What the game changing reforms from the Spending Review mean in practice
26 November 2015
While scrapping the original plans to cut tax credits may have grabbed most of the headlines in yesterday’s Spending Review and Autumn Statement from the Chancellor George Osborne, there can be little doubt where the main story lay for insurers.
In what has to be seen as a surprise development, the government has responded to a rising tide of complaints about the unacceptable practices which now form a large part of the current system for compensating victims with minor injuries from RTAs, by proposing two radical reforms.
The Compensation Culture and the cost of motor insurance
Two policy aims were identified. In his speech, Mr Osborne said that reform of the Compensation Culture was one of the reasons for the plans. In the accompanying Blue Book, the Spending Review and Autumn Statement 2015, the emphasis is on reducing motor insurance costs.
The Chancellor said that his proposed reforms are expected to save over £1bn from the annual cost of motor insurance in the UK, and that he would expect the savings to be passed onto consumers by insurers, which would see motor premiums reduce by an average of £40-50 per policy.
The key reforms
The proposed reforms are set out in paragraph 3.103 of the Blue Book.
“3.103 Motor insurance – The government will bring forward measures to reduce the excessive costs arising from unnecessary whiplash claims, and expects average savings of £40 to £50 per motor insurance policy to be passed onto customers, including by
removing the right to general damages for minor soft tissue injuries
removing legal costs by transferring personal injury claims of up to £5,000 to the small claims court “
The Blue Book refers to a determination to crack down on both the claims culture and the problem of fraud in motor claims. It makes specific reference to ABI data which says whiplash claims are costing over £2bn per year, and are adding £90 to an average motor policy.
It can be seen that while the government has followed the logic argued by the ABI and other insurers, including in Aviva’s Road to Reform, its own figures as to likely savings are more cautious, at exactly half the level seen as likely by the ABI. It is tempting to think that the government has simply relied on the data from the ABI and insurers, and as a compromise, halved it.
But the government has accepted the principle argued for by insurers, that the cost of whiplash claims overall “is out of all proportion to any genuine injury suffered”, in the words used in the Blue Book.
Part of the surprise at the announcement yesterday may be that various initiatives and investigations are underway already, from the ongoing development of MedCo, to the awaited report of the Insurance Fraud Taskforce and the Brady review into CMCs. The government seems now to think that something more fundamental is needed in addition.
The first key reform – “removing the right to general damages for minor soft tissue injuries”
This reform is clearly to be limited to whiplash claims. The phrase “soft tissue injury claims” is used in the Pre-Action Protocol for Low Value RTA Claims as a definition that will essentially include only whiplash claims. The phrase is likely therefore have been deliberately used. Paragraph 3.103 of the Blue Book itself specifically refers to motor insurance and to whiplash claims. It is essentially only in relation to that type of claim that the argument against an entitlement to compensation has been focused.
It is also confirmed that the position as to special damages will not change. Reference is made specifically to the fact that compensation can still be recovered for treatment if it is required, and for any loss of earnings. But other special damages such as for extra travelling costs will also still be recoverable.
A debate may though still arise as to whether a claim for care and assistance given voluntarily is in fact an item of special damage as usually claimed, or in fact linked to general damages. General damages will clearly include PSLA, but will also be made up by other non-pecuniary damages such as for example any minor Smith v Manchester damages or similar optimistically argued for in a claim of this type.
What is a “minor soft tissue injury”?
There is as yet no definition of what the government think is a “minor” soft tissue injury claim. Is it a whiplash-type injury causing symptoms for up to a certain number of months? Road to Reform suggested 3 months. And does it include a whiplash type of injury even though there are other physical or psychological injuries as well, at least up to certain level of severity?
Might it be sensible, if this reform is looked at in conjunction with the second key reform in relation to the SCT limit, to define a soft tissue injury claim as one which would under the old process have had a value of up to £5,000 or thereabouts, taking into account the potential for some special damages having been incurred within that figure? There could be sense in this, to bring the two strands of the reform programme together.
According to the new 13th edition of the JC Guidelines, a whiplash-type injury to the neck lasting 12 months, with the Simmons 10% uplift, would have a value of up to £3,630. Might the government intend that a claim with up to that sort of length of symptoms should be subject to the reform, as the overall quantum including specials would be unlikely to exceed £5,000? But is a 12 month whiplash claim really still “minor” as defined by government?
A 3 month whiplash injury had its value inflated in the JCG 13th edition to £2,050 including the 10% uplift. Looking now at the level of £5,000 to which the SCT limit will rise, the government may see a view that 3 months should be the limit of “minor” as too cautious a reform, though the debate may be easier to win at that level.
What is clear is that a definition which is clear as possible will be needed. Hopefully work will be done to ensure that we get one. It is quite clear from experience that it will be challenged around the margins. If a monetary figure is chosen, then claims inflation will occur to try to reach it. If a period of symptoms is selected, then a tendency to see effects lasting at least that long will need to be carefully monitored. If the definition is by reference only to the whiplash itself, then the argument will be that the addition of other symptoms is enough to take claims outside the new process.
The second key reform – “transferring personal injury claims of up to £5,000 to the SCT”
The wording here refers to “personal injury claims” rather than to “soft tissue injuries”. It seems likely that the government’s intentions in this reform are more than just for whiplash, and are likely to include all injury claims.
The position could be clearer and we run the risk of overanalysing the limited information currently available as to the government’s plans. They say that the reforms are being introduced expressly to make savings in motor insurance. But of course the argument has raged for years that the SCT limit for all types of injury claims has been static for too long at £1,000. And that an across the board increase for all types of injury claim is well overdue.
The list of key announcements produced as part of the Spending Review includes the sentence: “More injuries will be able to go to the small claims court as the upper limit for those claims will be increased from £1,000 to £5,000.” No reference there to this second reform applying to whiplash only. Of course if the first reform were to catch all whiplash claims up to £5,000, as may be the intention, there would be little point in having the SCT rise as well just for the same category of claim.
It does seem clear enough that it is the government’s intention that all injury claims will be subject to the new SCT limit. We will need to await the detail behind the proposed reform to be 100% sure.
The government says it will consult on its proposals in the New Year. While there are in fact two parts to the reform programme, it seems most likely to us that they will be taken forward together.
Looking at its place in both the Chancellor’s speech and in the Blue Book, the proposal seems to emanate from within government but from outside the MoJ itself. It can though be assumed that it will be for the MoJ to bring the proposal forwards.
Detailed Impact Assessments will be called for. There is important and key detail to work out as to how these radical changes would impact on the current compensatory regime. Effectively a much reformed process for the types of claim affected will be needed. Certainly RTA claims are mainly affected by the reform in relation to general damages, but we are expecting that casualty claims will be as well in relation to the SCT increase and a changed process will be needed for those too. Insurers will be keen to respond and to assist in developing workable new schemes within the parameters which have been outlined today.
It seems to us that it is very difficult to predict how much time a major reform such as this will take to implement. A number of sequential steps need to be taken in the process. Primary legislation through parliament would clearly be needed on the removal of the right to damages in minor soft tissue injury claims, even though we assume it would not be for the SCT limit being increased.
Our best estimate at the moment is that implementation, assuming it occurs wholesale as we believe likely, would not be until 2017, probably in the later part of that that year. The work ahead to achieve the government’s aims cannot easily be overestimated.
And then we believe the reform removing the right to compensation could only affect new accidents happening after the date the new law was implemented.
If the SCT limit rise were taken forwards alone, then perhaps it could be introduced more quickly, but we see choosing to advance the two reforms independently as less likely, and in any event new processes need to be established around the SCT increase which will take a good deal of time to draw up.
Prospects for the reforms happening
Will the reforms happen? We are in the first year of a new 5 year parliamentary term so there is plenty of time. There will be strong opposition within parliament as well as outside because of the wide ranging impact of these reforms, especially to the removal of compensation. It could not be denied that the SCT limit increase would be easier to achieve, and the temptation for government to go ahead with that alone cannot be excluded.
On the claimant side, no doubt thought will be given as to whether it can be argued that the reform removing the right to compensation is contrary to the European Convention on Human Rights, or whether some other challenge can be raised based on an allegation of illegality.
The significance of removing a right to compensation in a type of claim which would otherwise have been a key element of our system of providing damages as the usual form of redress will be argued. No doubt the government seeks to achieve a new type of culture in this type of claim, changing decades of history. A move to rehabilitation in place of compensation will take time to settle down. But other jurisdictions have followed this path before.
Ultimately, it is likely to come down to the strength of government commitment to both parts of the reform. We will have to wait and see on that. But what is clear is that the recession which lasted throughout the last parliament, and the drive to balance the government’s books which will last throughout this one, have created and continue to create an environment where reforms such as those which we saw from the report of Lord Justice Jackson which led to LASPO, and now those which we have heard of today, are likely to be seen as financially prudent and therefore the right way forward.
We need to recognise that the Transport Select Committee in 2013 advised the government against a rise in the SCT because of concerns about fraudulent claims and access to justice. The government at the time listened to that advice. They have now come forward with an alternative plan which they may argue deals with the TSC’s concerns, but by a different route.
Effects on the claimant RTA market
Assuming they are introduced, the plans will be of transformational effect on the market. The change will impact greatly on not only CMCs marketing the claims, but the lawyers handling them and the experts and other spin offs who are now part of the same industry. There are some large claimant enterprises which have been built on a continuation of the current compensation model which now is under threat.
If the reform had only been a rise in the SCT limit for RTA claims, then there would have been expected to have been a newly created market for those claims which we believe would have been filled by CMCs, as well as solicitors working on lower costs bases, competing for those claims, where their rewards would have been a percentage of the damages recovered.
And a simplified portal process alongside only a rise in the SCT limit for RTA claims would also have meant that claimants could alternatively have chosen to have acted for themselves, so keeping all of the damages without a reduction. The portal process would have needed development so as to have turned the result of a medical assessment objectively into a figure for PLSA to support the ability of claimants to self-represent.
Changed RTA processes
But now, if the reform is implemented, the only money left in the system for this type of claim will be any special damages payable. There will still be an incentive to incur the costs of rehabilitation as seen on the proactive model, but the momentum to do so will surely be less when current claimant business models are built around recovery of the larger PSLA component of the damages, from which the lawyers are used to taking a success fee.
Will the at-fault insurer be offering the rehabilitation going forward as proposed in Road to Reform? This will need to be worked out but there would be certain advantages in that approach. The need for rehab could be promptly assessed and where it was needed it could be supplied without any later dispute over the costs incurred.
In any event, there will presumably be little desire to litigate either at stage 3 of a portal process or outside of that on the SCT about what will be small sums incurred on other special damages, and an agreed new process for settling them could be followed. While the portal could in theory still be used for this type of claim below the level for recovering compensation in order to deal with the claim for special damages, it may well be that a new streamlined process would be a more suitable alternative.
The way forwards for whiplash claims which are at a level of injury above whatever cut off point is set for the withdrawal of general damages will be unaffected as far as use of the portal and MedCo processes are concerned. But the need for using MedCo in the context of RTA claims would be much reduced as a significant proportion of those claims would be likely to fall under that level.
Below that threshold in RTA claims, the principal reason for the current use of medical evidence will have been removed and presumably none now will be obtained simply to validate special damages.
Changed casualty processes
Assuming the SCT rise is in relation to casualty claims as well as we think is likely, including those submitted to the EL, PL and EL disease portals, then at least in relation to accident claims a new market is likely to be formed in which solicitors and CMCs offer to conduct those claims based on a percentage of the damages recovered, in the same way as would have occurred in relation to RTA claims if only the reform of the SCT rise had applied to them, as outlined above.
General damages will still be recoverable in casualty claims so a process will be required under which the results of a medical assessment can be turned into a PSLA valuation. And while MedCo has yet to be extended into the casualty arena, that could presumably happen as part of the changes needed to accompany this reform.
Disease claims may be less affected by yesterday’s announcement, at least insofar as it will be said by claimant representatives that many of this type of claim will be worth over £5,000. Where disease claims are worth less than £5,000 they would though be included in the SCT limit change.
As to NIHL claims, the lowest bracket in the new JC Guidelines values a claim for either slight noise induced loss or slight tinnitus at up to £5,860 for PSLA. We are already awaiting the initial report of the Civil Justice Council committee considering process reform and fixed costs, and its work could assist a way forwards for this type of claim within the newly announced SCT reform.
The question of the proposed reforms affecting the whole of the UK was not directly addressed yesterday. That seems to be the government’s intention, though opposition in Scotland in particular could reasonably be anticipated. Assuming all UK jurisdictions are to be included, then the process changes required will need to be achieved across the board, where currently different claims processes are used.
News of the proposed changes is likely to cause an increase in claims farming activity over the period till implementation. Current business models will have the chance of processing those claims under current processes. Insurers should be ready to respond to higher claims volumes in the short term.
We await further detail as to the proposed way forward as we enter a period of substantial change.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.