The personal touch

With claims management companies awaiting the outcome of Callery v Gray, Jeremy Fleming runs the rule over the personal injury market and assesses their commercial performance

All those connected with the personal injury world are currently holding their breath while the critical case Callery v Gray - which will determine the extent and feasibility of recovering insurance premiums and success fees in personal injury cases - is decided by the Court of Appeal (see [2001] Gazette, 14 June, 4).

Judgment is expected shortly, and nowhere is it likely to be awaited with keener interest than by directors and others working in claims management companies (CMCs) and other personal injury referral agencies.

The history of these organisations in England and Wales since they started booming - with the arrival of conditional fee agreements (CFAs) in 1995 - has had its ups and downs.

So, it is no surprise that, just as Callery v Gray occupies the attention of most personal injury practitioners, the headlines over the past week have been discussing the commercial performance of high-profile CMC Claims Direct.

Last week, former Claims Direct chief executive and chairman Colin Poole and Tony Sullman - the co-founders of Claims Direct, who pocketed9 million and 50 million respectively when the company floated last year - have now made a bid to take the company back into private hands, offering 10 pence a share (a third less than the current market value).

The Sunday Times recently described Mr Poole, a solicitor, and Mr Sullman as 'bandits' for selling shares in their company at a value that is now above the current market worth of the whole company.

One big shareholder has been quoted as saying: 'It's like raping someone and then going back and asking that person to marry you.'It may seem perverse that such a commercial dispute should be in the news spotlight when matters of principle in Callery v Gray are still being considered, but it neatly demonstrates the extent to which commercial realities are time and again the issues causing most controversy within the CMC industry.

There are a number of different CMC/referrals agency models.

First, Claims Direct's approach: it has a panel of solicitors who pay no membership fee, but must pay 5,000 for a relevant training course before joining the scheme.

Solicitors who take on cases can recommend that their clients take out an insurance premium through Claims Direct.

This costs 1,340 but the client only pays interest on a loan taken out to cover the cost of the premium.

If the client loses his case, then the insurance premium should meet the loss, and if the client wins then the solicitor attempts to recover the insurance policy from the opponents.This is a similar model to Claims Direct's rival, The Accident Group.For CMCs which operate on this model, Callery v Gray's findings on the issue of recoverability of premiums are vital.

While the Court of Appeal has already indicated that premiums taken out pre-proceedings should be recoverable, it is clearly considering how large such premiums should be.In the market as a whole, the premiums of companies such as Claims Direct and The Accident Group are higher than those of the referrals companies.

A Claims Direct spokesman suspects that it is the uncertainty over Callery v Gray that Messrs Poole and Sullman - in characteristically businesslike style - are exploiting to provoke an acceptance of their offer.

He says: 'If Callery v Gray finds that a premium of 1,000 or more is acceptable, Claims Direct will be fine, but if it comes out at a figure lower than 700, there would be trouble.

It is precisely this concern among investors that they are exploiting.' In other words, the company would not have too many difficulties if it had to reduce premiums, but not by more than, say, 350.These premium figures are larger than the Law Society-endorsed Accident Line Direct.

This is a referrals service and insurance premium seller, rather than CMC, which works in partnership with Abbey Legal Protection, which provides the insurance product.Accident Line's premiums are less - 'one price fits all' - than those of Claims Direct, ranging from 315 for fast-track cases to 3,045 (both tax inclusive) for multi-track actions at the high-value end.

But most of Accident Line's claims come in at the smaller 714 (tax inclusive) premium, making them less expensive than most CMCs.

Unlike Claims Direct, solicitors who want to be members of Accident Line must be on the Law Society's personal injury panel.

David Hartley, formerly head of the private client division the Law Society's policy directorate, and now director of services at Accident Line, says that the burning issue in Callery v Gray is 'what is the premium?' There is a perception that those companies charging on average higher premiums are including within that price some element for administration and other hidden costs.

The Claims Direct spokesman says that one factor that must be accounted for is that Accident Line's lawyers are at liberty to charge success fees, whereas Claims Direct's lawyers cannot.

But Accident Line is not the only referral service that considers itself away from the fray of mainstream CMCs.

Merseyside-based TalkLegal, launched in May this year, describes itself as a solicitors' collective - unlike the CMCs and Accident Line, there is no affiliated insurance product.Solicitors pay 3,000 to join and then 1,500 each month.

The membership fees go into a pooled advertising and referral effort.

Firms are then referred cases on a cab-rank basis, and are under no pressure to use any financial products.

Roy Fraser, formerly a legal officer with a CMC, left on 8 June, and is heading north to be a business director with TalkLegal.

He says: 'What appeals to me is that it's transparent.' So, does this mean that other CMCs are not?Mr Fraser says that the problem is commercial pressure.

He maintains that if solicitors who belong to CMC schemes get, say, ten referrals a week, they may feel under pressure to take the cases on, and therefore their ability to give 'best advice' to clients could be impaired.This situation is worsened by the reliance that many firms have on CMCs for their work flow, says Mr Fraser, who suggests that solicitors have become accustomed to being at the beck and call of the CMCs.

'In times gone by, lawyers were satisfied to take orders, and it takes courage for lawyers to turn around now and say "no more", 'he adds.TalkLegal is not the only scheme to spring up in the last six months, offering solicitors an alternative to mainstream CMCs.Another north-west based company - 121 Legals - has been set up by Denise Ballard, the managing director of Legal Marketing Services, a network of UK solicitors.

The company is run on a no win, no fee basis by solicitor members, and its clients take out a loan of 950 to cover their costs in the event of loss, and the interest on this loan is paid for by 121 Legals.

The client pays nothing; 121 Legals claims that its insurance rate - lower than Claims Direct - has always been recoverable.

The company itself makes its money from managing cases, which means that a part of the legal fee charged by the solicitor is taken by 121 Legals.

Ms Ballard says that no win, no fee is a much fairer way of handling personal injury claims in theory - but she adds that in practice, claimant companies have left the public 'entirely responsible for any losses that are unrecovered, or indeed the cost of the insurance policy'.Whatever the choice between referrals companies and CMCs, neither of these two groups has any choice about another critical commercial factor affecting their business: advertising.

Since bulk is the order of the day, the company with the highest - and most reliable - public profile is the potential winner of the game.

So, all the players fight it out on television, and Accident Line and TalkLegal are united by their personality frontliners: the model and television presenter Heather Mills and Sky presenter Lucy Lowe respectively.The advertising may at times be controversial for fuelling the so-called compensation culture - and the public has taken some time to become accustomed to its US flavour - but it is indispensable for any CMC or referral agency wishing to survive.

In this respect, there are competition issues.

Claims Direct - with its high budget spend (20 million last year) - could potentially target competitors in the regions.

TalkLegal, beginning as a small outfit in the north west, initiated a local campaign in its region to try to gain a foothold before turning its attention to the rest of the country.

At every stage - from advertising to the level and recoverability of premiums - the CMCs and referral groups are dealing with commercial issues; even if their solicitor members are dealing with the law.

It is in this atmosphere that calls are intensifying for regulation of the industry.Barbara Cahalane, director of strategic policy advice at the Law Society, says that things have moved on since the Blackwell report found no evidence of public concern about the activities of claims assessors last year.

She says client protection is the Society's overwhelming issue, adding: 'Some abuses in the claims system give cause for concern.'The Society will consider a number of policy options at the end of this month, which may range from helping to raise public awareness of the issues through introducing an industry standard, to encouraging legislation to regulate CMCs.A Claims Direct spokesman says: 'Although we believe we've set the industry standard, our view is that the industry would benefit from some kind of body, but its shape - regulatory or general trade association - is something that we still haven't pinned our colours to the mast about.' In a month or so, the claims sea will have settled down, but for now the storm is raging, and only a definite answer on Callery v Gray will blow it away.

Commercial realities are time and again the issues which cause most controversy within the CMC industry

The advertising may be controversial at times.

It has taken the public some time to get accustomed to its distinctly American flavour

'Although we believe we've set the industry standard, our view is that the industry would benefit from some kind of body'

There is a perception that those companies charging on average higher premiums include within that price some element for administration and other hidden costs