No-win, no-fee was originally encouraged by the Government as a means of making the legal system more accessible to everyone, regardless of their financial situation. Now, though, detractors say this process has made claiming too easy, and that it costs the loser too much if the no-win, no-fee lawyer wins the case and can then claims his fee.
In the case of a car accident, an injured party can engage a no-win, no-fee lawyer to make a personal injury claim without any concerns about the legal bill, which the opposing partys insurer will then have to pay if they lose the case. The ABI estimates that covering these costs adds 10% to each insurance premium, but the law is set to change imminently: the Government is committed to implementing Lord Justice Jacksons reforms on the cost of litigation, which includes proposals to further tighten regulation of the sector.
Instead of the no-win, no-fee arrangement, a winning lawyer would be paid a proportion of the damages awarded, reducing the burden of costs on the losing party.
The hidden costs of referral fees
Nor is the insurance industry blameless. The Transport Select Committee has highlighted the problem of referral fees . Committee chairman Ellman, said: Consumers are largely unaware of how much money moves around the insurance industry in this way when they make a claim. They deserve to see where their money is going.
If insurance companies cannot agree a method by which to improve transparency around referral fees, then the Government should step in, with legislation if necessary.
Accident management companies one part of this referral system have already been subject to tighter regulation. They look for personal injury and legal work that they then sell to firms of solicitors for a fee.
These companies are now overseen by the Ministry of Justice and must adhere to strict rules. Since the Ministry began regulating these firms, more than 100 have been closed down for failing to comply with the regulations, including ignoring requests for information from the regulator, criminal convictions for fraud, persistently misleading customers and non-payment of regulation fees.
MPs have described the insurance industrys referral system as a merry-go-round, but its more like a vicious circle, with the insured motorist footing the bill. It is based on the premise of the businesses involved in an insurance claim getting paid to tip off each other about potential work following an accident. Everyone from the insurer, recovery vehicle firm, to the vehicle repairers, credit hire firms, accident management companies or medical experts can sell on the details of the victim to each other, earning fees as they do so. Typically, a single referral fee can be anywhere from 200-1000.
The companies involved are happy to pay the fees to each other because it helps drum up business. However, every step of the process impacts on the cost of each accident to the insurer, which is then reflected in insurance premiums. The Government is investigating ways to restrict or abolish these fees.