At a glance
- Introduced in April in England and Wales to cut spiralling personal injury claims costs, ramifications of the reforms are beginning to be felt
- Need for brokers to be up to speed on latest developments, and highlight changes at renewal
- Claimant market moving into new areas, particularly deafness claims
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Market commentators have attributed falling motor premiums in part to the introduction of the civil justice reforms earlier this year, but are they right to do so and what impact will the reforms have on the wider insurance market?
The Legal Aid, Sentencing and Punishment Act (LASPO) enshrines these reforms in law throughout England and Wales and aims to reduce spiralling personal injury claims costs, particularly those in the motor market, by delivering compensation at proportionate cost.
Scotland follows suit?
In a similar exercise to that conducted by Lord Justice Jackson in England and Wales, which brought about the introduction of the civil justice reforms, the Taylor Review for Scotland, which was published on September 11, has recommended wide-ranging changes to civil litigation in the country.
In it, the Taylor Review looked into the costs and funding of litigation in Scotland and outlined 85 recommendations for change. Of these, the more controversial were the proposed introduction of qualified one-way costs shifting (QOCS), damages-based agreements and referral fees.
Contrary to England and Wales, Legal Aid has always been available in Scotland for personal injury claims, and many believe QOCS is not necessary to ensure access to justice.
There is also a strong argument to suggest that damages-based agreements are unenforceable in Scotland while legitimising referral fees seems an unusual step given they have been outlawed in England and Wales.
Although there is a long way to go before anything is finalised in law, Gilbert Anderson, Senior Partner for Scotland at law firm DAC Beachcroft, believes the Taylor report is flawed in regard to these areas. “I think this is a pursuer’s charter and it will increase claims in Scotland,” he said.
It has sought to do this by banning referral fees for personal injury cases, doing away with the recoverability of success fees and after-the-event premiums from the losing side and extending the value and type of claims that can be put into the Road Traffic Act (RTA) personal injury portal.
The changes to funding came into effect on April 1 while the extension of the RTA portal – to also include employer liability and public liability cases up to £25,000 – came into effect on July 31. Although the market has only had a few months to get used to these changes, there are already a number of issues to contend with.
The first and most blatant is the suspicion that many firms continue to pay and receive referral fees and this is a point David Southwell, Head of Personal Injury Claims at Zurich, makes when he says: “There is an immediate concern that referral fees are still being paid – and received – under the guise of marketing fees, underpinned by press speculation and market rumour. This activity is on the radar of the Ministry of Justice (MOJ) and Financial Conduct Authority (FCA).”
Certainly the Solicitors Regulation Authority is taking the matter seriously and it has stated its intention to work closely with both the MOJ and the FCA to eradicate such practice where it exists.
In light of the changed models created by the ban on referral fees, brokers should already be up to speed on any new processes around first notification of loss on the policies they have arranged for clients.
Similarly, the non-recoverability of both the premiums for after-the-event policies and the success fee uplift of a Conditional Fee Agreement, where the fee is payable only if there is a favourable result, means that brokers will need to highlight these changes clearly to clients at renewal.
Given clients will have to pay these costs out of their own pocket, it is likely many will be more willing to discuss what before-the-event cover has to offer.
Although the success fee payable as part of Conditional Fee Agreement is capped at 25% of the damages awarded, this still represents a large chunk of what a claimant would receive and may sway many towards before-the-event cover.
The introduction of Damage Based Agreements raises similar issues for brokers and their clients and using this method of funding for a legal action will again mean the successful claimant has to give up a substantial proportion of their damages.
To counter the fact that claimants now have to pay their own legal costs, an increase in general damages of 10% has been introduced. The implementation of qualified one-way costs shifting also protects claimants and means that if they lose they will not be liable for the defendant’s costs unless in exceptional circumstances such as fraudulent claims.
Given that motor insurers have already dropped rates, it is clear they believe the overall effect of the reforms will be to take cost out of the personal injury claims process.
However, there is still some way to go before the full ramifications of the reforms are understood and particularly in relation to the extension of the RTA portal.
Emerging claims landscape
As the earning potential of claims put through the portal has dropped there are still many claimant firms trying to see whether they can bend the new rules to their advantage and get claims to drop out of the process.
However, David Southwell at Zurich says it is important for the insurance industry to work consistently in the face of this. “It is inevitable that certain claimant law firms will seek to exploit, what they see as legitimate tactics to encourage claims to leave the portal process,” he said. “It is up to the industry to ensure that opportunities for such activity are eliminated or, at worst, kept to a minimum.”
There is an immediate concern that referral fees are still being paid – and received – under the guise of marketing fees, underpinned by press speculation and market rumour. This activity is on the radar of the Ministry of Justice and Financial Conduct Authority
David Southwell, Head of Personal Injury Claims at Zurich
The claimant market is also moving into new areas, and David added: “Claimant law firms are moving away from their traditional areas and moving into what they see as more lucrative areas such as industrial deafness claims, where there has been a significant and substantial increase recently.”
This is also something that the British Insurance Brokers’ Association (BIBA) has noticed.
“We are starting to see a few more queries relating to the historical tracing of old policies where deafness particularly is part of that issue and I think we will see a lot more of those,” said Steve Foulsham, Head of Technical Services at BIBA.
Whatever claim clients might need to bring in the future, brokers must make sure they are fully aware of how it will be funded and that they have made informed decisions about the legal expenses cover they have in place.