House of Commons - Driving premiums down: fraud and the cost of motor insurance

Driving premiums down: fraud and the cost of motor insurance - Transport Committee Contents

2 Ministry of Justice proposals to tackle whiplash fraud

Use of small claims procedure

8. The Government's proposal to raise the small claims threshold for whiplash claims (or personal injury claims more generally) from £1,000 to £5,000 was the most controversial aspect of the package of measure published by the Ministry of Justice in December 2012. Broadly speaking, insurers were in favour because most whiplash claims would be caught by the change and would thereby be simpler and cheaper to deal with: solicitors were against the change, citing concerns about access to justice.

9. We acknowledged that there were good arguments for and against the change. On balance, we did not support the proposal at that time. We thought it likely that access to justice would be impaired; claims management companies would find a way to enter the process, fuelling another boom in their activities; and use of the small claims track could prove counterproductive in efforts to discourage fraudulent and exaggerated claims.[13] We recommended that, before reconsidering this matter at some later date, the Government should:

· Analyse the impact of the electronic portal for submitting personal injury claims on claims management and costs;

· Consider further ways in which litigants in person could be assisted to use the small claims process, particularly in order to counter the inequality of arms likely to arise in personal injury claims; and

· Consider ways in which use of the small claims track could be combined with the routine submission of expert evidence, such as a medical report, to help restrict opportunities for fraud and exaggeration.

10. Whilst still favouring the change to the small claims threshold, the Government accepted our recommendation that, on balance, it was preferable not to proceed with the change at present. We welcome the Government's willingness to engage with the scrutiny process and to change its position as a result of the arguments put to it, particularly in relation to access to justice and possible counterproductive effects of the change.

11. The Government said that it would:[14]

Seek to ensure that adequate safeguards are developed to protect genuine claimants from any detrimental effects relating to access to justice or to the under-settling of claims from any future rise in the limit

We recommend that the Government inform us of what work is underway or planned to develop adequate safeguards to protect claimants from adverse consequences of raising the threshold for using the small claims procedure for personal injury cases.

Medical panels

12. The Government has proposed that medical reports for whiplash injury claims[15] should be supplied by independent medical panels (comprising accredited professionals) using a standard report form, and should be available equally to claimants, insurers, and (for contested claims) the courts.[16] We broadly agreed with this proposal and said:

· the accredited professionals need not all be doctors;

· the practitioners instructed to prepare such reports must be provided with information about the accident and the claimant's medical records;

· the MoJ should explain whether it wishes to mandate for general use the standard medical report form already used for whiplash claims processed using the electronic portal, or introduce an altogether new form.

· a random audit, perhaps by an existing regulator, of at least a proportion of medical reports prepared each year is essential.

13. The Government broadly agreed with these points, although it acknowledged that the provision of information about the accident and the claimant's medical records would have cost implications.[17] The standard report form used in the electronic claims portal will be replaced by an "improved" form, following consultation with interested parties.[18]

14. The MoJ said that precise details of how these recommendations would be implemented would be developed "at pace".[19] A stakeholder group has been established to undertake the work. The evidence we received demonstrated that there are numerous complex matters to be resolved.[20] The MoJ recently gave stakeholders just 26 days to comment on various detailed changes to the road traffic accident protocol and civil procedure rules, with the intention of the changes being made in July and implemented in October.[21] Details of how medical panels will be established-such as the qualifications doctors need to have in order to be accredited or how medical reports will be audited-remain unclear. The Government has committed to publishing details of the scheme and a full impact assessment in due course.[22]

15. Although we welcome the Government's obvious desire to get on with establishing independent medical panels as soon as possible, we are concerned that numerous detailed matters are being decided hastily and, in some cases, without much consideration of different options. We recommend that the Government publish for consultation comprehensive proposals for how medical panels will work, in time for the new system to be introduced by next Easter.

16. We wish to comment on two further issues in this area which have been raised with us by witnesses. Firstly, in proposing to introduce independent medical panels for whiplash reports, the Government is seeking to "address the links which may impair the independence of medical examiners, so that they are not paid by those who favour a certain outcome in their diagnosis and so that they do not have other financial interests in the outcome of the claim".[23] However, this may run counter to other legal changes introduced by the current Government to enable legal practices to be owned by non-legal entities, in what are known as "alternative business structures" (ABSs).[24] For example, Co-operative Insurance said:[25]

We foresee the situation whereby an accredited practitioner could be employed within one entity of an ABS, and the claimant solicitor being another entity within it. We believe that this would be wholly unacceptable, as for the system to be 'fit for purpose' it is crucial that independence and transparency are truly in existence.

17. We wrote to Chris Grayling MP, the Secretary of State for Justice, on this point and he replied:[26]

We do not believe [the Government's commitment to addressing links which may impair the independence of medical examiners] to be at odds with our support for ABS, but clearly we have to come up with arrangements that address concerns around independence, particularly where a [medical reporting organisation] is owned by, or associated with, an ABS. As a minimum, financial links between organisations involved in the claim process should be open and transparent. This means looking at ways to improve transparency in relation to payment for reports so that experts are paid on completion of the report and regardless of the outcome of the claim.

The MoJ has subsequently published detailed proposals to ensure that "there should not be a financial link between the party commissioning the medical report and any intermediary organisation through which the report is provided (or indeed with the medical examiner), other than for payment of the examination/report".[27] In our view, medical reporting organisations should be prohibited from providing reports on whiplash and other soft tissue injuries for claims being pursued by solicitors belonging to the same business structure. Furthermore, a robust accreditation system should provide mechanisms for penalising practitioners whose work is influenced by their view of what the claimant might want in a report. We welcome the Government's intention to act in this area.

18. We also noted concerns from Xpede Medical, a small medical reporting agency employing one member of staff, that the Government's proposals would favour larger firms at the expense of smaller ones. Xpede said:

There could be a tender process requesting medical legal agencies to bid for the tender. This process would mean small startup companies should as mine will have to spend tens of thousands of pounds just to prepare to run for the tender process … small companies like mine will close down leaving only the big companies, including the ones owned by personal injury solicitor firms, to run for tender.

Xpede also expressed concerns about the costs of accreditation for medical staff.[28] We recommend that the Government explain how it will prevent small firms being squeezed out by the introduction of independent medical reporting panels for whiplash and related injuries.

Challenging fraudulent or exaggerated claims

STRIKING OUT EXAGGERATED CLAIMS

19. In our most recent report on whiplash we drew attention to the case of Summers v Fairclough Homes Ltd, which was decided by the Supreme Court in 2012.[29] In this case, an employee exaggerated the extent of injuries he had suffered at work in order to claim £800,000 in damages. Although the courts have the power, in exceptional circumstances, to strike out claims which have been grossly exaggerated, in this case damages of £80,000 were awarded in relation to the genuine injury. Insurers raised this case as an example of undue leniency which might be said to have the effect of encouraging exaggerated claims.

20. We acknowledged the force of the argument that gross exaggeration of a claim should lead to it being rejected outright, even if there were grounds otherwise to award compensation. However, we noted that this is a complex area of law and judicial decisions invariably rest on the facts in individual cases. We asked for the MoJ's view on this matter. It said:[30]

The courts' approach reflects long-established legal principles which have implications across the spectrum of tort law. The Government understands that the issue has been raised with the Law Commission for possible consideration as part of its forthcoming 12th programme of law reform. The Commission will be discussing proposals for its programme with the Ministry of Justice shortly, and we will consider further whether to support its consideration of this issue.

The Law Commission is currently considering whether or not to undertake work in this area.[31]

21. On 7 June, the MoJ announced that it would introduce measures "requiring courts to throw out compensation applications in full where the claimant has been fundamentally dishonest-to stop people who have had an accident from exploiting the system by making bogus claims or grossly exaggerating the extent of their injuries", unless a substantial injustice would arise as a result.[32] No further details of how or when this change would be made have been released.

22. We support, in principle, the Government's proposal to require courts to strike out compensation claims where it can be shown that a claimant has been "fundamentally dishonest" by, for example, exaggerating the claim. Several witnesses also supported the change and suggested that the UK could follow the example of the Republic of Ireland in legislating on this matter. However, there was also widespread recognition that the legal issues are complex and deserved detailed consideration by the Law Commission.[33] We call on the Government to clarify how and when it intends to introduce measures requiring courts to throw out compensation applications in full where the claimant has been fundamentally dishonest. Although we broadly support this initiative we would caution against hasty legislation: the legal issues need to be fully thought through so that the eventual solution is effective and does not have unintended consequences.

INDUCEMENTS TO CLAIM

23. Many witnesses-solicitors as well as insurers-argued that solicitors should be prohibited from offering inducements, such as cash or tablet computers, to people considering making claims. It was suggested that inducements to claim could encourage people to make fraudulent claims.[34] Claims management companies were prohibited from offering such inducements in 2013.[35]

24. We raised this matter with the Solicitors Regulation Authority, which said that "there was insufficient evidence for the imposition of a ban on solicitors offering inducements to claimants". It drew attention to the principles which solicitors are required to follow which, it argued, should ensure that the provision of inducements did not diminish public trust in the legal profession.[36]

25. On 7 June, the Government announced that it planned to ban solicitors from offering inducements to claim.[37] No further details of how or when this ban will be implemented have been published. Inducements to claim are likely to have encouraged fraudulent claims so we support the Government's intention to ban them. We call on the Government to publish details of how and when this change will be made.

PRE-MEDICAL OFFERS

26. We have commented previously on how insurers sometimes offer to settle whiplash claims before a claimant has been subject to a medical assessment.[38] This can make financial sense for the insurer, given the cost of defending whiplash claims and the difficulties in doing so successfully. However, it is widely accepted that this practice could encourage the submission of fraudulent or exaggerated claims, particularly towards the end of the three-year period in which such claims can be made.[39] For example, the Association of Chief Police Officers told us that the practice of offering compensation without there being a medical examination "does not help to weed out any fraudsters who may be uncomfortable about faking an injury to a medical examiner".[40]

27. In its response to the consultation on the Government's whiplash proposals, the MoJ said it was "attracted to introducing a rule to ensure that a medical examination and report is completed before a claim can proceed".[41] Some insurers have reacted cautiously to this proposal. The Association of British Insurers said insurers would need to have confidence that medical reports were worthwhile, fees for reports would have to be controlled, and, in some cases, such as with very minor injuries or claims for injuries sustained months or years earlier, reports would add no value. It warned that:[42]

Any move to prevent the ability of offer to settle claims before a medical report has been obtained and before the proposed reforms to the medico-legal reporting system are implemented will only serve to increase insurers' claims costs which will ultimately put increasing pressure on car insurance premiums.

The Government has recently restated its intention generally to prohibit pre-medical offers but is consulting on whether they should be permitted if a claimant has obtained their own medical report, outside of the system for independent panels currently being designed.[43]

28. We are in no doubt that fraudulent and exaggerated claims have been encouraged by the insurers' practice of paying out for whiplash claims without requiring a medical examination. We strongly agree with the Government's intention to prohibit such offers, as part of the new system for independent medical panels for diagnosis and reporting.

29. Problems caused by claims for injuries sustained months or years ago could be ameliorated by reducing the period in which claims can be made or by requiring firmer contemporary evidence of the impact of the injury. We have made the case for these changes previously, although the Government has not yet been persuaded. In our view, these changes will be required to make the system work effectively.

30. It is unfortunate that the ABI should argue that action to tackle fraudulent and exaggerated claims, by insisting on medical examinations, will increase premiums. We would have hoped for a firmer commitment from the industry to driving out fraud. In our view, money saved from reducing fraudulent and exaggerated claims should more than compensate for any extra costs resulting from more stringent requirements for dealing with whiplash claims.

CLAIMS FOR PSYCHOLOGICAL DAMAGE

31. Axa Insurance drew our attention to claims for psychological reactions to road traffic accidents, which, like whiplash injuries, may be difficult to diagnose objectively. Axa said:[44]

Restricting the scheme to soft tissue injuries runs the risk of moving the problem to other areas. Although psychological reaction to alleged physical injury is unusual and accounts for less than 1% of all motor claims registered with the Compensation Recovery Unit of the Department of Work and Pensions, allegations of travel anxiety or some form of psychological reaction is a common additional feature in many whiplash claims. In the context of low value road traffic accidents an undesirable situation could arise where, in future, there is a robust medical assessment process supported by an accreditation and monitoring process in place for physical injury, but a separate and potentially less rigorous approach in respect of reports addressing any psychological reaction to a road traffic accident.

32. The ABI told us that it was concerned that some solicitors were increasingly ordering additional medical reports on psychological injuries, adding significantly to the cost of claims. Furthermore:

In a number of cases, unqualified individuals are testing claimants for psychological injury. In addition, the questionnaires being used to assess claimants are insufficiently rigorous to reach a robust clinical diagnosis of traumatic anxiety, depression or adjustment disorder without a review being undertaken of the claimant's medical history and records to assess the impact of any pre-existing psychological injury. In addition, even if a psychological injury results from an RTA, there remain doubts as to the effectiveness on the claimant's recovery of providing cognitive behavioural therapy so soon following an RTA

The ABI went on to say that "where a claim for psychological injury is made, that claim is often being advanced for the benefit of the claimant's solicitor rather than the claimant themselves given that the former is seeking to maximise the fee income that can be derived from the claim".[45]

33. The ABI suggested that separate psychological reports were ordered in around 2% of whiplash, neck and back injury claims, twice as many as before 2011.[46] The Motor Accident Solicitors Society said that its own survey had shown that separate psychological reports were requested in 4% of cases. It concluded that "this is clearly an area that requires closer investigation in the future".[47] Once proposals for independent medical panels for whiplash injuries have been implemented and shown to work, the Government should be prepared to extend their scope to other types of injury if necessary. We also recommend that the Government press the Solicitors Regulation Authority to stop some solicitors from playing the system to maximise their income from unnecessary medical reports.

POLICING

34. In our first report on the cost of motor insurance, we recommended that the insurers should fund a police unit specialising in tackling insurance fraud. In July 2011, an Insurance Fraud Enforcement Department (IFED) in the City of London Police was set up, funded to the tune of £9 million over three years by the ABI. Additional funding has since been secured from Lloyd's of London.[48] IFED deals with all forms of insurance fraud and in relation to motor insurance has focused its efforts on 'cash for crash' scams, particularly those in which criminals deliberately cause accidents in order to make claims. We were told that "organised crime groups often have close links with professional enablers including: car replacement companies; car repair body shops; motor engineers; doctors and solicitors".[49]

35. We are in no doubt of the value of IFED as one element in the fight against motor insurance fraud. As the Association of Chief Police Officers argued, IFED "has introduced the very real possibility that insurance fraudsters will be investigated, arrested and prosecuted. This is acting as a deterrent and making insurance fraud a less attractive proposition".[50] IFED's funding beyond this year appears to be uncertain. We expect the insurance industry to continue funding the police Insurance Fraud Enforcement Department in the long-term: we recommend that the Government oversee IFED's funding arrangements to make sure that the unit has a long-term future.

Data sharing

36. We have previously called for greater sharing of data-between insurers and the Driver and Vehicle Licensing Agency (DVLA) and between insurers and claimant solicitors-to help tackle fraud. The MyLicence database, enabling insurers to check DVLA data in real time has just gone live.[51] Data sharing between insurers and solicitors could help identify claimants with a record of making claims. Progress has been slow and the Government has recently called for work on detailed arrangements to be completed by the summer.[52] We are pleased to note that better data sharing to tackle motor insurance fraud is now beginning. We share the Government's wish to see results as soon as possible, but it will also be important to get the details of the scheme right. In particular, data sharing should be compulsory: otherwise, only the most reputable firms will take part and the impact on fraud will be limited.

13 CMI 3, paragraphs 50-54. Back

14 First reply to CMI 3, paragraph 42. Back

15 The Government intends to apply this system to "similar road traffic accident soft tissue injuries, such as those to the back and neck" as well as to 'classic' whiplash claims: First reply to CMI 3, paragraph 9. Back

16 A consultation on arrangements concerning whiplash injuries in England and Wales, Ministry of Justice, December 2012, Cm 8425 (hereafter Whiplash consultation) Part 2. Back

17 Further reply to CMI 3, p7. Back

18 Further reply to CMI 3, p4. Back

19 First reply to CMI 3, paragraph 13. Back

20 For example, see submissions from Express Solicitors (CMI0005) paragraphs 9-17, AXA Insurance (CMI0006) section 2, Your Legal Friend (CMI0008) paragraphs 11-15, Co-operative Insurance (CMI0011), Aviva (CMI0013) paragraphs 5-20, Association of Personal Injury Lawyers (CMI0014) paragraphs 1-8, Royal and Sun Alliance Insurance plc (CMI0015) paragraphs 15-26, Forum of Insurance Lawyers (CMI0016) paragraphs 3-14, Enterprise Rent-A-Car (CMI0019), Irwin Mitchell Solicitors (CMI0020) p3 and p5, Association of British Insurers (CMI0025) paragraph 7 and Motor Accident Solicitors Society (CMI0028) paragraph 13. Back

21 http://www.justice.gov.uk/downloads/civil-justice-reforms/whiplash-proposal-on-fixed-costs-for-medical-examinations.pdf. Back

22 First reply to CMI 3, paragraph 17. Back

23 Whiplash consultation paragraph 12. Back

24 For example, see Keoghs (CMI0007) section 1. Back