Both lawyers and insurers agree that the personal injury claims process is in need of radical change. But, asks Anita Rice, will the government's recently released proposals to reform the industry appease everyone?
Since the Access to Justice Act 1999 withdrew legal aid provision for most personal injury (PI) claims and made conditional fee arrangements (CFAs) the norm, the PI industry has been dogged by arguments over the level of, and liability for, legal costs.
Spiralling overheads and lengthy settlement times in lower-value PI claims have seen legal costs frequently far exceed damages, and the introduction of recoverability of costs, success fees and after-the-event (ATE) insurance premiums from insurers marked the start of the so-called costs war.
As unpleasant and unedifying as that has been at times, it was not a matter that ever rated on the general public’s radar. What did, however, was the highly damaging scandals surrounding the activities of some of the, until recently unregulated, claims management companies that mushroomed following the 1999 Act. With them came the rise of the compensation culture – or rather, as is now recognised by those who know but not those who write about the issue in their national newspaper columns, the perception of a compensation culture.
The problem of perception was the main finding of the Better Regulation Task Force’s report, Better Routes to Redress, almost exactly three years ago, which was the catalyst for the government’s recently released proposals to reform the claims process and case track limits (see [2007] Gazette, 26 April, 1).
While lawyers are concerned that reforms should not jeopardise the provision of legal representation for claimants, insurers have been battling what they regard as overly time-consuming procedures and wildly disproportionate costs.
Both sides acknowledge that the system needs radical change to ensure access to justice for some of the most vulnerable members of society, while ensuring costs are proportionate.
David Marshall, a former president of the Association of Personal Injury Lawyers (APIL) and managing partner at London firm Anthony Gold, says the government brought CFAs – which had been available in a limited fashion since 1995 – into the mainstream after noting that trade unions were rarely charged by lawyers for lost cases.
Although popular with some sections of the electorate, particularly with the so-called Minelas (middle income not eligible for legal aid), he believes the government acted in haste.
Reflecting the frustration felt across the industry, Mr Marshall describes the 1999 reforms as ‘a political quick-fix to get through the abolition of legal aid. The insurance industry inevitably experienced a big increase in bills. Claims management companies really took off on the back of these changes, but no one was protected from unscrupulous firms.
‘The government should have piloted recoverability of success fees and ATE before bringing this in. You could say the government was reckless in racing it through.’
Given the behaviour of some claims-management firms, the current APIL president, Martin Bare welcomes the industry-wide regulation brought in by the Compensation Act 2006. ‘It was unfortunate that regulation wasn’t brought in at the same time as legal aid was removed,’ he says. ‘Regulation would have perhaps assisted in some of the worst examples [of behaviour] that have come to light since.’ Put simply, the government did not see claims farmers coming.
Little wonder, against this backdrop, that both claimant solicitors and insurers are anxious to ensure that the government does not repeat past mistakes with the latest round of proposed reforms.
When Lord Falconer, the Lord Chancellor and justice secretary, finally announced the government’s consultation paper at APIL’s conference in April, professionals immediately focused on his decision not to raise the small-claims track limit for PI cases from £1,000.
Any significant hike in the limit would have immediately removed the majority of run-of-the-mill PI cases from the fast track to the small-claims track where, unlike in the fast and multi-tracks, costs for legal representation cannot be recovered. Instead the key measures proposed in the paper centred on establishing fixed costs, raising the fast-track limit from £15,000 to £25,000, early notification of claims and early admissions of liability.
At the start of the process, it was widely assumed that the small-claims limit would rise – the Better Regulation Task Force put forward £5,000, the constitutional affairs select committee £2,500. But with strong lobbying from the Law Society, APIL and others on the claimant side, perhaps the government went through the same process as the Master of the Rolls, Sir Anthony Clarke, who recently told the Gazette’s sister publication, Litigation Funding, how he has changed his mind over the issue since taking over from Lord Phillips.
Speaking before publication of the government’s proposals, he said: ‘When I came into this, I thought there was a strong case for raising the small-claims limit to something greater than £1,000 for PI cases. But as I’ve listened to the debate over the past 18 months or so, I’ve concluded that that is wrong. While a small inflation-based increase – to, say, £1,250 or possibly £1,500 – would probably be OK, anything more than that would be a mistake. I think most district judges would agree with that.
‘I’ve been around and talked to quite a lot of district judges. They are confident with the current limit – they would probably want to increase it in the way I’ve indicated – but otherwise they do consider the assistance of lawyers as valuable in arriving at sensible figures after that.’
Insurers, unsurprisingly, are disappointed there was not at the very least an inflation rise in the limit.
Justin Jacobs, assistant director of liability and motor at the Association of British Insurers (ABI), wanted a £5,000 limit. ‘With the vast majority of non-contentious personal injury claims under £25,000, the legal costs are too high,’ he says. ‘For every £1 that insurers pay out in compensation, a further 40 pence is paid in legal costs.’
However, he describes the paper as being ‘positive overall’, picking out streamlining, early notification and fixed costs as measures that should ensure legal costs are more proportionate. This is a sentiment echoed across the insurance industry. ‘Crucially, it recognises that the current system is not working and needs radical reform to meet the needs of claimants,’ Mr Jacobs says. ‘The ABI, Citizens Advice, employer groups and many local authorities have been saying this for some time.’
In turn, claimant lawyers were concerned that any hike in the small-claims track limit would undermine both claimants access to justice and damage PI law firms, possibly putting many out of business.
Mr Bare welcomes Lord Falconer’s proposals concerning the limit, saying: ‘The most pleasing thing is that the Lord Chancellor is concerned about vulnerable claimants. It is a point we have been making for some time.’
The proposals are not dissimilar to those made by the Law Society in its ‘Fast and Fair’ campaign. Chief executive Des Hudson says: ‘We have argued that there should be no change to the small-claims limit and have suggested to the government on several occasions that streamlining is the best way forward for lower-value claims – we are pleased they have taken our suggestions on board. We have some concerns about seeking to implement a system designed for the most straightforward cases for claims up to £25,000. We believe the system is more likely to be successful if introduced for a lower value of claims – the vast majority of personal injury claims are for less than £5,000. The success of a move to fixed costs will depend on a transparent process for setting fee levels and a clear review process.’
However, while noting Lord Falconer’s ‘clear recognition’ that changes in behaviour, such as unnecessary denials of liability, were essential to effective reform, Mr Bare underlines that ‘the devil is always in the detail’.
And so it is. Unsurprisingly, insurers are keen to see the introduction of fixed fees. Equally unsurprising, there is no small amount of caution over fixed fees from the claimant lawyer side.
Mr Marshall warns: ‘It is hard to talk about proposals for fixed costs because the figures are not known. Clearly the proposed procedure could improve things, but we should be careful about assuming lawyers will be able to operate successfully with fixed costs.’
Mr Bare echoes his concerns: ‘The first and most important thing is that fixed costs are sustainable and reviewable. For example, the amount barristers get for fast-track claims is the same as it was in 1999.’
Fixed costs have effectively been trialled since 2003 with the predictable costs scheme for road traffic accident (RTA) cases worth less than £10,000 that settle pre-issue. Research undertaken recently for the Civil Justice Council (CJC) indicated that, overall, the scheme has worked well, although there was evidence of claimants issuing proceedings so as to escape it – a get-out that would be nullified by post-issue fixed fees.
Crucially, fixed fees post-issue and for other areas of PI have not just been on insurance companies’ wish-list. The CJC is behind them, as are senior judges, such as Sir Anthony.
The problem claimant lawyers have is the fee levels. If the government fails to set fixed costs at a high-enough level now, and for some time in the future, Mr Bare says PI work may not be attractive or economically viable for specialists.
He warns: ‘It has to be set at a level so there will still be skilled and experienced lawyers about to provide the service, rather than have advice deserts because the amounts have not been set at sustainable levels.
‘There seems to be this misconception that we are talking about insurance claims here, but what we are actually talking about is a process that might end in a trial.’
And even if they are initially set at a reasonable rate, they have to be reviewed. The figures for the RTA scheme were based on data gathered in the summer of 2002, meaning that even by the time the scheme was introduced in October 2003 they were out of date. That they have not been updated since, despite what claimant lawyers consider a promise to do so, is seen as a flashing warning light. The mooted costs council, currently awaiting approval from the Ministry of Justice, could be the answer to this problem.
Other measures designed to speed up the process include shorter time limits for admissions of liability. Insurers will have to respond within 15 working days to RTA claims and 30 working days on employer’s and public liability claims.
Lea Brocklebank, president of the Forum of Insurance Lawyers, believes the deadlines are not realistic. ‘The new time limits that are being proposed may be a challenge for some defendants,’ she says. ‘For cases within the scheme, the three-month period for making a decision on liability has effectively been halved for employer’s liability and public liability cases, and reduced by three-quarters for RTA cases.’
The consultation paper also recommends changes to the way ATE insurance is taken out and recovered by winning parties. At the moment, it is routine for claimant solicitors to recommend that clients take out an ATE insurance policy at the outset of a claim if there is no existing insurance and a CFA is appropriate.
However, the government believes it is inappropriate for the premium of any ATE insurance taken out at the beginning of a claim to be recoverable under a CFA. Instead, it recommends that ATE insurance is taken out only if parties cannot reach agreement over damages in cases worth more than £2,500 or if a defendant/insurer denies liability – effectively removing the case from the proposed new scheme.
ATE insurance providers are up in arms, saying the reforms would derail the entire market. The business model underpinning the market is that the many pay for the few, meaning that ATE insurers need the premiums from the bread-and-butter cases to pay for the minority of claims on which they have to pay out. Remove the winners from the equation and you are left either with huge and unaffordable premiums, or insurers pulling out of the market – or probably both.
Without ATE, the whole CFA system is likely to come crashing down, and it is not insignificant that the C JC’s recent work on identifying alternative methods of funding litigation is predicated, to a large degree, on this very event happening. The government, however, continues to leave all of its eggs in the ATE basket.
Abbey Legal Protect’s David Hartley, who runs the Law Society’s Accident Line scheme, considers the apocalyptic vision to be realistic. ‘If the proposals happen and the insurers change their processes, then the volume ATE market disappears,’ he says. ‘I am not surprised, but there is still a lot for the Ministry of Justice to understand about the ATE market which it doesn’t at the moment.’
In contrast, the ABI is more philosophical about the implications for the ATE market. Mr Jacobs says: ‘We believe this market will adapt to any new system. We have always said that the change in personal injury compensation, which is long overdue, will require flexibility and adaptation on all sides – and that includes insurers as well as the legal profession.’
Lord Falconer may well have pulled off something of a coup with this paper by having broadly kept all sides on board, but many highly contentious issues remain to be resolved. Introducing a system that keeps both sides relatively happy and has the confidence of the public may prove elusive.
The past few years have been bruising on all sides. With the shape of the whole market now up for grabs, despite recent advances, it is not peace in our time between claimants and defendants. As Mr Marshall says: ‘Things have calmed down quite a bit, but the distrust created on both sides won’t be dispelled overnight.’
PI claims reforms – at a glance
Track limits
l The small-claims track limit for PI cases to be unchanged at £1,000.
l The fast-track limit for PI cases to be raised from £15,000 to £25,000.
Fixed costs
l Amounts unknown, although differential fixed costs proposed for claims of more than £2,500.
l Calculated to reflect the work needed to comply with new process.
l Not to include referral fees.
l Introduction of a fixed success fee.
Notification of claims
l Solicitor and claimant to send claim form five days after meeting and instructions taken in RTA and employer’s/public liability cases.
Decision on liability
l If the insurer is unable to respond within the deadline, it should offer an explanation – it is unclear if penalties could be incurred in certain cases.
l Defendant/insurer decides on liability and rehabilitation within 15 working days of notification in RTA cases.
l Defendant/insurer decides on liability and rehabilitation within 30 working days after notification in employer’s/public liability cases.
l Claimant solicitor halts further investigation work, unless it is an exceptional case, to prevent front-loading of costs.
l If appropriate, an offer of rehabilitation should be made at this point.
l Where the defendant/insurer admits liability, it will be binding.
Settlements
l Settlement packs to be sent out within 15 working days of the medical report being agreed by the claimant.
l Views sought on time periods for more complex, higher-value claims.
l Defendant/insurer to have ten days to consider and accept the claimant’s offer or make a counter-offer.
l Where a counter-offer is made, a further 20 days is available for consideration and negotiation.
l Claims to be referred upwards, with individuals named in advance if negotiations falter.
ATE insurance
l Premium for ATE taken out at the outset of a claim no longer recoverable.
l Claimant solicitor to arrange an ATE premium if defendant/insurer denies liability.
Implementation
l The consultation period ends 13 July 2007.
Lord Falconer said he would like to implement reforms as soon as possible – most people believe by end of this year/beginning of next.
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