A month after shelving plans, the Government has released a consultation paper outlining their proposals to further reform the personal injury market, with the honourable aims of combatting fraud and tackling the endemic compensation culture. The consultation closes on 6 January 2017.
The proposals largely mirror those announced by the former Chancellor in last year's Autumn Statement and concentrate on increasing the small claims threshold and removing the right to claim compensation for minor whiplash claims. A notable addition is the proposal to move to a tariff based system of predictable damages for compensation, which will replace the Judicial College Guidelines (JC Guidelines).
The overall thrust of the proposed reforms is to move towards lower cost claims and, as a consequence, for there to be fewer claims. However, lawyers, insurers and others are still appraising the consultation document and the devil will be in the detail of the eventual legislation. We welcome the overall direction of travel that ensures fairness in the claims space and lower premiums for consumers.
The Government must be mindful of the unintended consequences of their proposals, which may operate to undermine the anticipated benefits and move the problems to other areas. Indeed following the LAPSO reforms, increases in fraudulent claims were seen in areas such as hearing loss, sickness claims and slip and trip claims. A more cohesive approach to tackle fraudulent claims will be required, in order to better utilise resources such as IFED and the IFB, as well as greater collaboration with the claimant sector.
Claiming for general damages
The Government's position in relation to general damages for 'minor' soft tissue injury claims is to either (i) impose a complete ban on such claims or (ii) place a cap of £400 for such injuries with a maximum of £425 for 6 month injury claims involving a psychological element.
'Minor' is to be defined by reference to the prognosis period, and both 6 months and 9 months have been proposed, with the Government recommending that 6 months would be the most appropriate way forward.
The Pre-Action Protocol definition of 'soft tissue injury' has been proposed, with the addition that claims where the psychological injury is the primary element will also be included.
The Ministry of Justice (MoJ) proposes to include a process for assessing the duration of an injury and has suggested two alternative approaches:
- Diagnosis Approach – The claimant would attend an examination with a medical expert after the prescribed period (of either 6 or 9 months) to determine whether they are still injured and therefore entitled to compensation. There is usually no objective sign of injury for a whiplash injury and it largely comes down to the credibility of the claimant and the veracity of their account to the medical expert. This approach may largely mean that the process remains as open to abuse as it is now. However the change of process may alter claimants' perceptions and mean they will be less inclined to bring opportunistic claims if they believe they will be subject to greater scrutiny.
- Prognosis Approach – This would be similar to how the system works now. The claimant would obtain a medical report via MedCo. This would need to be undertaken in a suitable period, likely to be 6 months; although the report does not specify a time frame. If it was brought within 3 months it might have a positive impact because it would remove the possibility of late claims, where claims are more likely to have been farmed, with claimants being cold called and badgered into making a claim by accident management companies. It is likely to have little impact on opportunistic and organised fraudsters who are likely to welcome the opportunity to get their medical evidence as soon as possible and get paid out quicker.
MedCo are currently facing difficulties in relation to the number of shell companies and repeat searches of the MedCo database by claimant firms, which would need to be resolved in order for this system to be effective. Indeed without more robust MedCo regulation it will be easy for claimants to inflate the claim beyond the 'minor' threshold.
Additionally, it is unclear whether the current position in relation to special damages will change; compensation for things such as rehabilitation treatment costs and loss of earnings may still be recoverable, undermining this costs saving initiative.
Ministers are keen to introduce a 'transparent tariff system' for more significant whiplash injuries. It is thought the tariff will provide more certainty and reduced entitlement when calculating compensation than the current JC Guidelines.
The tariff system has seen success in Europe, most recently in Italy. The MoJ want to have 3 month increments, from 6 months to 24 months in total. The band would be between £400 (for 6 month injuries) and £3,500 (for 24 month injuries) or between £425 and £3,600 for the same prognosis periods if there is a psychological element.
As the tariff system has been proposed, we think it more likely this will be implemented than an outright ban on 'minor' claims, with 'minor' claims classed as those of under 6 months rather than the 9 month mark.
This would produce significant savings if the claim volumes at each injury level remained the same. However there would be clear financial incentive for claimants to inflate the claim in order to increase their benefit.
It is also suggested there would be provision for the judiciary with the ability, upon application, to apply an uplift of 20% in exceptional cases, for claims where the injury duration is more than six months. This again would give claimants' more incentive to inflate claims above the 6 month mark.
Small claims threshold
The Government has proposed to raise the small claims limit from £1,000 to £5,000 with a view to clamping down on a 'predatory claims industry' to stop minor, exaggerated or fraudulent claims which are driving up the cost of motor premiums.
The proposal is in line with the former Chancellor George Osborne's proposals set out in his Spending Review and Autumn Statement and is expected to save over £1bn from the annual cost of UK motor insurance. If these savings are passed on to consumers, it is estimated to reduce motor premiums by an estimated £50 per policy.
The MoJ has stated there are two options available for increasing the small claims threshold:
(1) Increasing the threshold for all personal injury claims therefore bringing in liability claims as well as low level clinical negligence claims. These claims are commonly more complex in nature than RTA claims, requiring evidence in respect of liability and causation.
This may restrict claimants' ability to gain access to justice but may also cause claim displacement as claimant lawyers seek to plead the case above the £5,000 threshold to secure costs entitlement. This may increase the global cost of claims.
It has been suggested that in exceptional circumstances complicated cases could be allocated to a different track. However there would be the danger that this exception would become the rule which would significantly undermine the proposals.
(2) Raising the threshold just for RTA claims. This may present logistical issues given the multiple procedural thresholds and different systems dealing with RTA personal injury claims. The system would need an overhaul but there is no reason why this could not be achieved as the Portal system currently in place has had great success. Indeed this is likely to significantly reduce the cost of claims, although it will not be without unintended consequences.
Litigants in person
Either proposal is likely to lead to an increase in litigants in person, which is something that won't appeal to the majority of claimants. A substantial reworking of the Civil Procedure Rules (CPR) would be required to ensure it is simplified and fit for a lay person to understand in order to make the system as workable as possible.
An automated system similar to the MoJ Portal would be useful for litigants in person, as cases of this nature are simple enough to not require legal representation. Implementing a similar system would tie in with the HMCTS' proposals for an online court system. Indeed this could be the first pilot of the online court system.
With the potential for smaller pay-outs and more use of the small claims court, in the absence of claimant firms, new entrants may enter the market, such as claims management companies. This would bring potential problems with the lack of regulation of these entities and may encourage an increase in fraudulent claims. It may also increase the use of paid McKenzie friends who are largely unregulated and, as recent examples have shown, would leave the door wide open for abuse.
The final measure is to ban defendants from making pre-medical report offers. These have been used historically by claimants and insurers to settle claims quickly and to limit costs. Aside from issues of under settlement, the lack of scrutiny leaves the practice wide open to fraudulent abuse.
However a ban will prevent insurers from taking an economic view, as in the majority of cases these claims would be settled in any event. This additional regulation would fetter insurers' discretion in the management of claims, leading to higher administrative burden and costs.
Insurance Fraud Task Force
It has been proposed that claim notification forms are amended to include the referral source. This would be beneficial to both claimant firms and insurers who would be able to identify the referral source which is an important feature in many fraudulent claims particularly at the organised end of the spectrum. Insurers would be better able to identify suspect referral sources and allocate resources to tackle the problem sooner.
We believe that fraudulent claims would be best fought by greater collaboration between insurers and claimant firms. We would be particularly interested in meeting with leading market claimant firms to discuss the implementation of collaborative processes that would help combat fraudulent claims.
Primary legislation will be needed to remove the right to damages in minor soft tissue injury claims; however it is assumed that it would not be required for the small claims limit to be increased.
As has already been seen, there will be fierce opposition both within and outside Parliament, particularly in respect of the removal of the right to compensation. Claimant firms together with APIL will no doubt be considering whether it is possible to argue that removing the right to compensation is contrary to the European Convention on Human Rights and we may see Judicial Reviews brought if legislation is enacted.
These radical plans are likely to transform the personal injury market. It will not only affect the claims management companies who market the claims, but the lawyers handling them and the medical experts who provide the reports. Many claimant firms, who have invested heavily in infrastructure to compliment the current process, may see their business model come under threat.
In the short term, these proposals are likely to result in an increase in pre-implementation claims farming and insurers must ready to respond to these anticipated higher claims volumes as the legislative timeframe becomes clear.