Raising the limit, but not the bar

The legal expenses market is in limbo. The ABI is stepping up its campaign to have the personal injury small claims limit raised to £5,000 from £1,000. But many within the insurance industry - not just legal expenses insurers - say such a move could be "disastrous" for the before-the-event market.

It could also cost brokers up to £80m in lost commissions, argues the Legal Expenses Insurance Group (LEIG), a representative body for some of the legal expenses market.

The ABI insists raising the small claims limit will improve access to justice for claimants. But the recently formed LEIG says claimants will become isolated because lawyers will refuse to take on their cases.

The government's new Compensation Act has had huge implications for the insurance industry. But there is still more work to be done. Raising the small claims limit, says the ABI, will mean the majority of road traffic accident claims can be fast tracked through the courts.

The small claims court would capture around 90% of road traffic accident claims if the limit were raised to £5,000, says the ABI. That would leave just 10% to be pursued by claimant lawyers, thus dramatically slashing the cost of defending a claim for insurers.

But legal expenses insurers fear that an increase in the small claims limit could have a potentially damaging impact on their business models because BTE premiums will increase.

"The before-the-event (BTE) model will collapse if the small claims limit rises," says one leading legal source. "At the moment BTE will cover small claims. But if it is to rise to £2,500, solicitors won't be able to cover their costs so who will pay? It will either be the claimant directly or the BTE cover that will have to be at a high cost," the source says.

Tony Baker, director of the LEIG, says the rise could be the catalyst for disaster.

"We have undertaken some simple calculations and we consider that the additional pure claim cost per policy would increase by a few hundred percent," says Baker.

"The average gross premium is currently £20 to £25, so even if intermediaries took no extra remuneration then the premium, with IPT, would need to double."

He continues: "Would many policyholders, especially motorists, decide it was not then worthwhile having this policy? We suspect there would be big drop in the number of policies being sold."

And where would that leave access to justice? Another market source says: "It could mean that the cover will become difficult to buy. And then those who end up with a claim won't be able to get compensation because they won't be able to pay for the legal fees."

Not surprisingly the ABI's calls to increase the small claims limit have not been met with widespread approval.

The Civil Justice Council, which would like to see more emphasis within the industry on BTE cover, says the current small claims limit of £1,000 is sufficient. But the ABI has the backing of the Citizens Advice Bureau (CAB). The Association of Personal Injury Lawyers (Apil), on the other hand, is fiercely fighting the ABI over the proposal. And lawyers are powerful people.

The Society of Labour Lawyers (SLL), whose secretary is Fraser Whitehead, a senior partner for Russell Jones and Walker, and whose

vice-president is the secretary of state, Lord Falconer, wants to see the small claims limit remain unchanged. It has concerns that raising the limit would leave organisations, such as the CAB, overwhelmed with people seeking advice on how to bring a claim.

It also uses the standard argument that insurers will exploit the decision to limit the number of claims they will pay out on.

Then there are the trade unions. The trade unions were instrumental in persuading the government to include a clause on mesothelioma claims in the Compensation Act.

Could they also be instrumental in helping to save the legal expenses market by persuading the government to leave the limit at £1,000? The TUC wants the limit to remain unchanged

"Trade unions have a vested interest here because they make a lot of money out of personal injury cases," says one industry insider. "The referral fees they make by selling on these personal injury cases to lawyers is a major source of income for them.

"Raising the limit means that many of those cases will slide by without representation. And the trade unions will miss out on the referral fee."

Legal expenses insurers could also miss out on referral fees. The Accident Relief Campaign (ARC) believes legal expense insurers are duping lawyers into paying up to £700 in referral fees per case. It also says insurers are ripping off consumers.

So thanks to some very critical articles in the national media, many see legal expenses insurers as the baddie in the picture. ARC says most motorists pay £15 on top of their motor premiums to cover them against claims when any solicitor would usually handle their cases on a 'no win, no fee' basis.

But this is not strictly true, as the claimant would be advised to buy an ATE policy to pay any costs should the claim fail.

But if the BTE premiums have to increase so should ATE premiums, say legal expenses insurers. The cost of the ATE premium should be proportionate to those of BTE - making BTE a more desirable purchase.

"ATE will become more scarce as BTE becomes more expensive," one legal expenses source said.

This takes us full circle. If ATE insurance is unavailable or too expensive for the claimant how will they be able to get access to justice?

"These are worrying times for the legal expenses industry," says a legal expenses source. "Nobody knows whether they will exist and still be able to make money in a years' time. The model will have to be revised."

But the ABI says it has backing from some legal expense insurers who have models that will be flexible enough to adapt to new rules.

It is a complex arena which, unless there is government intervention soon, is likely to spin out of control. Legal expenses insurers want and need answers soon; otherwise it is going to start affecting their profits. IT