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Referral fees and perverse incentives

The Actuarial Profession last week published a report in which they highlighted a marked increase in the number of personal injury claims made last year, despite a corresponding fall in the number of road traffic accidents. The group rightly laid the blame for this rise at the door of claims management firms, who have been profiting from selling the details of those involved in traffic accident on to personal injury lawyers.

The Consumer Justice Alliance has long been of the opinion that these referral fees serve to distort the personal injury landscape by perversely incentivizing those with unmeritorious cases. Referral fees have led to the commodification of personal injury and are largely responsible for the growing perception that a compensation culture exists. For these reasons the Consumer Justice Alliance was the first major consumer group to call for the abolition of referral fees.

However, claims management firms are a symptom of the problem, rather than being the problem itself.

In holding the claims management industry wholly responsible, the Actuarial Profession’s report has failed to acknowledge the fundamental role that the insurance industry has played in driving unmeritorious cases to court through the sale of referrals.

Whilst insurance companies complain about the high cost of premiums they need to examine the part they have played in these high costs. Currently, insurance companies are able to sell their customers’ data and pass personal injury details onto lawyers, a practice which can be highly profitable.

Admiral, one of the UK’s top motor insurers, reported last year that it had earned £8 million from the sale of referrals in the first six months of 2011, accounting for 5.6% of its profit.

This situation threatens to push up insurance premiums, as insurers have to cover the cost of unfounded compensation claims. Furthermore, claimants who have a legitimate case may find their details have been sold to the ‘highest bidder’, rather than to the solicitor best able to deal with their claim.

Thankfully the Government has become aware of the impact of this practice and earlier this year included measures to ban referral fees in the Legal Aid, Sentencing and Punishment of Offenders Act. The CJA welcomes this ban and hopes that once implemented there will be an end to this illicit trade in ‘cash for crash’. However, as we progress toward implementation of the Act in April 2013, we will no doubt see a raft of ever-ingenious tactics used by both insurers and the claims management industry to circumvent the ban. The Government must remain firm on referral fees and ensure that the ban is successfully implemented as this will lead to a fairer system for consumers and claimants.

Despite the ban on referrals fees, which clearly is in the public interest, the Government urgently needs to re-think their reforms to ‘no win, no fee’ cases. The Government’s decision to reduce fees may mean that it is no longer profitable for law firms to offer legal support for victims of road traffic accidents. This threatens to deprive some of the most vulnerable in society of their right to access to justice and may leave victims significantly out of pocket as they struggle to pay legal fees. This is particularly significant considering that although the number of road traffic accidents has fallen; the number in which people are killed or seriously injured annually has actually increased.

The number of people killed or seriously injured in road accidents has risen to 1,901 in 2011 from 1,850 in 2010, the first annual rise since 2003. This highlights the need for the Government to maintain access to justice for those injured in road traffic accidents, an issue which the Consumer Justice Alliance wholeheartedly supports.

 

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