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The UK’s Compensation Claims Mess: An Insider’s View

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Working in the claims industry these days brings a naggingly persistent stigma. The so-called ‘compensation culture’ spiralling out of control has fuelled the hunt for scapegoats and newspapers are ever eager to deliver. For those unfamiliar with this particular political kerfuffle, compensation culture is a term created to label the problem of an apparent increase in the number of legal cases launched against offending drivers in car accidents. The claims seek damages for personal injury (the majority of which are whiplash injuries) and other losses incurred.

While there’s been a great deal more finger-pointing than answer-finding, it appears we’ll soon have a breakdown on how the UK earned the title ‘whiplash capital of Europe’. With a Transport Committee investigation due to close later this year, let’s take a look at the story so far without the gratuitous witch hunt.

The phrase ‘compensation culture’ can be traced back to the 1990s. Significant changes to personal injury law saw an explosion in personal injury claims in the UK. The trio of adjustments were: the abolition of financial aid in personal injury cases; the introduction of conditional fee agreements (no-win, no-fee); and the subsequent rise of the claims management company.

In 2004, however, a report by the Better Regulation Task Force (a government body set up to examine such phenomena) strongly disagreed that such a phenomenon existed. Quotes from the document include ‘compensation culture: exploding the urban myth’, ‘media creates a storm in a coffee cup’, and don’t ‘believe everything you read’. Time told a different story, though it’s a non-fiction that was indeed media-fuelled.

The Media’s Role in Boosting Compensation Claims

These changes represented a chink in the legal system’s armour against pressures created by an economic downturn. A combination of unscrupulous claims management firms encouraging people to ‘have a go’ and a few frivolous victories made for good copy sales. After all, winning thousands of pounds for a collision no faster than might occur between two supermarket shopping trolleys is pretty shocking. As more such cases surfaced, the extensive coverage and use of the ‘compensation culture’ buzzword were petrol to the fire.

A lot of it is hype, too. When the banks finally went down in the court battle against PPI repayments (insurance to cover one’s debt payments in case of an accident or illness), standardisation of the repayment process saw PPI claims skyrocket. Is this ‘compensation culture going berserk’, or people getting their stolen money back? The media jumped on board, picking up on the usual unscrupulous minority. Very few publications pointed out the fact that the chancers trying to claim for PPI that they never actually had represented under 4% of the hundreds of thousands of claimants. Hardly a shocking statistic, but it made for some decent, topical hype.

Cowboys and Claimants

Unfortunately for most of the claims management industry, a small handful of borderline-unbelievable cowboys made a bad reputation for those of us sending properly-vetted leads to grateful solicitors. Several crooks such as Speed Claims, recently uncovered for not only handling the claims but for staging the car accidents too, made the perfect bogeyman scapegoat for rising insurance premiums in these tough economic times. Another factor is referral fees. Maintaining a page-one Google search listing in a competitive industry is a colossally expensive and skilled endeavour. The economics balanced out and the referral fee for claims management companies sat at several hundreds of pounds per claim.

On the face of things, these referral fees look like large sums of money, spurring public belief that it was claims management companies to blame, and spurring more would-be bogeymen to start claims companies in order to make ‘easy money’. However, once met with the considerable business challenge of competitive-sector Internet marketing, claims management cowboys that lacked the business acumen to make a legitimate, successful company were faced with two choices. Either fold the business into which they invested so much time, hopes, and dreams, or take the bandit’s root and dismiss Ministry of Justice regulations (such as the regulation never to cold-contact anyone) in order to turn a profit. Ambulance chasers, indeed.

The Ministry of Justice culling 700 claims management companies in a year demonstrated the second option was just about as good as the first. I have an acquaintance who works as a broker for commercial property in London who recently won a £120,000 commission for passing the phone number of a client to a landlord. On the face of things, £120,000 looks like a great deal of money. However, it’s not as much as it seems when compared to the annual Internet marketing bill of the company, not to mention the 10 years of dedicated work it took the Director to build that company up.

Investigations

While the claims management firms were left burning at the stake, investigations were looking into the insurance industry to find out whether there was foul play. Anyone who’s been stung by an insurance company in the past will testify that they’re not in business for their health. A particularly noteworthy story on the Law Gazette leaked an email whereby the insurance companies were planning to suggest road traffic accident Portal fees be reduced to just £150 as a ‘negotiating tactic’. Not long before this, Admiral Motor Insurance posted a Q1 2012 profit increase of almost 10%, pushing up their income to well in excess of £500m for three months’ trading; two facts which tell their own story.

The Office of Fair Trading, the Transport Committee, and the Competition Commission all waded into the nitty-gritty, only to find out that insurance companies have been engaging in a fair bit of double-dipping themselves – not bogeymen cowboys, but fully-blown PLC companies. The investigations found the 40% increase to insurance premiums was ‘totally unfounded’. It was found that insurers would sell client details onto solicitors’ car hire fans and garages for inflated rates, thus pushing up the insurance premiums overall and filling their own coffers in the process. Not to mention the breach of regulations to the Information Commissioners Office. Looking up the ongoing Transport Committee investigation, the most recent instalment of which was published in March this year, will reveal that the insurance companies are the primary target for the rise of insurance premiums rather than claims management companies.

Conclusion

While we wait for the final word, it’s clear that something needs to be done in order to make the legal system surrounding car accident claims more robust. The problems were caused by a self-perpetuating cycle of frivolous claims, media publication thereof, increased insurance premiums, and empty pockets spiralling things out of control. One hopes that the coming conclusions will see things go back to an acceptable level and help the sector to find an equilibrium once more so claims management companies with scruples firmly in place can lose their stigmas.

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