Written evidence from Carpenters Ltd

1.              Carpenters is the UK’s largest motor injury law firm, working in partnership with major insurers and brokers to represent their policyholders. A policyholder involved in an accident will be referred to Carpenters by their insurer, and we then represent that customer in the pursuit of a non-fault claim.

Introductory comments

2.              Reform in certain areas of the claims process is necessary, but it must be done only after careful consideration of all the consequences and as part of a balanced and proportionate response to the issues in the claims sector. We need a balanced package of practical measures to achieve a fair, efficient and smaller claims market. Carpenters absolutely accepts that we need to reduce fraud in the system and this should the primary objective of any reform package.

3.              This package must include a tougher, but affordable, regulatory framework for Claims Management Companies (CMCs), the transfer of powers and adequate resources to the Financial Conduct Authority (FCA), a formalised legacy vehicle to deliver the recommendations of the Insurance Fraud Taskforce, provisions to tackle abuse in medical reporting and rehab, and extra powers and commitment by the Solicitors Regulation Authority (SRA) to genuinely tackle the worst lawyers in breach of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO).

4.              The proposed reforms are a very blunt instrument to tackle some of the complex issues in the sector, will have a huge impact on legitimate customers, and create new areas of exposure for insurers. They will unfairly penalise injured people, threaten our system of restorative insurance cover and create the conditions for a significantly less regulated market where the ability to pursue justice is severely curtailed. They will do very little to reduce the number of claims, prevent fraud or address the bad behaviour of CMCs. Instead they will drive bad behaviour at the expense of the customer.

5.              The judiciary is right to be worried that the proposals will place an increased burden on the court service and will not provide vulnerable litigants with the safeguards that the system really must provide:

“There will undoubtedly be a very large increase in the number of LIPs…This will increase the judicial time needed per case by a factor of at least two (but probably three or four).”

(Civil Executive Team of the England and Wales Judiciary, submission to whiplash consultation, January 2017)

6.              We do not recognise the assertion that road traffic injury claims are synonymous with fraud and find that the overwhelming majority of cases that we run have no association with fraud (99+% of claims in 2015). Even if we were to generously assume that half of clients who failed to provide us with instruction did so because their claim was fraudulent, this still only produces an incidence of fraud of 3%. We strongly suspect that it is less. The difference between detected and suspected fraud can be significant, but whatever these difficulties, it is still universally accepted that the vast majority of claims are genuine. If the reforms are introduced, it will mean that 9 in 10 of customers who have suffered an injury because of a third party will be told that they are not entitled to compensation.

7.              The recent history of the sector has shown that piecemeal and staggered reforms will not work. They will create a regulatory vacuum that will be filled by unscrupulous CMCs, the worst of the regulated sector and the unregulated. All measures, including any that result from Part 2 of the proposed reforms, expected to be published by the Ministry of Justice within the next few weeks, should be co-ordinated to be implemented simultaneously, in October 2018, as part of a complete package.

Detailed comment on the proposed reforms

8.              Where a policyholder suffers financial loss, or sustains injury through the fault of another driver, they expect to be compensated. Many customers will form the view that insurers are happy to take their premium, but are not willing to help with genuine claims, or pay where the customer is injured by a third party.

9.              The proposed reforms are unlikely to reduce the number of claims and perversely could exacerbate fraud and exaggeration. They do nothing to address extortionate credit hire claims, the increasing issues we have seen in relation to repair and total loss, the abuse of MedCo, or the growing problems with rehabilitation. Accident victims will continue to seek damages and the reforms will drive them towards CMCs or some derivative of a McKenzie friend.

10.              We welcome the Ministry of Justice’s commitment to work with insurers, lawyers and medical experts to develop a definition of soft tissue injuries that is fit for purpose.

Raising the small claims limit

11.              The increase in the claims limit to £5,000 is entirely arbitrary. Applying an increase in line with inflation, as recommended by Lord Jackson, the limit should not be increased above £1625, which is the inflationary increase from 1999 to date.

12.              Raising the small claims limit to £5000 will 1) increase the burden on the NHS as more people seek treatment, rather than through insurer-funded rehab, 2) reduce recovery of NHS charges, 3) fail to recover benefits, 4) deprive the Court Service of issue fees and other court fees generated from PI claims, 5) severely disrupt the BTE model providing means of representation for those with low value property damage only (non-injury) claims (approximately 30% of Carpenters’ customers have non-injury small claims).

Introduction of a fixed tariff system

13.              We do not oppose the introduction of a fixed tariff system for compensation, but the levels should be fair and reasonable. The level of award for pain suffering and loss of amenity has been honed over the years by Judges, supported by Judicial College guidelines, to provide a fair level of compensation. The proposed levels appear arbitrary and the basis for the reduction is not clear. The government’s rationale for reducing compensation payable is not clear, beyond the intention to reduce the obligation on insurers to compensate the injured, with the associated aspiration that premiums will be reduced. 

No explanation has been provided as to why such significant reductions are proposed for genuinely injured individuals.

14.              The proposed awards for physical pain lasting months are disproportionately below other compensatory awards: flight delay of 3-4 hours (£260) or 4+ hours (£520), Holiday sickness with mild food poisoning (£700+) or cramping/diarrhoea (weeks) (£650+), legal services complaints for poor service (£250-750), injury to feelings caused by discrimination awards (£600+ for less serious cases such as one off or isolated incidents).

15.              The proposed Prognosis approach should enable the claimant to be directed for appropriate advice and treatment at an early stage, expediting recovery and reducing the overall value of the claim. It also avoids burdening the NHS.

Loss of Legal Expenses Insurance (LEI)

16.              The current LEI model would likely collapse. The current model works because, whilst the legal costs are insured under the policy, they are in fact paid by the insurer of the party responsible for the accident. This enables the insurer to manage the service provided under the legal expenses policy, and to ensure quality. Legal expenses insurance not only covers solicitor/legal costs, but also disbursements, which depending upon the incident, could include Medical Report fee, production of medical records, a Police report, an engineer’s report, Court fees, DVLA fee, MID fees or CUEPI fees. If the LEI model is to survive in the new world, then there will need to be changes either in the underwriting models or in the extent of cover.

17.              Since June 2013, nearly 30% of Carpenters’ customers do not pursue injury claims, but have sustained financial loss. These claimants cannot possibly be tainted by the suggestion that injury and fraud is the same thing. These customers are often overlooked, but fall within the existing small claims track and are currently looked after by their insurer. The claims are essentially funded by the current LEI model – subsidised by cost bearing claims. The reality is that without assistance the vast majority of these customers will bear the loss themselves – to the benefit of the at fault insurer. CMCs will have no interest in running a low value non- injury claim.

18.              If Before the Event (BTE) insurance does plug the advice gap, premiums will certainly rise to cover the cost, eroding the potential savings to consumers on reduced insurance premiums and further undermining the impact of the reforms. However, where costs are not recovered from the third party (the cost is not incurred by the provider of the BTE insurance policy), then the BTE model is likely to fail and will not provide the assistance the government anticipates.

Growth in CMCs

19.              The market fully anticipates that there will be a growth in CMCs as a direct consequence of the proposed reforms. On the day of the publication of the consultation response and the Prisons and Courts Bill, the share price of at least one of the leading publicly-listed CMCs shot up by 30%. It is generally felt that CMCs, with a lower cost base and fewer regulatory burdens, will be able to make the numbers work and will likely flourish in the new claims market. They will fill the hole left by solicitors as they exit the market to, in the words of MoJ, “find alternative economic activities”. The bad CMCs will do all they can to ensure that “minor” injury claims exceed the cap and become “tariff” claims, and to push the value of other claims above the new SCL - increasing the cost to the insurer and increasing the CMC’s share of the policyholder’s damages.

20.              The ban on pre-medical offers is a positive step to defer fraudsters, but in isolation it will simply encourage CMCs to arrange a medical report and rehab through a “friendly” agency – with all that entails in terms of the value of the claim and the need for and cost of treatment.

21.              Insurers will have no control of the level of service provided. Customers will be represented by individuals who are not required to have any qualifications or experience, no professional indemnity insurance and do not have any real supervision or regulatory scrutiny. The CMC will take a significant proportion of your customer’s damages and there is a higher risk that your customer will be encouraged to bring a fraudulent claim, potentially unwittingly.

22.              The reforms will increase activity in the claims management sector and will apply not just to motor injury claims, but also to non-injury motor claims and to other areas such as credit hire, repair and total loss, pushing up costs for insurers. Whilst Carpenters welcomes some of the recent initiatives aimed at further regulating CMCs, it is worth noting that only 3% of fines imposed on CMCs have been paid.

23.              It is known that some CMCs retain McKenzie Friends on a “self-employed” basis, disguising the link with the CMC and avoiding the need for instance. These reforms will lead CMCs and a proliferation of McKenzie Friends to become inextricably linked, with a vested interest in maximising the value of the claim and so encouraging negative behaviour. They will be untrained, unregulated and uninsured. It is deeply regrettable that the call from the Judicial Executive Board to recommend a ban on McKenzie Friends being able to charge fees has been rejected.

24.              To mitigate the risks of an expanded CMC market, we fully endorse the recommendations of the Independent Review of Claims Management Regulation (“Brady Review”). We urge that its recommendations (particularly re-authorisation, fit and proper person test, personal liability, storage of calls) are introduced as part of a coherent package at the same time as the changes to the claims process come into force.

25.              We welcome that responsibility for enforcement of the new CMC regime is to be moved to the Financial Conduct Authority, but stress that it is vital that this is fully operational and adequately funded for when the latest reforms are implemented.

26.              It is worrying that we have yet to see the primary legislation necessary to authorise the transfer of responsibilities for the regulator from the MoJ to the Financial Conduct Authority. The chances of it happening in time to correspond with the 2018 date for the other reforms are dwindling rapidly.

27.              We suggest that the regulator needs to be particular robust to ensure that disreputable CMCs adhere to any cap on a percentage deduction from damages. We are also concerned that the levels of fees charged to CMCs are carefully considered. If they are set too high, there is a danger that this could drive CMCs underground into the unregulated market.

Proliferation of LIPs

28.              We are very concerned that LiPs – many of whom will be existing customers seeking claims – will be faced with the choice of either pursuing a claim themselves, be forced into paying someone else (CMCs) to assist them out of their damages or will simply not claim for the damage or injury suffered, forced not to pursue justice.

29.              When liability is disputed, LIPs will need assistance to obtain liability evidence (witness evidence, police report, traffic light search, engineering evidence and accident reconstruction reports), medical evidence, evidence of financial loss and potentially evidence of rehabilitation treatment received. Additional losses may require further evidence: loss of use of their vehicle, loss of enjoyment of holiday, diminution in the value of their vehicle or disadvantage on the labour market. Furthermore, the LIPs may need to negotiate the complex provisions of the Road Traffic Act and Court Rules and Protocols.

30.              Various fees are currently funded by claimant law firms on behalf of their clients, and recovered from the third party at the end of the case if successful. Most individuals will not be able to fund these claims. These fees are generally not now paid by before-the-event insurers. If the BTE providers are expected to fund these fees, then cost will be passed on to consumers through increased premiums – negating the intention of the reforms. LIPs would be expected to engage in a complex process at significant expense with the risk of recovering nothing.

31.              A range of fees are typically incurred in pursuing a claim: DVLA fee (£2.50), GP report (£216), Consultant report (£504), Issue fee (£205), Application fee (£255), Hearing fee (£545), Police report (approx. £70), Medical records (£50), MID (annual fee), AskCUEPI (annual fee). Fees may also be introduced for use of the MOJ Portal, which would introduce further cost.

32.              LIPs will not be aware of the Motor Insurance Database (MID) (details of the insurer of all insured vehicles in the UK), DVLA and the Motor Insurers Bureau (MIB). Even if a member of the public or a CMC is directed towards these services, it is doubtful that they will be allowed full access. Barriers to identifying registered owners, insurers and uninsured motorists will all serve to prevent LIPs from pursing legitimate claims. In reality, the claims will not be brought, and those that are brought will be subject to delay and additional expense.

33.              No details have been provided about how LIPs are expected to know about the existence of the Claims Portal or MedCo to arrange a mandatory medical report, or to access them. We train our staff on use of the Portal and MedCo. LIPs have no training or experience, and will clearly need guidance on this process. Claims will either not be pursued, or claimants will be driven into the hands of CMCs. It is almost inevitable that the Civil Court system will be clogged with LIPs, with increased demands on court staff and the judiciary.

34.              The government has alluded to support for LIPs through publications and leaflets and online assistance. They could not realistically provide the level of support and guidance needed to negotiate some of the complexities of law and evidence described here. There will be significant inequality of arms for LIPs, conducting claims against experienced claims handlers employed by insurers. Insurers currently choose to incur the expense of instructing law firms to conduct these cases, rather than do it themselves.

Ban on pre-medical offers

35.              Carpenters has long advocated a statutory ban on pre-medical offers, enforced by the regulators, and we fully support this reform. Carpenters have always supported the obtaining of medical reports in each case, and consider that essential to the effective operation of the process. It is not clear, however, how the fee for an initial report, currently fixed at £216, is to be funded. It should be clear that the costs of the medical report will be recoverable from the party responsible for causing the injuries.

Further areas for reform

36.              We have been promised Part 2 of the Government’s reform programme, covering credit hire, rehabilitation and CMCs, sometime soon, possibly before Easter 2017. It is essential that this round of reforms progressed as quickly as possible to enable their implementation alongside the provisions of the Prisons and Courts Bill. Many smaller CMCs have found that accident management activities, including recovery, storage, repair and vehicle hire, have become more profitable than injury claims. These all make significant contributions to costs which are of course passed on to the customer. Regrettably the likelihood of any action being aligned with the timetable for the Bill and other non-legislative reform looks increasingly unlikely.

37.              We agree that rehabilitation treatment is open to exploitation and that commission arrangements have simply moved from medical reports to rehabilitation for some insurers and CMCs, unlike to a law firm who would be in breach of LASPO.

30 March 2017