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If you don’t want to know the score, look away now

Posted by Tony Walton, managing director of Litigation Futures sponsor Questus [1]


Under pressure: firms will need to count the pennies from April

Hands up all you personal injury (PI) lawyers who seriously think the portal fee is going to be much more than £500 after the consultation? Behind the scenes, everyone has been doing their sums and they won’t look much different to these:

The next two steps in this discussion are invariably, “we’ll have to charge the client” followed by “but what about our costs of acquisition?”. Before the hurdles of how much needs to be spent on acquisition and whether a profit can be made once the claims are acquired, I see the biggest hurdle of all as whether these claims can be acquired at any price. By this I don’t mean that there won’t be any claims brought or that claimants will do what’s needed themselves instead of paying up to 25 % of what’s due to get professional assistance.

Implicit in costs of acquisition being any sort of hurdle at all is the reality that many firms would struggle to make a profit on the revised fees even if they paid nothing at all. Even modest advertising would turn a small profit into a loss.

So here is the biggest hurdle of all: as a lawyer advertising for claims, you will soon have a competitor so huge, it’s an entire industry: the insurance industry. Worse than that, the potential claimants you seek (at least the policyholders) are already their customers and will do what good policyholders have always done as soon as they’ve had an accident – ring up their insurer and tell them. When they make that call, won’t they be offered the service of handling any viable claim?

Think about it. This isn’t the murky practice of third-party capture or selling personal data for a referral fee; it’s a legitimate, transparent service by an organisation almost certainly with a magnetically strong brand and which, by definition, has already attracted the caller to give them several hundred pounds to insure his car at some point in the last 12 months. Won’t the majority be persuaded there and then? How many millions of pounds will need to be spent by the collectives on advertising to persuade that caller to resist? The insurer will have acquired the claim for no direct cost at all.

And why might insurers be interested in offering such a service? Farewell lost referral income running collectively to hundreds of millions of pounds per annum. Behold an ocean of opportunity to take a share of damages to replace it. Back of an envelope, there are 700,000 successful portal claims a year and average damages in each amount to £2,000, an annual payment totally £1.4bn. Twenty-five per cent of that is £350m. Add the 10% enhancement of general damages and typical specials on top, and this a £400m a year market. And that’s just portal claims worth up to £10,000.

Can they do it? As an already Financial Services Authority-regulated organisation, an insurance company is exempt from Ministry of Justice regulation and can offer this service now. Becoming an ABS broadens the offering even more.

Where might there be a gap in this potential monopoly? Perhaps at the bottom. If a law firm or collective, possibly with a strong affinity with its local community, could make a small profit on the portal fee we have from April, they could, like a market town resisting a new superstore, hold out. All the more so, if insurers have no appetite to make maybe just a couple of hundred pounds on that lowest-value claim, after their costs of actually handling the claim are deducted.

Do not patronise or underestimate the claimants in all this. Whilst the potential demise of the ancient doctrine of restitutio in integrum may not be the hot topic on social networks, nevertheless, if claimants are going to have to start to pay to claim, they will make demands on both price and quality.

The outcome rests on the small claims limit. If it stays anywhere below the value of the typical claim of around £2,000, then the insurers will continue to fund claimant lawyers, albeit on the very reduced scale set out above. This should allow some to evolve and survive. If the limit goes anywhere above £2,000, just to £2,500-£3,000 never mind £5,000, then the game in its current form is over.

The irony then arises that the most sustainable existence for claimant lawyers from now on is to offer their services to the very insurers whom they have been battling for so long, on the insurers’ terms and for fees of the insurers’ choosing.