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Motor insurance referral fee ban outlined

13 September 2011

Jack Straw today introduced his Motor Insurance Regulation Bill to parliament, under the ten minute rule. This follows the statement of Jonathan Djanongly last week that the Government will implement a ban on referral fees in relation to personal injury claims.

Straws Bill proposes:

to make it a criminal offence to solicit, offer or pay for any personal injury claim arising from a road traffic accident (RTA) (Straw commented that he would propose to widen the Bill to injury claims generally)

to require clear objective evidence to establish a claim in connection with whiplash

to reduce fixed fees for injury claims under the current pre action protocol for low value injury claims arising from RTAs to £600 (half its current value)

to prohibit insurers from isolating risk on the basis of a geographic area smaller than a region.

Many interest groups, including insurers, public bodies and the Law Society, believe that referral fees are unattractive and drive up legal costs without there being any discernible benefit to the general public. The fees form the basis of the business model of claims management companies (CMCs), which are commonly seen as having driven an increase in claims. At a typical value of £700 per claim, this is a substantial layer of costs.

However, Straws Bill is unlikely to be sufficiently robust to tackle many of the problems associated with the industry. For example, one of his complaints was in relation to NHS trusts being paid to advertise the services of personal injury companies but the Bill will not affect such advertising. In addition, many insurance companies currently profit from referral fees and the press report this week about Admiral will feed fears that in fact even if these changes are introduced, insurance premiums will not come down.

More fundamentally, the Legal Services Act will permit CMCs to introduce new business models such as employing in house solicitors so that the means will exist so that CMCs will continue to profit from fees in injury claims.

Proposals to reduce the fixed fees payable for such claims are likely, in our view, to prove far more popular with liability insurers. However, Straws figure would appear to be one that has been reached with little research. While we would favour a review of these fees, we see little merit in an arbitrary reduction, particularly as this could be open to challenge in the Courts. In addition, this figure is not consistent with the research carried out by Lord Justice Jackson with his assessors.

We have also been concerned to hear that plans for qualified one way costs shifting (which are separate from Straws Bill) may include provision to prevent defendants from recovering fixed costs under the process. That would undermine the key incentives for claimants to settle claims early.

Straws additional proposals to restrict whiplash claims are unlikely to prove effective and the proposals are somewhat woolly. Surely if an expert reports, as is now the case, that there is a whiplash injury, that would be "clear objective" evidence?

Straw commented in parliament that whiplash is "a profitable invention of the human imagination" and questioned the reliability of the experts who provide the diagnosis. Based on our experience, we must disagree. Whiplash is a widely recognised injury, with a well understood causal mechanism. While individual cases may be questionable, it is rare to find an expert who dismisses the existence of whiplash altogether.

In response to a private question, Straws office has informed us "the requirement to provide more definitive proof of injury to ensure we crackdown on fraudulent claims would obviously not affect those with genuine injuries".

However, the issue of fraudulent claims is entirely separate from concerns over claims for injuries of limited severity. Evidence of injury from an appropriate expert is already required and "more definitive proof" may only serve to increase cost.

In our view, the steps already being taken by the industry to deal with claims more efficiently under the pre action protocol for low value injury claims arising from RTAs is more likely to reduce litigation costs. We would encourage the Government to look again at the introduction of a formal damages tariff for whiplash claims, which will further reduce costs.

The Bill raises a number of important issues, but we are not persuaded that the measures proposed are the right ones to address them.

In our view:

the focus in relation to low value injury claims should be procedural efficiency so that litigation costs are controlled

additional evidence in relation to whiplash claims is not attractive as it will increase cost

a damages tariff for whiplash claims would be a valuable tool in resolving these more quickly and cost effectively

costs in relation to the pre action protocol for injury claims arising from RTAs should be kept under review, but a kneejerk reduction is not what is required.

Straws Bill has yet to be published. We will circulate a further email bulletin when it is published. The Bill will have its second reading on 20 January 2012.

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