Referral Fees – the other side of the story

There has been much adverse publicity surrounding referral fees in the media of late. A number of insurers have stated that the payment of referral fees is forcing insurance premiums up, and the call to arms has been taken up by a number of MPs.

What has yet to be adequately explained is how referral fees are forcing insurance premiums up. As a concept referral fees were originally introduced by the insurance industry as a method of raising revenue. Many policies of motor insurance were sold with optional Legal Expenses Insurance, a policy of insurance designed to provide the policyholder with legal advice and representation in the event of a non-fault accident. The premium was often very cheap compared to the cost of privately funding a claim for personal injuries and/or vehicle damage in the event of an accident. In the event of an accident the insurer would arrange for “free” legal representation under the terms of the policy. What this actually meant is that the insurer would refer you to one of their panel firm of solicitors, in exchange for a fee. Thus the “referral fee” was born.

For a number of years insurers were able to make a significant profit from the selling of claims, a practice they now claim is abhorrent. This was largely a “win-win” scenario for insurers, they charged their insured a premium for the insurance, and the solicitor a referral fee when the details were passed over. Insurers often stood to gain £800.00 or more as a result of their policy holder’s accident. By ensuring that they dealt primarily with non-fault accidents the risk to the insurer was minimal compared to the gain.

For years many insurers would erroneously tell policyholders that they “must” use their nominated firm of solicitors, usually a firm with whom they had a referral agreement.

The tide turned against insurers with the rise in Claims Management Companies. These business were adept at intercepting claims before they reached insurers, and they too sold details on to law firms in the same manner that insurers had been doing for years. Of course with insurers no longer in receipt of the funds generated by “referral” fees, and with an obligation to their shareholders rather than their policyholders, the insurers react in the time honoured fashion – raise the premiums.

It is not the referral fee itself that is causing the rise in premiums, but rather the fact that insurers have been outclassed in their own game. A ban on referral fees therefore does not benefit the insurer directly, but rather it forces the competition out of the business. There is a clear advantage to insurers in doing this, particularly on the eve of the Alternative Business Structure, which will see insurers being able to own and operate their own law firms. If claims management companies whose revenue is often solely from referral fees, are put out of business, the insurers once more retain control over where claims are placed. Once they also own and operate their own law firms, it is fairly clear that they will serve themselves first.

A ban on referral fees is not the benevolent consumer protectionism it is portrayed to be, rather it is business as usual.

How will the consumer fare in all of this? How many insurers have openly stated that in the advent of a ban in referral fees they will reduce premiums? Policyholders are not shareholders after all. How fairly will insurers who operate their own firms represent and give advice to their policyholders? Most Personal Injury lawyers will be able to tell tale after tale of offers made by insurers that are far too low. Many will speak of the virtues of litigation in securing a good deal for their client. Will insurers ensure that accurate levels of compensation are paid to the victims of accidents? It is in their interests to pay out as little as possible. It is in the lawyer’s interests to secure as much compensation as possible for their client.

Insurers have stated that there needs to be more control over the cost of personal injury cases. The lawyers costs however have largely been fixed since October 2006 with the advent of “Fixed Recoverable Costs” where the amount of costs paid to the law firm is based upon the compensation recovered for the client. Since April 2010 those costs have decreased again due to the advent of the Claims Portal.

Insurers speak in horror that law firms are still able to make a profit therefore the costs must be too high. Law firms are businesses too, and managers of all legal practices will have an eye on turning a profit, otherwise why would they be in business. This should come as no surprise to the CEOs of insurers, who also want to turn a profit and fulfil their obligations to their shareholders. Law firms have had to react to changes in the law and fee structures; those who do so successfully continue, those who do not go out of business.

Of course portraying lawyers as “greedy fat cats” who care little for the client serves the insurers purpose in terms of affecting public opinion. The reality again is not being faced. When legal aid began to fall by the wayside it was lawyers who took the burden of risk in dealing with their client’s claims. No Win No Fee agreements are great for lawyers when they win, but are costly if they lose. A minor uplift is factored into winning cases to pay for the losing cases. It is however the lawyer who is funding the case in terms of both time and cost until the claim succeeds. The client has not faced the risk directly. When fixed recoverable costs were introduced limiting the amount lawyers could claim in terms of their fees, the amount of work did not decrease by a corresponding amount. Indeed the amount of the uplift was capped for different types of case. The same is true following the advent of the claims portal. Lawyers therefore operate under ever decreasing margins, whilst still providing a valuable service to their clients. Squeezing that margin further will see many Personal Injury practices re-task their resources to other more profitable areas of law in order that they can stay in business and continue to employ their staff. Fewer Personal Injury lawyers does not mean fewer claims, but it will have a knock on effect with regards to the quality and expertise available to the public. If that personal injury lawyer is employed by an insurer, how confident can the public be with regards to the advice that is given.

This is not a “feel sorry for lawyers” sentiment; the fact remains that to legally drive a vehicle you are under a legal obligation to carry third party motor insurance, which you pay to your insurers who controls the level of premiums; if you have an accident you have no obligation to make a claim, and therefore the lawyer has no control over the amount of work they are likely to receive.

The very real threat to insurers and lawyers alike does not stem from referral fees or a degree of rivalry in the accident compensation business. The threat lies with the increase in fraudulent claims. There is no doubt that there has been an increase in fraudulent claims, nor a similar increase in claims management companies, and doubtless some law firms, who appear to be perfectly willing to engage in such activities. Stamping out these fraudulent claims is in the interests of lawyers and insurers alike. Claims Management Companies are supposed to be regulated by the Ministry of Justice, but there appears to be little public action taken to stamp out fraudulent claims. Insurers treat lawyers as the enemy and will not share information about repeat claimants, despite having access to the information, and despite the Civil Procedure Rules encouraging co-operation. Law firms generally do not profit at the hands of a fraudulent claimant; they stand to lose time, money and reputation. Most law firms, if presented with evidence that their client is committing fraud, would cease to act for the client immediately.

A ban on referral fees will not end fraudulent claims, it will not bring about consumer protection, it will not result in fewer claims; it will almost certainly not result in decreased premiums. It will result in control of claims reverting to insurers and fewer independent lawyers available to provide impartial and accurate legal advice. The call to arms should not be in relation to referral fees, it should be to eliminate the criminal enterprise that has taken a foot hold in the personal injury claims arena. The people with the power to tackle that? The insurers and the Ministry of Justice