Grasping the nettle

Personal injury (PI) lawyers are not happy bunnies at present. For the last 18 months or so, PI lawyers have been struggling against lower margins, problems with conditional fee arrangements (CFAs), insurers dropping out of the market… The list goes on.

What really rankles is that they feel they could have taken control of the situation earlier. Take the claims management companies (CMC) – the Claims Directs and The Accident Groups (TAGs) of this world. The surviving ones can add an extra layer of cost to litigation, particularly by adding referral fees. Also, firms receive from CMCs only a few high-value cases, which do not pay for the largely low-paying ones. Furthermore, CMCs are poorly regulated, and some have got away with questionable practices. As a result, the public is largely cynical towards PI matters generally – and lawyers specifically.

PI lawyers say more could have been done to counter this earlier on. Now it seems they are trying to regain control. Russell Jones & Walker (RJW) has taken over the Claims Direct business, and last week The Lawyer reported how eight South West firms have muscled in on the claims management arena by contributing to the cost of local radio advertising and the use of a call centre.

But firms are still reeling from the impact of CMCs and a bad market in general. One firm relayed the following story. A few years ago it started getting cases from TAG.

The first were good, later ones were “rubbish”. The latter were expensive to run and margins were low (even lower, in fact, than the margins in other areas of PI work, which were themselves low compared with other practice areas).

Then the firm approached Claims Direct. It needed the work. It was getting knocked off insurance panels, which had been rationalising the lawyers to whom it sent work (a trend that is on the increase and which is causing great concern for many PI lawyers). After one year, Claims Direct began sending it the same sort of unprofitable “rubbish” that TAG had plied the firm with.

That firm is still paying the cost for having taken on the bad cases. Ultimately, the firm was forced to make decisions which, in retrospect, were bad for it.

Most PI firms can report similar tales of woe, and recently we have seen various moves to counter this.

There was KSB Law’s decision to close its claims unit and make 55 staff redundant, a move that critics say was down to low PI margins. Clarke Willmott, struggling against a long lock-up (a big problem in ‘trips and slips’ work, but not in the high-paying, big group actions), has set up a separate funding facility to ease the financial pressure. Palser Grossman brought in management consultants to make its PI department more workable. Merricks delayed staff payments to counter cashflow problems. RJW, partly in the face of increased competition in the PI sector, underwent a restructuring.

All these firms are trying to regain control. Many say they want to be full-service firms, albeit for different reasons.

Some say full service means they can fulfil all the needs of a single client. Others say that, in a downturn, you need lots of different practices to fall back on should others fail.

This seems to be a wise strategy. The market is still tight. Insurers continue to consolidate and firms need to be in that loop or face losing masses of work.

Insurers’ rates have not increased noticeably for a few years. Margins are low, and yet firms rely partly on high-risk CFAs for income. An alternative could be the introduction of contingency fees, where lawyers are paid a fixed fee plus a percentage if they win. Lawyers doing smaller claims work get paid less and later than those doing big-value work, who are paid handsomely and incrementally. CMCs still exist and keep litigation costs high.

The full-service firms, such as Merricks, RJW and Thompsons, are affected the most by all of this.

Specialist firms are less so. Take Irwin Mitchell, which last year posted profits per partner of £460,000. Its PI side, headed by John Pickering, assisted in these amazing figures. It specialises in big group litigation, particularly diseases-related, and this pays for the lower-value PI work, which has large overheads. Its PI department is also kept small (PI is 26 per cent of its overall business), so it is less open to the risks associated with PI.

The generalist PI firms, meanwhile, continue to struggle. Things are being done to counter this, such as RJW’s takeover of part of the CMC market.

However, a long-term strategy is now needed, particularly for medium-sized firms, to make up for the work lost by the contracting of the insurers’ market and low rates. One way could be by snatching the slips and trips work from the high street firms. But that is another story for another day.