas and ways all parties can work together to reduce the number and cost of fraudulent, exaggerated and unnecessary claims.

31. The Government has taken firm action to reduce the costs associated with civil litigation. There have been far too many claims being brought in to the legal system inappropriately, and once in the system they are being resolved too late at a high and disproportionate cost. Since the Prime Ministers insurance summit in February 2012 the Government has:

introduced Continuous Insurance Enforcement, making it illegal to own an uninsured vehicle unless has a registered statutory off road notification;

consulted on increasing the penalties for uninsured driving;

implemented (on 1 April) Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (including fundamental reform of conditional fee agreements and a ban on the payment and receipt of referral fees);

banned claims management companies from offering upfront cash incentives or other gifts to people who bring claims to them; and

consulted on proposals to reduce the number and cost of whiplash claims.

32. The reforms implemented on 1 April 2013 will remove incentives for excessive litigation, and will make a significant difference to the costs involved in civil litigation and the culture of claims. In addition, the Department of Transport will also shortly be publishing a Green Paper on measures designed to help reduce premiums for young drivers, who pay more in insurance claims than any other group of drivers.

33. In addition, the Competition Commission is also currently investigating the motor insurance sector and is looking at the provision of credit hire and vehicle repair services. Uncontrolled costs in these areas can add a considerable extra cost to an insurance claim, which is ultimately passed on to consumers through higher premiums. The Government will consider carefully the results of this investigation and any recommendations made by the Competition Commission for improvements in this sector.

34. In terms of whiplash, the Government would like to see insurance companies addressing the behaviours which encourage excessive and unnecessary claims within their own business models. Following the referral fee ban, lawyers can also be more active in checking claims are genuine before agreeing to represent clients to challenge claims.

35. The Government is keen to ensure that the number of unnecessary, exaggerated or fraudulent claims—which have led to high premiums and contributed to the growth of a compensation culture—fall. Since the Prime Minister’s summit in February 2012 there has been a vigorous debate in the media about the issues around the high number of personal injury claims in England and Wales. Also during this period the Insurance Fraud Enforcement Division5 of City of London Police, have made a significant impact on identifying and tackling insurance fraud.

36. The numbers of claims are now decreasing, but it is vital that all involved in this industry continue to work together to ensure that not only do the genuinely injured receive the compensation they deserve, but that those making unnecessary, exaggerated or fraudulent claims are effectively deterred from doing so. Greater co-operation between the insurance industry and claimant lawyers is vital to this process, and the Government encourages the sharing of data on potential fraudsters. Such co-operation is crucial to help to stop fraudulent claims at source.

May 2013

1 http://www.svv.ch/sites/default/files/document/file/CEA_HWS-Studie_englisch.pdf

2 Written evidence from AA motor insurance to the Transport Committee. The Cost of Motor Insurance, Volume I (March 2011). Written evidence page 62. Data for a sample of RTA personal injury claims from one commercial source indicates that the median claim is for around £2,600. These data relate to three types of case only and only to a very small proportion of the total number of cases. Whether the data is representative of wider cases brought has not been verified.

3 Written evidence from Saga group to the Transport Committee. The Cost of Motor Insurance, Volume II (March 2011). Written evidence page 19. Data from the same commercial source as for footnote ‘4’ indicates that more than 75% of claims are valued at less than £5,000.

4 ABI, Tackling whiplash Prevention, Care, Compensation. November 2008

5 http://www.cityoflondon.police.uk/CityPolice/Departments/ECD/IFED/

Prepared 29th July 2013