Bearing the brunt of the personal injury reforms

An overwhelming sense of betrayal and disappointment was felt across the insurance industry when the government finally published its reforms of the personal injury claims process last month.

For such a drily titled report, Case track limits and the claims process for personal injury claims, it certainly packed a punch. Or rather, it didn’t. Compared to the

far-reaching reforms proposed in the consultation paper published all the way back in April 2007, the Ministry of Justice has barely scratched the surface of a system agreed by many to be broken beyond repair. Worse still, the negative impact of the changes it has made will be almost entirely felt by insurers, with claimant solicitors, claims management companies, unions and legal expenses insurers left unscathed.

“Everybody’s just reeling from the fact that they thought this was going to be a useful contribution to reforming the claims culture and it just came out slanted in favour of claimant lawyers,” says John Bell, head of claims at broker Aon, summing up the sentiments of the industry.

The avowed intention of the reforms was to speed up and slim down the system for granting injured people compensation after road traffic accidents, accidents at work or in the public domain. Insurers argued that claimant solicitors were carrying out unnecessary work for straightforward claims, incurring large fees and dragging out the process. They estimated that for every pound paid out in compensation, another £1.40 goes towards the costs of bringing the claim. Since the government effectively abolished legal aid for personal injury claims in 2000, leaving defendant insurers to fund cases, the costs of settling claims have spiralled. Where liability is disputed by an insurer, solicitors could earn success fees of up to 100% of the amount of compensation. Trade unions earn referral fees of up to £600 for passing cases on to solicitors.

In response to the consultation, one local authority reported a case where compensation of £1,200 was dwarfed by legal costs of £12,000. Another case was settled well before trial for £1,400. But the legal costs claimed were £11,774 – plus £1,355 for preparing and checking the bill.

“There’s no need for solicitors to do a lot of work where there’s no dispute on liability,” says Roy Hebburn, divisional claims manager (technical) at Allianz. “There’s an industry that has grown up around additional costs – trade unions and solicitors earn a huge amount of money.”

Personal injury claims fall into three categories – motor, which covers 70%-75% of cases, employers’ liability and public liability. They also follow different tracks depending on the size of the claim: small claims are under £1,000 with little legal involvement; fast track claims involving solicitors currently cover everything up to £15,000; and the rest fell into the multi-track process, where there is serious injury or a complex set of circumstances.

The report back-pedalled on proposals to raise the small claims limit, stating – with no apparent irony – that “a better option would be to improve the claims process”. There will be a new streamlined system, but only for motor claims under £10,000. It also raised the upper limit for fast track claims to £25,000, though in practice, the more complex ones will still be referred to the multi-track process.

Under the new process, people injured in road traffic accidents would visit their solicitors, who would submit a standardised claim notification form to the defendant’s insurer. As yet, there is no final version of the form. The consultation envisaged a five-day deadline for solicitors to submit forms to insurers after the claimant first contacted them, and then insurers would have 15 working days to admit liability or not. When it finally emerged from the consultation mill however, the proposal looked a little different.

The five-day deadline for solicitors is still there, but it has been watered down so as to be meaningless. It now starts to run “as soon as the claimant solicitor has gathered all the required information to complete the claim notification form”. So rather than limiting the work a solicitor puts into the claim before the insurer has had a chance to accept liability and therefore fast-track it through the system without the need of expensive and time-consuming legal attention, the process gives solicitors as long as they want.

“For the claimant to have all the time in the world while the insurer has only 15 days with no extension is manifestly unfair. It is also incredibly dangerous.

Henry Bermingham, Foil

But insurers must still respond within 15 days, most likely via email. The consultation mooted extensions for insurers in a specified list of situations – where a client could not be contacted because they were on holiday, for example. This was dismissed as unworkable in practice – it would be impossible to compile such a finite list and the inherent uncertainty in the system would open the door to satellite litigation over whether or not claimant solicitors were right to refuse extensions. So there will be no possibility for an extension of an insurer’s decision on liability, regardless of the circumstances. Understandably, insurers are angry with such a one-sided decision.

“We were prepared to work within that time limit with a view to speeding up the process, providing there were other changes,” says Hebburn. “The proposal was that solicitors have to submit documents within five days of receiving notification from their clients, to strip unnecessary costs incurred from investigations. As soon as a solicitor takes any action, the clock starts running. Now that has been taken away, the solicitor doesn’t have five days, he has as long as he likes. He can go around incurring costs, but insurers have still only 15 days in which to respond.”

Of course, claimant solicitors are pleased with the outcome and have little sympathy for insurers’ complaints. Fraser Whitehead, a senior litigation partner at Russell Jones & Walker, says: “I’m pleased the government has brought this in. I believe it represents a real opportunity for the industry to move forward. It is essential that insurers do come to the table, reorganise their ‘back of house’ and deliver prompt decisions on liability. If they can deliver in this area, they will merit consideration of a broader approach to this way of working. If insurers fail to deliver, they have no right to complain. Most insurers cannot make a decision in three months let alone 15 days. I can’t see why any claimant lawyer would delay filling in the form. All it would be doing is depriving its clients.”

Some insurers have taken this more optimistic view that if they can prove the system works for lower value motor claims, it may be extended in due course. But others fear the new process may end up being worse than the old one.

Where insurers admit liability within the deadline, cases will proceed along the simplified route incurring fixed costs. These have yet to be agreed [see box]. But where the insurer misses the deadline or the defendant alleges contributory negligence, the claim drops back into the normal process.

Henry Bermingham, president of the Forum of Insurance Lawyers (Foil), which represents firms which work for insurers, is concerned about the unforeseen consequences. “For the claimant to have all the time in the world while the insurer has only 15 days with no extension is manifestly unfair. It is also incredibly dangerous,” he warns.

Bermingham believes that the costs payable for claims that fall outside the new system could be so much larger that they will not only encourage insurers to accept liability more often – inviting fraudulent claims – but actively discourage defendants from alleging contributory negligence.

For example, where a claimant helped to cause an accident by speeding or their injuries were greater because they were not wearing a seatbelt, such contributory negligence might reduce a claim by 25%.

“In that kind of situation, with a claim worth £2,000, you might get up to £500 discount by alleging contributory negligence. But by going outside the system, you could pay four or five times as much in costs. It could increase from a £700 fixed fee to up to £6,000. In a case where there’s fault on both sides, alleging contributory negligence would have a cost implication. What you’ve got is a system that leaves the claimant in the driving seat able to take as much time as they want, while the defendant is put under terrible and unreasonable time pressure and enormous economic pressure to pay up.

“All of that adds up to what is a very dangerous set of proposals. Every person who has a driving licence and a car is a potential defendant in a road traffic case. I would like to feel that if I were involved in an accident, insurers were not under so much pressure that I don’t have a fair crack of the whip. The right to a fair trial applies to the trial and the process that gets you there.”

Another area where the latest report fails to deliver on the consultation’s promises is in the after-the-event (ATE) insurance premiums for legal services. Since legal aid in personal injury cases was stopped, victims who do not already have legal insurance ‘ ‘ arrange cover with a specialist provider. In the vast majority of cases, the premiums are paid by the defendant’s insurer.

“The reason why the committee exists is that the interests of the interested parties do not all point in the same direction. It is always a balancing act.

Steve Nickell, chairman of the Advisory Committee on Civil Costs

The original consultation paper proposed that ATE premiums would only be recoverable where the insurer disputes liability or misses the time limit, reasoning that where liability was admitted at an early stage there was no risk of costs to a claimant.

ATE insurers feared for their business models, but they need not have worried – the government has left the system unchanged.

“Overall, we’re very, very happy with the way it’s worked out,” says Tony Buss, managing director of Bristol legal services insurer Arag. “The only area where there’s potential for change is with the road traffic accident claims, amounting to less than 50% of cases in the ATE market. It’s a little early to know for sure because the MoJ’s response is a little unclear on what will happen with claims going in and out of the process.”

ATE premiums are around £350, whether a case lasts one day or 10 years. Buss expects that under the new system, premiums will be lower for cases where insurers admit liability within the 15-day deadline to cover the solicitors’ fees for gathering information and submitting the claim notification form. But, he says, they will rise to reflect the greater risk in cases where liability is disputed.

“Overall, it’s the same amount of money in the system. It just depends how you divide it up. The question is how easy is it to go in and out of the system. Insurers could admit liability within 15 days, but if there’s a dispute about causation or the quantum [level of damages] it goes out of the system. That’s the next area of clarification. We’re asking a load of lawyers that and they’re coming back to us saying ‘we’re asking the same thing’.” Buss expects, for the sake of administrative simplicity, this risk will be factored into overall premiums.

This is another reason why, for insurers, time will be money as never before. Allianz has already set up a system for speeding up investigations in anticipation of the new process. Allianz’s Hebburn says: “People at the front of a personal injury claim have the knowledge and experience, so they can decide whether to admit liability or not. We’ll continue with that – insurers have to find some way of taking expense out of the system.”

If the reforms fail it could encourage the growing trend for rehabilitation, believes Peter Ashdown-Barr, chief executive of industry collaboration body InterResolve. “The failure of the reforms might have a positive impact. Insurers must look another way. If they can reach claimants directly, but ensure they are independently looked after, then the present expensive and inefficient system can be side-stepped. This brings benefits both to claimants and insurers. If insurers want to capture more claims, the key is to ensure that claimants are advised and cared for by independent organisations that are not hide-bound by the existing system.”

Before the new process can come into effect, the fixed fees must be included in amended court rules, signed off by the Master of the Rolls, the most senior judge of England and Wales. There are two timeslots for this – in April, or October. It seems unlikely all the details will be ironed out by next spring, so the earliest it will start is October 2009, two and a half years after the consultation was first issued.

In the meantime, there are still several aspects of the new system to be ironed out. Apart from fixed fees, the format of the claims notification form is still unclear, and the amount of work that needs to be done before it is submitted to insurers – crucial to firming up vague proposals for a five-day limit for solicitors.

The government says it will also work with stakeholders on standardising special damages, something insurers supported in the consultation document. The Civil Justice Council, which initially kicked off the reform process seven years ago, is in talks with the government about mediating discussions but has so far been unable to agree the terms of engagement.

The ABI will be lobbying on all these issues, represented on the advisory committee on costs by Dominic Clayden, director of claims at Norwich Union.

It will also continue to lobby elsewhere in Parliament. Justin Jacobs, the ABI’s assistant director of property, motor and liability, says: “If this government isn’t prepared to go further, we need to make sure we’re doing everything we can to explain the situation to the other parties. A proper reform is one that no one welcomes but everyone accepts. Here, one side clearly welcomes and the other side doesn’t accept it, so it’s clearly not a balanced set of proposals.”