Adding insult to injury

Following the plummeting share price of Claims Direct in the financial pages has become something of a spectator sport among personal injury (PI) lawyers over the last few months.

It has been a source of considerable satisfaction for the sceptics, who are barely able to hold back a righteous smile at their old adversary's problems, but a distressing experience for those 300-odd law firms that are signed up to the ailing claims management giant.

But love it or hate it (and let's face it, no one has mixed feelings), Claims Direct has revolutionised the way in which PI claims are handled. Certainly, the City was particularly enamoured of the claims management company (CMC) when it floated last July and saw its share prices leap from 180p to 353p in two months.

The future looked so bright back then. But it has been downhill all the way since: pursued with indefatigable enthusiasm by media campaigns by the BBC's Watchdog series, not to mention The Sun, which memorably dubbed the company “Shames Direct”. By the end of March, the beleaguered company issued its third profits scare, and shares scraped to an all-time low of 7p.

Rumours of the imminent demise of Claims Direct abound, and the situation has not been helped by news that the founder of the company, former cabbie Tony Sullman, has stepped down from his chairmanship and legal director and company secretary Paul Rew is departing.

But maybe this is all wishful thinking. According to a Claims Direct spokesman, the company's state of mind is currently “very optimistic”. He says: “It's been a difficult period, and there have been some very real issues to address within the company. We're now well on top of dealing with all those issues and can look very positively ahead, both for the existing core business and for branching out into new areas.” Shares have been rising for the last few weeks and are now valued at 23p.

The company's recent problems began with last October's Watchdog programme. It accused the company of leaving clients with as little as 2 per cent of their compensation after their £1,250 insurance policy had been deducted from their damages.

In particular, Watchdog reckoned that some 19,000 customers who took out insurance before last April – when premiums became recoverable under the Access to Justice Act – were left stranded with little chance of getting their money back.

In an exclusive in The Sun, the tabloid told the story of Jason, a bar worker, who was scarred for life after an accident at work involving boiling tea. After a two-year wait he was awarded £1,525, only to receive a cheque for £63. According to the tabloid, even television celebrity Will Hanrahan, who fronted some of company's adverts, was “outraged”.

In the meantime, the claims management company is keeping its head down; it is cutting its once saturated television profile and slashing the number of cases it takes on per month from 4,000 to 2,500. The Claims Direct line is part mea culpa and part all-out attack. The company “just got it wrong” over the pre-April clients, admits the spokesman. A £5m fund has been set up to allow for ex-gratia payments to wronged clients.

Many lawyers remain unimpressed. “There was never any suggestion that [the legislation] was going to be retrospective – it would've been most unusual had it been – and certainly, no one else thought that,” says Frances McCarthy, the president of the Association of Personal Injury Lawyers.

McCarthy has her doubts about the fund, which promises to pay claimants to the extent they would have been prior to the introduction of their insurance policy. The company used to take a third of any damages in the event of a customer winning their case. “It's easy to say that you have a fund set up and then keep your fingers crossed that nobody asks to be paid,” says McCarthy.

A bad situation was made even worse by the current impasse between defendant insurers and claimant lawyers, some of whom are currently refusing to pay premiums and lawyers' success fees.

According to Claims Direct, the media “hasn't fully understood the issues” and has blamed the company for the problems of the whole industry. “The issues haven't been explained properly to them, which we're trying to do,” says the spokesman. “The image of the industry has been a little tarnished as a result,” he adds.

As a preventative measure, Claims Direct has bumped up its premium to £1,495 which, it argues, will ring-fence the first £1,000. However, the company is now on the front line in the battle with defendant insurers over recoverability of premiums. It is hard to see the insurance industry being persuaded by the logic of increasing premiums, which they already think are far too high anyway, in an attempt to protect damages.

“I've said all along that I'm not satisfied that the premium represents the proper premium to be paid,” claims Martin Staples, a former president of the Forum of Insurance Lawyers and a long-time critic of the company. It has long been a criticism of CMCs that the “insurance” element that ends up with the underwriter is a fraction of the whole, with the rest going towards funding the marketing campaigns and commissions. Staples' view is that, of the Claims Direct premium, only a very small fraction is strictly insurance.

The high cost of insurance is one reason why the Law Society has been calling for the regulation of CMCs. But there are wider concerns about CMCs encroaching upon lawyers' territory. According to vice president David McIntosh, the society is concerned over the “existence of unregulated and uncontrolled individuals and entities” seeking to monopolise the PI claims process by using solicitors as “no more than subcontractors”.

The unassailable rise of CMCs over the last year has led to claims managers dominating the PI process, determining whether a claim is issued through to how the litigation is conducted, including how evidence is gathered and which expert witnesses are used. And the lawyers do not like it. In only February 2000, former army officer Brian Blackwell completed his report into non-legally qualified claims assessors who negotiate settlements on behalf of accident victims and concluded that there was no need for regulation, but the findings are variously described by PI lawyers as “missing the point” or a “whitewash”.

“The world has changed since Blackwell,” says McIntosh. “With some of the CMCs having to face up to criticism over their massive marketing budgets, the size of their membership fees and premiums and their role in fostering what is commonly called a 'compensation culture'.” The Law Society intends to “re-open” its Blackwell representations when it responds to the Office of Fair Trading's 'Competition in the Professions' report.

There is also the wider concern that CMCs are encroaching upon the lawyer's territory.

But the unstoppable rise of CMCs presents a direct threat to the profession – do they sign up to their panels or go it alone in an ever crowded marketplace? Kerry Underwood, senior partner at Underwoods and the author of No Win, No Fee, No Worries, is one of the most outspoken critics of Claims Direct and its ilk. But as he says: “My argument's more with the solicitors than with Claims Direct.”

His blunt view is that the profession is allowing the CMCs to “do for PI work what the estate agents did for conveyancing”. Supine solicitors have let these intermediaries enter the profession and cream off the profits in return for the promise of an easy time.

Such sentiments have not endeared him to those firms on the panel. In the Law Society magazine Litigation Funding, former Law Society president and Claims Direct panel member Tony Girling went head-to-head with Underwood. Girling reflected ironically on how superior PI lawyers treat their Claims Direct colleagues. Apparently, they have sold their souls to the devil or taken the “Claims Direct shameful shilling”.

Roger Bolt, a partner at Islington firm Bolt Burdon and a Claims Direct panel member, believes such pious comments are not helpful. CMCs have been able to exploit a gap in the market, which is there because of a failing of the profession. He says: “Solicitors appear to be completely incapable of organising themselves into any coherent marketing force that would do the business for them, and so the claims farmers have moved in.”

It is a point with which Underwood would readily agree. He has for a long time berated the profession for not getting its act together. Last year he took the CMCs on at their own game and invested £350,000 in a prime-time television advertising campaign in ITV's Anglia region.

Roger Bolt appears to be taking a wait-and-see approach to Claims Direct. “I haven't formally resigned,” he says, “but at the same time, I haven't renewed [membership].”

He sees claims farmers as having provided a service to many accident victims. “The sensitivity of the general public out there has been heightened to the fact that claims are worth money – and there are people now who are making claims that otherwise wouldn't have been made.”

He calls it “couch potato syndrome”. “You lie on the couch and the ad is on the TV, and all you have to do is phone the freephone number,” he says.

Many see the current backlash against the likes of Claims Direct as an opportunity for solicitors to regain territory lost to the CMCs. What Claims Direct has done is take the marketing out of the lawyers' hands. “And what lawyers should do is take it back into their own hands,” reckons Carol Jackson, head of PI at Manchester firm Pannone & Partners, which is also on the Claims Direct panel. Her practice has concerns about recoverability of premiums with Claims Direct, and uses the policy only for more risky cases “because we feel that the clients are more able to justify the premium”.

Jackson sees a lesson to be learnt for the profession from Claims Direct. She says: “It's been successful because the public has felt more comfortable with them rather than going directly to solicitors – and that's a pretty sad state of affairs.”