Cutting a swathe through legal costs

After two long years of discussions and deliberations, the Department for Constitutional Affairs (DCA) has finally published its proposals on how to reform the personal injury system.

The hefty 92-page document will have far reaching implications for the sector which has long been dogged by inefficiencies and hefty costs.

In December 2005 the ABI published its Care and Compensation paper, outlining its complaints about the current personal injury system and how it should be fixed. It marked the beginning of an insurer-led campaign to clamp down on excessive legal fees.

The ABI estimates that of every £1 paid out in claims, nearly 40p goes on legal costs. The DCA proposes a reformed system which it says is fairer to the claimant, cuts settlement time and dramatically reduces costs.

Under the DCA's proposals the small claims limit will remain at £1,000, but the fast track limit will be raised to £25,000. In the fast track system fixed medical and legal fees will be introduced.

Claimant lawyers will no longer be able to claw back referral fees and after-the-event (ATE) premiums through the settlement. Instead success fees will pay the solicitors' costs which are expected to become proportionate to the overall settlement.

Both insurers and solicitors will have to work within set time periods, to speed up admittance of liability or dispute. Where the case is disputed a district judge will intervene and set new fixed costs and time periods which are proportionate to the case.

Henry Birmingham, vice president of the Forum of Insurance Lawyers (Foil) says the reforms will bring about a change in claimant solicitor culture.

"Fixed costs will concentrate solicitors' minds on what they need to do. It is going to save insurers from arguing about excessive costs. It will save money by introducing predictability and drive out unnecessary costs. It will get rid of the situation where the lawyers receive a better payment than the claimant."

But there are concerns. Dominic Clayden, Norwich Union (NU) technical claims manager, says the level of fixed costs needs to be made clear. "Crucially what isn't in the consultation paper is how much lawyers will get paid," he says.

"Until insurers see the figures, how will they be able to respond to the DCA? We want to see the figures."

The DCA advisory body, the Civil Justice Council (CJC), has held discussions over the past two years about how costs should be fixed. Clayden says if it fails to pull off a deal it could mean the DCA consultation was "utterly pointless".

Nick Gunter, head of technical claims for Fortis, goes further: "The DCA document is a bit scratchy. It fails to set out the methodology of how we come to those fixed costs. Process reform is fine, but until you know what the costs are, how can we respond?"

Culture of fear
The key is proportionate costs, the ABI says. "At the moment legal costs are hideously disproportionate," says Nick Starling, ABI director of general insurance and health. "And that has lead to a culture of mistrust and fear between insurers and lawyers."

Through the ABI, the insurance industry lobbied hard for the small claims limit to be raised to £5,000. In May 2004 the Better Regulation Task Force recommended that the government should investigate what the implications of raising the limit would be.

But the CJC said introducing fixed costs would have the same impact.

The decision to leave the limit at £1,000 has been met with "disappointment" by the insurance industry. "It is an opportunity missed," says Clayden.

But the Association of Personal Injury Lawyers (Apil) has welcomed the news.

Incoming president Martin Bare says: "We're delighted [Secretary of State for Constitutional Affairs] Lord Falconer has recognised that injured people are individuals and their unique needs are not to be treated in the same way as faulty goods."

Raising the small claims limit, Apil says, would leave thousand of claimants without legal representation and open to under settlement by insurers which treat them as cattle.

It may be the case that Apil won the battle but lost the war. One leading defendant lawyer says: "While Apil was focusing on the small claims limit, the ABI was looking at what it could do in other areas to reduce the legal costs.

"Although the small claims limit has stayed the same, other proposed changes will hit claimant lawyers hard."

The DCA decision to raise the fast track limit to £25,000 from £15,000 will see the majority of personal injury claims captured by the fixed costs system. In cases where liability is admitted the DCA says ATE insurance is unnecessary.

It says: "Under our proposals we do not consider it appropriate for the premium for any ATE [insurance] taken out at the commencement of the claim to be recoverable."

Liability insurers have welcomed the move.

Steve Thomas, Zurich's UK general insurance technical manager, says liability insurers have long argued that ATE premiums "are not needed if liability is admitted".

Clayden says: "It will get these cases back to being dealt with as an insurance matter rather then piling on the costs."

Fortis's Gunter says some ATE premium are "grotesquely disproportionate".

But the legal expenses market warned that ATE premiums will rise in cases where they are recoverable.

David Haynes, Arag Legal Expenses underwriting manager, says legal expense insurers will respond by putting up premiums in disputed cases. "Potentially there will be a lot fewer cases, but where there is liability over quantum, premiums will be much higher."

Less lucrative
Introducing fixed fees will also make it less lucrative to buy and sell cases. Referral fees can be sold and brought for as much as £1,000. Buying personal injury cases is big business because of the profits to be made.

The DCA's new model is aimed at bringing about the end of the referral fee system.

"That can't come soon enough," says Thomas. Zurich has long accepted and paid referral fees. But Thomas says it will abandon the process in favour of the reforms.

"What we have at the moment is a layer of costs that we don't need. We would give it up tomorrow."

Foil vice president Birmingham says that both insurers and solicitors have failed to tackle the selling of claims: "Referral fees have become the norm. There has been a collective failure to get to grips with this. The Law Society is divided on the issue."

He says the DCA's desire is to "strip referral fees out of the system".

Economically unviable
Stripping referral fees from the system will also have an impact on claims management companies operating in the sector. "It will be economically unviable to be in the market of selling cases," a source close to the claims management regulator says.

"At the moment there is enough money in the system to encourage spurious claims. There is the option of banning referral fees altogether, but why do that when we can make it less economic to pay and receive them?"

The ABI regards the DCA reforms as the government finally recognising that claimants are not at the heart of the personal injury system.

That admission, says Starling, is to be welcomed. "The government has recognised here that reform is a necessary concern and the ABI can take credit for that. If we hadn't put forward the proposal early we may not have got what we wanted."

But some insurers remain cautious. Clayden says the devil is in the detail. Unless the CJC is able to introduce proportionate costs, insurers will reject the DCA proposals and discussions will go back to square one.

Sensitive discussions behind closed doors will take the debate forward, but as one leading insurer points out: "This is a much better starting point than we had anticipated." IT