The seemingly unrelenting rise in the cost of personal injury referral fees has resulted in a barrage of criticism from many quarters but the solution is far from straightforward. Lynn Rouse delves into the depths of a multi-faceted and often murky subject
There are no two ways about it: exploring the rights and wrongs of referral fees in personal injury claims leads you into muddy waters where arguments go in a vicious circle and their resolution is far from clear. On the one hand, their opponents appear to argue that these fees are the single greatest driver of PI claims cost inflation, as opposed to a rising number of claims or higher damages. On the other hand, their supporters argue they are a justifiable cost of business acquisition, legitimised in 2004, whereby the payment of such fees has to be disclosed to the claimant and the claimant suffers no detriment as they do not bear the cost. In addition, supporters argue, paying for business lead generation is hardly a revolutionary industry practice.
But few would disagree that the level of referral fees being paid is rising. Anecdotal evidence from market commentators suggests it is now not unusual for the fee per PI claim to be in the region of £500 to £750. Indeed, law firm Simpson Millar, which has recently launched a scheme that pays injured parties direct for their claims rather than third parties, asserts that fees can be as high as £1000.
Whichever way you look at it, those sums seems to represent a disproportionately high cost to pay for what is essentially someone's contact details and basic claims file. And when actuarial consultant EMB recently published its findings on the associated and soaring cost of credit hire organisations to motor insurers, it estimated that the cost of PI referral fees alone is adding between 2% and 4% to average loss ratios of UK motor insurers (Post Motor Report, 10 April, p22).
Justin Jacobs, head of property, motor, and liability at the Association of British Insurers, says: "Referral fees are a symptom of the current problem with our personal injury and replacement vehicle system. The fact that solicitors and credit hire companies are able to pay referral fees demonstrates that they are making disproportionate profits. That is why we need PI claims process reform so that solicitors and credit hire companies receive payment for the job they are doing at a fair price - not current disproportionate prices."
However, what Mr Jacobs fails to point out is issues surrounding PI referral fees are made more problematic by the fact that, alongside claims management companies, the other main recipient is before-the-event legal expenses insurers. So, while liability insurers may bemoan their existence and rising level, their brethren on the BTE side are financially benefiting from them.
Andrew Underwood, partner at law firm Keoghs, suggests BTE insurers have little choice in the matter: "Legal expenses insurers aim to capture claims early doors - if they don't someone else will. That rush for claims means the pressure is on to get the work and firms are prepared to pay a higher rate."
David Hartley, director of after-the-event services at Abbey Legal, makes some interesting revelations surrounding the escalating cost of referral fees. He recalls that, back in the 1990s, these fees could be as little as £50 per claim. With the advent of aggressive - and at that point unregulated - claims management companies, such as Claims Direct and The Accident Group, he says these were gradually pushed to "about £150 to £200 and then a little higher to the £300 mark". However, he adds: "Funnily enough referral fees have risen much higher since both these firms collapsed. Now they are probably double what they were then." He attributes this not only to "a number of very large claims management companies" but also - more revealingly - to "the expansion of liability insurers into third-party capture as well as the amount charged by BTE insurers."
Commenting that he, like many others, wishes referral fees did not exist, Mr Hartley adds: "It is a shame it has come to this - claimant firms are having to fight to maintain their share of the market that is being squeezed by claims management companies and liability insurers engaged in third-party capture."
So, in short, insurers are not blame free.
Simpson Millar's new scheme aims to cut out the middle man and pay injured people £250 on acceptance of their claim, if it comes direct to the firm (Post, 24 April 2008, p3). When it launched last month, partner Bryan Nott said the selling of victims' claims is the "uncomfortable truth" of the PI market. He went as far as to comment: "There is something ethically muddy about a business that benefits financially merely from passing on details of people's misfortune."
But does Simpson Millar still pay referral fees and, therefore, will it be operating a dual system? Mr Nott responds: "Yes, we have paid them but referral fees have not been an overwhelming feature of the way we acquire work. As for whether we will continue to do so, that all depends upon whether it makes business sense. I am not saying we will never pay another referral fee to a third party, but do feel that we can offer better value to the public by paying them. This way they receive the financial benefit."
Asked whether the firm hopes to make savings - by paying claimants arguably less than it would cost to buy their claim from a third party, he says: "The fact we are offering clients less than we may have to pay to buy claims is by no means to get work 'on the cheap'. By the time we have factored in the additional marketing costs we are aiming for a cost-neutral position."
The Ministry of Justice would appear to hold some sympathy with the view that referral fees are fuelling costs associated with PI claims handling. When it first published its consultation document to reform the PI claims process last year, this included a proposal for a phased payment of fixed fees for PI lawyers that would only reflect the work needed to comply with the various stages of the new system. The MoJ explicitly stated that these fees would "not include the cost of referral fees". Since these fees are not recoverable and cannot be passed on to the claimant, what the government was effectively proposing was setting fixed fees at a level where it would no longer be economically viable for lawyers to pay them.
However, bearing in mind what Mr Nott says about the need to pay for extra marketing and advertising if you are not paying referral fees, surely this system of lower fixed fees would penalize those not paying them?
Mr Hartley would seem to agree: "It is far more difficult for those solicitors who do not pay referral fees but are spending their own money on marketing to a local client base. If the MoJ reduces the costs that can be recovered by those who pay referral fees, you would also have to do this for those that do not pay them and choose to market their own firms. And if you do that in an environment where everyone is fighting for access to the clients, you have got to include defendant insurance companies who are investing in third-party claims capture."
Equally, BTE insurers would argue the money they make from referrals subsidises the cost of legal expenses insurance. Without this income, premium levels would rise. Of course, the counter argument is that perhaps premiums for BTE insurance should reflect the actual cost of underwriting in any case.
But those in favour of maintaining referral fees suggest that consumers genuinely benefit from their existence. David Green, chief executive officer at MTA Solicitors, says: "Since the earliest days of commerce, businesses have been prepared to pay for leads; this is not a new concept and consumers understand this. Regulation requires that the consumer is made aware of the referral fees and they cannot be recharged to the client. This has meant solicitors have been required to absorb the referral fees as part of their overhead costs. With fixed costs being prevalent for the majority of PI claims this has forced solicitors to introduce efficient and customer-focused methods of working to maintain any profit in this area of law."
But not everyone agrees: "We are now seeing a price war between firms bidding for the opportunity to run these claims, which has driven up referral fees," says Mr Nott. "The result is that many law firms are forced to put less experienced lawyers in charge of handling PI claims for it to be viable."
But Mr Green refutes such assertions about reduced expertise. While accepting that the impact of referral fees has been to reduce the profit available, he stresses: "This has forced firms to become more efficient in terms of their management of claims and to match the service levels expected by BTE insurers through service level agreements. This has seen the development of sophisticated case management systems and specialist personal injury lawyers enabling the refinement of the claims management process in order to ensure they can still make a sustainable return."
Lawyers behaving badly?
Yet other commentators are adamant that, far from driving positive claimant solicitor behaviour, referral fees in PI claims actually actively encourage bad behaviour.
Tony Emms, motor claims director at Zurich, says: "Any lawyer who pays a referral fee to buy business starts with a profit and loss sheet on that case - and it starts at minus whatever has been paid to acquire the case. So the question is - how does that lawyer recover that sum of money and ensure they make a profit?
"In motor claims, we have predictive costs and fixed fees that barely cover the cost of the referral fee. Therefore it follows that if, for some reason, that case no longer falls within the rules of the predictive fee environment, lawyers are more likely to balance their books. This encourages solicitors to take claims out of the predictive fee regime."
To put this in context, for road traffic accident claims worth between £1000 and £5000, the fee is £800 plus 20% of damages; for RTAs worth between £5000 and £10,000, the fee is £800 plus 15% of damages. On top of this, lawyers can charge VAT plus disbursements, such as medical reports.
"If the agreed protocol falls down at any point, this allows the solicitor to commence legal proceedings," says Mr Emms. "And, in my view, we are seeing more litigation because of the need to take claims out of the predictive fee environment."
Mr Underwood agrees. "PI claims are a valuable commodity and referral fees are only made affordable because of the cost that can be extracted from PI claims. This has consequences for the PI lawyer - they are forced to look at other ways to maximise their recoverable costs. Claimant lawyers will try and avoid the predictive fee environment by filing proceedings early doors."
But surely claimant solicitors can only do this if liability insurers fail to adhere to deliver what they are required to do and when?
"It's a fair challenge," concedes Mr Emms, "but there are ways and means to make that happen and it can drive the wrong behaviour. For example, an insurer could be out by a day or may write to the solicitors on a certain point that requires a response before the insurer can do what it needs to in the timescale. If they do not get that response, they will exceed the number of days allowed. So instead of a response, you get a summons from the claimant side."
But Mr Green challenges this claim. "Yes, there is the potential to get higher costs if insurance companies do not make a reasonable offer, as then the solicitor can issue proceedings. But within the insurer's armoury is the ability to argue for premature issue and costs will be restricted.
"So if insurers say a solicitor has actively pushed a claim into litigation, the judge is aware they have the potential to stamp on it."
But Mr Emms says judges do not necessarily use this tool and stresses: "Everything we are talking about here also relates to credit hire, where we face exactly the same situation. People are increasing the cost of third-party claims by referring innocent parties to a supplier for the sole purpose of earning a referral fee rather than for the good of the innocent party and at a time when more cost-effective alternatives are available."
He adds: "I would also like to hear the FSA provide a view on the practice of paying referral fees in the claims market, given that the payment of these is increasing the cost of claims. In turn, this increases premiums. So, is the practice of paying referral fees 'treating customers fairly' in the overall context of the market? The FSA is always talking about TCF and mitigating the cost of claims and yet it remains silent on this issue."
The Solicitors Regulation Authority recently revisited the question of banning referral fees, having legalised their payment in 2004, but announced in January that this is not feasible. Instead, it plans to introduce new measures and tough penalties to improve compliance with its rules. The main point of these rules is that, if you can extrapolate the actual cost of a case referred, it must be disclosed to the client. Where the payment is more general in nature the requirement is to advise the client of the fact that a financial arrangement exists.
Protecting the public
Looking back, Denise Kitchener, chief executive of the Association of Personal Injury Lawyers, comments: "Apil never wanted to remove the ban on payment for referrals but the Law Society's code - which governed the ban - had proved unenforceable and, in the end, we believed the public would lose out as there was no transparency or consistency in a chaotic system.
"This situation forced the association into the position of reluctantly supporting removal of the ban, provided the client is protected from unscrupulous operators and any arrangement made between solicitor and client is completely transparent. We also strongly supported the final wording in the professional rules stipulating that the agent who refers the client to the solicitor should not have acquired the business through any marketing practices that would not be allowed under the solicitor's publicity code, such as cold calling."
So, the situation on referral fees is far from black and white. As Mr Hartley concludes: "If there was an easy solution, someone would have been able to find it by now as there are enough people who feel referral fees are a bad thing. But nobody has come up with a workable solution as far as I can see. And I fear this situation will go on until there is a lot of pain suffered on one side of the market or the other."
But what will happen if the level of referral fees continues to escalate? At what point will the cost be seen as extortionate and detrimental to consumers? And is there evidence of an increase in unnecessary litigation, as Mr Emms suggests? These questions certainly deserve further examination and exploration by all stakeholders in the PI claims industry.
- Gallagher Bassett acquires claims management firm
- Finch and ICB owner on acquisition trail with sight set on €500m revenue by 2022
- Top 100 Insurtech: Quarter four update
- Green light for UK-US insurance trade deal
- Roundtable: Is a single customer view taking off in insurance?
- Analysis: The mystery of the missing Insurance Fraud Taskforce report
- Blog: You really need to listen before walking the walk