Compensation Culture: How Insurers Contribute – Professor Richard Lewis

Students of tort at Cardiff learn that “compensation culture” can mean a variety of things. Usually it is associated with an explosion in the number of claims for personal injury damages. Motor claims have doubled in the last ten years and we have seen a rise in insurance premiums. But is this because people now find it easier to see a lawyer to bring a claim or because the system is being unfairly exploited? Those who focus upon the problems caused by litigation invariably blame unscrupulous claims companies, exploitative lawyers, or fraudulent claimants. However, there has been a lot of misinformation about what is actually happening. One perspective often overlooked is the role that insurers play in the system.

Insurers are fundamental to personal injury litigation: what they do very much affects whether a claim is made, how it is processed and the amount of damages gained. Although the great majority of claims are brought against defendants who are individual people, they almost all are insured. In nine out of ten cases the real defendants are insurance companies. A handful of insurers dominate the market so that in motor claims four companies only are responsible for over half the premiums collected. Insurers are the paymasters of the tort system being responsible for 94% of damages paid. They fund not only the damages award itself but also most of the administrative and legal costs of the system. They provide legal representation not only for most defendants but also many claimants.

The influence of insurers inevitably permeates the system. Intuitively we might expect that out of self-interest insurers would act as the system’s gatekeepers and policemen. This might involve them discouraging certain claims being made in the first place, carefully examining those that are brought and paying up only when evidence of legal liability is clear. However, the reality has been far from this. In recent years insurers have actually encouraged claims in a number of ways and they have made payments, albeit usually of low amounts, very readily.

An insurer’s desire to defend a case has always had to be tempered by cost considerations. A heroic defence denying that a driver has been negligent in a marginal case may prove not only to be a risky but also a very expensive tactic. Legal costs can easily exceed the sum being claimed. This danger is present in the majority of cases because the average payment of damages is less than £5,000. As a result, it is unusual for insurers to contest liability: one study of insurers’ files revealed that they ‘contained remarkably little discussion of liability,’ finding it initially denied in only 20% of cases. In fact claimants succeed in more than 9 out of 10 cases. Because insurers make some payment in this great majority of cases, in effect, they encourage claims to be made.

Insurers also encourage claims by providing cover in motor and home policies to enable claimants to have ready access to a lawyer. Not only do insurers profit from this by including an additional cost in the premium charged, but they also used to receive a referral fee from solicitors for each personal injury case they forwarded. Referrals earned insurers about £700 per case and constituted a substantial income. For example, the Cardiff-based Admiral insurance company received over £18 million in referrals in 2012, being about £6 for each vehicle it insured and constituting about 6% of its profit. A related practice of insurers was to collect information about all potential claimants in an accident and again sell those details to law firms. The result was the development of an ultimately flawed business practice: profit was sought from these individual cases but in doing so a more febrile claims atmosphere resulted. Insurers in general eventually suffered.

Gradually insurers became concerned about the problems which they had in part created. These included not only the rising number of claims but also the increasing legal costs to which they became subject. In seeking to reduce these costs insurers adopted practices which again in the longer term had the opposite effect of that originally intended. For example, one tactic still used today is “third party capture.” This is where the insurer makes a direct approach to any injured party who is not their own insured and does so before they have contacted a lawyer themselves. Insurers seek a quick settlement of the potential claim before any legal costs can be incurred. This has resulted in many people with only very minor injury from the accident in which they were involved (or often no injury at all) being offered sums to settle cases which they had no previous intention of bringing!

Another tactic which also has the unintended effect of encouraging claims has been the making of “pre-med offers.” These are offers made to claimants very early in the proceedings, often immediately on receiving notice of a claim, and before any medical report has been obtained. They are pitched at a low level, usually less than £1,500, and are aimed at removing the nuisance value of a small claim together with its potentially disproportionate costs. For example, until recently a quick offer could save an insurer paying up to £700 (now reduced to a maximum of £180) for the cost of a medical report even though these are often standard form and produced by a mere GP. Commonly made in whiplash cases, these pre-med offers have been heavily criticised on the one hand as attempts to buy off claims for derisory amounts and, on the other hand, as encouraging claims where injury is non-existent and thus feeding the compensation culture.

Criticism of insurers making very ready offers was voiced by one solicitor interviewed as part of recent research carried out by the author with Annette Morris. He stated:

“… if it becomes known, as I think it did with whiplash, that all you have to do is say: ‘I was in a car accident’ and really the insurers just pay you some money, I’m not sure that’s necessarily a good message to be sending out to the public. I think that insurers have got caught ….If they’re going to make those sort of offers, they can expect people just to have a go all the time.”

The conclusion of a Parliamentary committee is that “a highly dysfunctional market” has been created “in which the pursuit of profit … has led to higher prices for consumers and, in some cases, business practices which are not in the consumer interest.” Overall it is clear that certain routine institutional practices of insurers in processing claims have contributed to some of the problems now identified as part of compensation culture.

The full article will be published in the December 2014 issue of the Journal of Personal Injury Law. In the meantime, you can view it here

Professor Richard Lewis has been a member of Cardiff Law School for 40 years and has recently received the prestigious Doctorate of Civil Law from Oxford University.