Legal Aid, Sentencing and Punishment of Offenders Bill

Debate between Lord Thomas of Gresford and Lord Dubs

Wednesday 1st February 2012 Lords Chamber

[Lord Thomas of Gresford]

I apologise for wearying your Lordships once more. The amendment would ban the practice of third-party capture life insurance companies. Third-party capture is something with which many people, including many insured people, will not be familiar, but I have heard about it. Frankly, it is a nefarious practice.

The amendment would ban an insurance company—we are talking about banning in this amendment, not regulation—from directly contacting third parties who have been involved in accidents. That is currently commonplace behaviour following road traffic accidents. An accident happens, two drivers exchange with their details, driver A submits full details to his or her insurer and that insurer contacts driver B and offers an early settlement, usually at a much lower rate than would be achieved through due legal process. Insurers frequently make offers to accident victims that are far lower than the claim is worth, denying a person who has suffered an injury caused by someone else the redress that they deserve. They frequently make settlement offers without proper medical examination to ascertain the full extent of the injury, again denying the accident victim real evidence-based representation.

In this way, insurers seek to close off a claim without offering accident victims the opportunity to seek independent legal advice. There is obviously a conflict of interest. Insurers are acting both for the defendant, their policyholder, and the accident victim. Given that the insurers’ primary objective is to minimise the level of payments, they have little interest in securing a fair deal for accident victims.

There is another, equally unpleasant practice carried out by insurance companies where they contact a third party who has been injured in an accident with one of their policyholders and suggests that he or she makes a personal injury claim through their legal services arm. Other insurers simply refer the case details on, at a price—we will be dealing with referral fees shortly—to an independent personal injury lawyer. That is a major revenue stream for insurance companies, but it overrides common sense and is a substantial conflict of interest for insurers.

Since I tabled the amendment, I have been approached by the Association of British Insurers. It has kindly sent me its code of practice. The ABI code of practice for third-party assistance occupies some 11 pages, unlike the two-page code I was referring to in the previous amendment, and presents advice for insurers on how to contact unrepresented claimants, what they are to say to them about the injuries that they have received, how they are to deal with the damage to their vehicles and how to hire other vehicles. A section headed “Managing the Relationship” says:

“This section sets out how the insurer will manage the relationship with the unrepresented claimant where they have agreed on a provision of services, and covers where a claimant goes from unrepresented to represented”.

It sets out the policy, how to arrange medical treatment and so on. I suppose that in one way this could be said to be good practice. If the insurer is to be allowed to interfere with the other side in this way and to make offers of settlement, it is good practice to advise him to get a proper medical report and so on, as the ABI code says. However, there is absolutely nothing to enforce it. An insurer—and there are many insurance companies—may have a copy of the ABI code of practice but there is nothing to require him to adhere to what it says. Therefore, not only can the insurer ignore the provisions of his own code of practice but he can directly approach the other side. That is what my amendment seeks to prevent. I beg to move.

[Lord Dubs]

My Lords, I should like to speak to Amendment 164ZA in my name and give my support to Amendment 164, which has just been moved by the noble Lord, Lord Thomas of Gresford.

The Bill contains a series of proposals that attempt to dent access to justice for people who have suffered harm. It reduces their damages quite dramatically by taking away the recoverability of success fees and “after the event” insurance premiums. The referral fee ban may go some way to curbing the abuses of some claims management companies, but it will also sweep up many organisations, including important victims’ charities and membership organisations, that do a lot of good hard work in ensuring access to justice, and it will do nothing to curb some of the abuses that have inhibited access to justice.

The noble Lord, Lord Thomas, referred to third-party capture. What is it and why is it so controversial? Perhaps I may quote from the Financial Services Authority’s guidelines on third-party capture:

“Third-party capture (or third-party assistance) is when an insurer deals directly with a person who has a potential claim against their policyholder, in order to investigate and settle the claim. Typically, an insurer offers a compensation payment to settle the claim directly to a third party, rather than settling through a legal representative for that party. This is mainly used for third-party motor claims. But sometimes it’s used in other types of insurance, such as employers’ liability.

Concerns have been raised by industry bodies and consumer groups that this practice could mean third parties do not receive fair and reasonable treatment and compensation.

The handling of all insurance claims by insurers—including third-party claims—is regulated under the Financial Services and Markets Act 2000. This means that an insurer’s conduct towards third parties must comply with our Principles for Businesses and, where relevant, the claims handling rules in chapter eight of our new Insurance Conduct of Business Sourcebook ... Complying with our Principles for Businesses includes acting with integrity, due skill, care and diligence and observing proper standards of market conduct”.

The trouble is that that is not how it works in practice, as the noble Lord, Lord Thomas of Gresford, has clearly shown.

The system is used by insurers, in their drive to maintain and increase profits, to collect premiums but reduce the amounts they pay out. In short, the insurers want to be their own judge and jury. The system should protect legitimate claimants who may have suffered great harm and be in great mental anguish and who are therefore susceptible to an approach that undermines their rights but ends the process quickly. They should receive what the law says they are entitled to, not what the insurance company says it is prepared to pay, and there is a big difference between the two. In the old days, it was not unusual for the same solicitor to represent both purchaser and vendor in a conveyancing transaction. Of course, there were clear conflicts of interest and major problems as a result. Thankfully, that practice no longer occurs.

Third-party capture has the same risks to consumers attached to it. The insurer, who has a responsibility for paying out on a claim, also decides how much to pay, more often than not on the basis of no, or inadequate, medical evidence and without the claimant having the benefit of legal advice. There could not be a clearer conflict of interest between a big insurance company playing the numbers and an unrepresented, unadvised claimant, but the great irony is that insurers end up actively encouraging claims with the direct approach of offering to settle quickly without the purported inconvenience of a medical examination.

A further irony is that the idea of putting forward a whiplash claim can be put in the mind of a claimant when they had not originally thought of claiming. Of course, the newspapers are full of such behaviour. The insurers are, in some respects, playing the numbers. They think that if they can buy off 10 whiplash cases for, say, £1,000 or so—even if some of them are, dare I say, fraudulent—it will cost them less than paying out the correct compensation to properly advised claimants on, say, four or five of them. That benefits insurers significantly. It can be no surprise that that has led to an increase in low-value whiplash claims and the undersettlement of more serious claims.

The insurance industry and the personal injury industry have been playing games for too long at each other’s expense. The result has been that genuine victims of harm lose out—and lose out significantly. Third-party capture is a damaging practice and I urge the Minister to accept either this amendment or the other one.