Playing it safe

“A measure of the success of regulation of the claims management industry is that the perception of a runaway ‘compensation culture’ has largely been dispelled.” So wrote then justice minister Bridget Prentice in last year’s Claims Management Regulation Annual Review.

One year and one new government later, the compensation culture debate is back. Lord Young of Graffham’s review of health and safety – commissioned by prime minister David Cameron – starts from the premise that such a culture exists. Its terms of reference states that it will investigate the growth of the compensation culture, as well as “the current low standing that health and safety legislation now enjoys”.

Unsurprisingly, liability insurers are pleased. “It is fascinating that they’ve looked to address this issue so early in the life of the coalition,” QBE claim director Andrew McBride says. “It’s very heartening.”

Some commentators say the unions’ reliance on referral fees was the reason Labour shied away from taking any action. But in 2004 the cross-departmental Better Regulation Task Force found the compensation culture existed only in perception, not reality.

Law firm Keoghs’ market affairs director, Steve Thomas, says behaviour has changed. “People are more wary of finding themselves in situations where they can be sued.”

A campaign by the Countryside Alliance Foundation to encourage teachers to take pupils out of the city more proves the point. Almost half identified a “fear of litigation in the unlikely event of an accident” as a barrier to any trips, but statistics obtained under the Freedom of Information Act show that, of the millions of school trips taken between 1998 and 2008, only 364 ended in legal action and just 156 in compensation.

Association of Personal Injury Lawyers (APIL) chief executive Denise Kitchener says she hopes Lord Young realises that “there’s more to health and safety and compensation than common misconceptions and banner headlines”.

Crucial role

Although the review’s two elements are clearly linked, they need to be looked at separately. “Health and safety legislation has to play a crucial role in protecting people from serious injury – and protecting the state from the cost of supporting them,” Kitchener says. “Reducing the law isn’t the right approach.”

Broadly speaking, most insurers agree. AXA managing director of claims David Williams says good health and safety regulations have helped “massively”. Garwyn health and safety director Mike Williamson points out that the main pieces of legislation have been in place for many years and that the number of accidents has gone down – 151 people were killed at work in 2009/10, a record low.

But claims have not been going down by the same proportion, he says, because cases that wouldn’t have been seen five or 10 years ago – such as those involving a massive element of contributory negligence – are coming through. He says Garwyn’s loss adjusters successfully repudiate 40% of claims.

For him the problem is how the legislation is interpreted. “It is encouraging defensive behaviour rather than proper risk management,” he says. This leads to stories about local authorities banning conker competitions and the like.

Groupama director of claims Phil Bird believes there is a fear factor at work. “People who have to take on health and safety as part of their responsibilities have used it as risk prevention rather than risk management,” he says.

Forum of Insurance Lawyers chief executive Laurence Besemer agrees. “Health and safety regulations have lost a lot of their credibility and have been misinterpreted,” he says. If this continues, he warns, risk avoidance rather than risk management will become the norm. “Where risks can’t be avoided, costs could become prohibitive – which could become detrimental to profitability and therefore for economic recovery.”

But Williamson argues that new guidance is needed to address this, not a change in the law. “It would be a disaster if we went too far in letting companies self-regulate.”

Crash course

The real problem surrounding compensation is in motor claims. Compensation Recovery Unit (CRU) figures show that motor is the only claims category to increase over the past decade. They hovered at around 400,000 per year until 2004/05 but had shot up to 675,000 by 2009/10.

Some blame The Law Society’s 2004 decision to drop its ban on referral fees, but APIL offers other possible explanations, such as the growing number of new drivers and the fact that 20% have a crash during their first year behind the wheel.

Another factor fuelling the increase, APIL and others argue, is the growing practice of third-party capture in which insurers approach potential claimants directly to settle their claims quickly and before a lawyer is involved.

Liability insurers have no doubt about the reason for the rise in litigation: claims management companies (CMCs) advertising for people to come forward with injuries and selling those cases to solicitors, who handle them under no win, no fee agreements.

“Claims farming adds nothing to the process except cost, and that cost has to be recouped,” Williams says, echoing the views of Lord Justice Jackson, who, in his review of litigation costs published in January, recommended banning referral fees.

Williams acknowledges that insurers also receive referral fees, but reckons that a fixed fee of £200 (Jackson’s fallback position in the event a ban is not introduced) is reasonable in terms of marketing expenses. “Lawyers can then compete on speed, quality and efficiency, not on who is the highest bidder.”

Right to claim

Referral fees, however, have been reviewed to within an inch of their lives of late, and have emerged unscathed. First an economic analysis conducted for the Legal Services Board (LSB), then the Legal Services Consumer Panel and finally the Advisory Committee on Civil Costs have all come out against reintroducing the ban.

Contrary to insurers’ claims, the LSB’s economic analysis found no evidence that higher referral fees have increased the price of legal services. Although premiums have probably increased, researchers said this was partly offset by the referral fees that insurers receive. In any case, it was “difficult to describe this as detriment”, as the rises were caused by consumers exercising their right to bring a claim.

APIL has never been keen on CMCs and referral fees, but accepts them as a fact of life. Kitchener says that she would like to see the Advertising Standards Authority looking at personal injury advertising to ensure it helps educate the public that they “don’t just get money for any old accident”.

At a Claims Standards Council workshop held earlier this year, consultant – and former ABI director-general and Ministry of Justice (MoJ) head of claims management – Mark Boleat distributed a paper which said that CMCs were “not an independent factor in increasing the number of claims, but rather were the means by which a market opportunity was exploited”.

Council chairman Darren Werth insists that what CMCs do is good for the public. That claims are going up while the number of motor accidents is going down “shows to me that access to justice is working”, he says.

Werth has told Lord Young that “the demographic of the people we reach out to are the type of people who aren’t particularly sophisticated, are scared of going to a lawyer, but are looking for a way to access the system”. He believes that most malpractice is the result of contrived accidents, which have nothing to do with CMCs.

But Besemer counters that the access to justice argument must be seen from a wider social viewpoint: it is, after all, bearing the cost of increased premiums. He points to figures showing a 250% increase in legal costs over the past decade: while in 1999, for every £1 paid in damages, 38p was forked out in legal costs, that has now risen to 93p. “Claimant lawyers are entitled to reasonable reward, but we would argue that that rise has become disproportional,” Besemer says.

But Werth counters that no win, no fee means there is no point in solicitors chancing their arm with a bad case. Yet insurers say that they sometimes take a commercial decision to pay.

But why not fight and recoup your costs? Groupama’s Bird suggests one reason is that it is “too easy to claim whiplash”, which makes defending even bad claims hazardous.

Cohesive proposals

There is a sense, though, that the Young review is not needed, at least as far as compensation is concerned. We are only three months into the MoJ’s new claims process for uncontested road traffic claims worth less than £10,000. After a troubled start, it is picking up speed. AXA is now admitting liability within 15 days in 61% of cases, Williams says. Costs have fallen by £200 a claim and, although he reckons they could come down more by hitting referral fees, “we don’t want to throw that away”.

Then there is widespread insurer support for the Jackson report amid signs of a greater interest from coalition ministers than their Labour predecessors. “I don’t think there’s a need for another review,” Williams says. “We’d just sign up to Jackson.”

Bird predicts that Jackson would do more for insurers than Young through ending recoverability of additional liabilities and extending the use of fixed fees. McBride says: ‘If we saw Jackson implemented … it would reduce claims frequency and disproportionate costs.” Claimant lawyers argue that Jackson would result in vulnerable people, those least able to afford to bring claims, losing out financially.

Now we wait. It is clear from what Lord Young has said in public that he wants change. Intensive lobbying is underway and whatever comes out of the review is unlikely to be the end. Essentially, one man’s compensation culture is another man’s access to justice. Let battle, once more, commence. IT

Lord Young interview

Claims management companies are clearly worried by Lord Young’s review and, in an interview with Insurance Times, the peer gives them no crumbs of comfort.

Lord Young accepts that statistics show that compensation has not increased dramatically in recent years, but believes “the problem is one of perception”. He puts the blame at the door of the media – for “exaggerating, ridiculing and reporting on instances that, in reality, are nothing at all to do with health and safety” – but also of “aggressive advertising” by what he calls claims referral agencies.

Despite three recent reports vindicating referral fees, Young refuses to give them a clean bill of health. He says: “The role of referral agencies in exacerbating fears around health and safety is a genuine concern. In my view, these agencies encourage individuals to believe they can easily claim compensation for the most minor of incidents and even be financially rewarded once a claim is accepted.”

Young says that he fully supports the recommendations of Lord Justice Jackson’s review of litigation costs, and his vision for how the process should work sounds very like Jackson’s: “I am interested in putting in place a system where compensation awards properly reflect the injury incurred, do not include disproportionate fees for lawyers and referral agencies, and can be brought to a conclusion as swiftly as possible.”