George Osborne’s crackdown on claims management firms could cut the legal fees responsible for soaring motor premiums.
By Chris Torney
Motorists could be in line for cheaper car insurance following the news that the government is to clamp down on Britain’s “no win, no fee” compensation culture.
The cost of settling claims adds millions of pounds to motor insurance premiums every year.
In his Budget speech, chancellor George Osborne said he would implement the recommendations made by Lord Young in his 2010 review of UK’s health and safety laws.
This is likely to mean a drastic reduction in the number of personal injury claims brought on a no win, no fee basis, as well as legislation to ban the widespread advertising of this type of service.
Britain’s drivers, who are already celebrating a cut in fuel duty announced on Budget day, look likely to benefit. (Motorists win battle as fuel duty is cut.)
The cost of our compensation culture
In a recent investigation into soaring motor insurance premiums, the House of Commons Transport Select Committee was told that the cost of meeting claims for injuries such as whiplash added around £100 a year to the price of a typical policy.
Around 40 per cent of this is attributable solely to legal costs.
Osborne’s announcement was applauded by the insurance industry.
Nick Starling, director of general insurance and health at the Association of British Insurers, said: “We welcome the chancellor’s promise to implement in full Lord Young’s recommendations made in his health and safety legislation review. Lord Young rightly identified how badly interpreted or misunderstood regulation, bureaucracy and disreputable claims management firms have contributed to a compensation culture.”
Starling added that such firms helped fuel the belief that behind every accident there should be a claim, and added costs to the legal system that had to be met by all policyholders.
What are the problems?
In his report, Lord Young identified a number of problems with the current legal system which meant that the cost of dealing with personal injury claims had spiralled out of control.
One of the biggest issues is that individuals can bring claims for compensation at little or no cost – even if they are unsuccessful. (Why your car insurance is costing you more.)
Hundreds of solicitors offer no win, no fee agreements, partly because they can take out insurance against losing the case. What’s more, the present set-up allows the solicitors to recover the cost of this insurance, plus any success fees, from the losing party if they win.
He also believes ministers should address the way claims management firms operate.
These companies advertise to the public, and encourage anyone who thinks they may have a compensation claim – typically for an accident that “wasn’t their fault” – to contact them.
Young says there are a two damaging issues with this system:
- Many adverts for claims managers offer members of the public cash inducements if their case is accepted.
- The managers then auction off their cases to solicitors, who pay a referral fee if they are awarded the business. The report found that referral fees had leapt from an average of £250 per case in 2004 to £800 in 2010.
These extra payments add an extra burden to the cost of legal action, which is ultimately passed on to consumers in the form of higher insurance premiums.
How the government will act
Lord Young’s advice – which the government now says it will act on – is that solicitors should not be able to recover their success fees or the cost of insurance against losing the case from defendants.
This will inevitably mean that compensation awards to claimants are cut.
He also wants referral fees to be limited – say to £200 per case – or banned outright. And the advertising carried out by claims management companies should be subject to severe restrictions.
At the moment, for example, many claims managers cold-call or text individuals to encourage them to bring cases.
An investigation by MPs
Earlier in March, the MPs on the Transport Select Committee published their own report on rising car insurance costs.
The committee said it wanted to see more transparency on referral fees – which are also paid to insurers by solicitors – so consumers had a better idea of who was being paid to pass on their claims.
But the ABI said the committee had not gone far enough, and said the fees should simply be outlawed.
Nick Starling added that action against claims management firms and the UK’s compensation culture was the only way to control legal costs.
He said: “Until this happens the cost of motor insurance will continue to rise.”
