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The government says honest motorists are seeing car insurance premiums rise as insurers seek to cover the costs of increased compensation claims
The government hopes to stem rising insurance costs by banning referral fees in personal injury claim cases.
The fees, highlighted by former Labour MP Jack Straw in June, are paid to claims management companies, garages and insurance companies who provide details of accidents – often car accidents – to personal injury lawyers.
The business is estimated to be worth £3bn a year, and successful claims are paid in most cases by insurance policies. Insurers have covered the cost by passing it on to policyholders in the form of higher premiums.
Justice minister Jonathan Djanogly said: "Honest motorists are seeing their premiums hiked up as insurance companies cover the increasing costs of more and more compensation claims. Many of the claims are spurious and only happen because the current system allows too many people to profit from minor accidents and incidents.
"Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system."
Djanogly said people were being encouraged to sue at no risk to themselves, "leaving schools, business and individuals living in fear of being dragged to the courts for simply going about daily life".
He added: "We will ban referral fees and we will go further. We have proposals before parliament to end the bizarre situation in which people have no stake in the legal costs their cases bring. This will make claimants think harder about whether to sue and give insurance companies and business generally an incentive to pass the savings on to customers through lower prices."
A spokesman for the Ministry of Justice denied that the announcement was in response to an announcement by the Office of Fair Trading yesterday that it will investigate soaring car insurance premiums to determine whether drivers are being overcharged.
The Association of British Insurers (ABI) said the industry was committed to keeping costs down for consumers, but reform of the compensation system was necessary if premiums were to come down.
Director general Otto Thoresen said: "Rising claims costs from personal injury claims, excessive legal costs, insurance fraud and uninsured driving, coupled with lower investment returns in recent years, have unfortunately led to rising motor insurance bills for many customers.
"In fact, the motor insurance sector has not been profitable for the last 16 years because the amount paid out in claims and expenses has been greater than that received in premiums."
Thoresen said moves to reform the compensation system in Ireland had led to a 16% reduction in motor insurance premiums.
The news was welcomed by consumer group Which?. Chief executive Richard Lloyd said: "This is great news for motorists. Referral fees feed the growing compensation culture that has been pushing up insurance premiums at a time when many families are already feeling the pinch. It's absolutely right to ban them, and quickly."
There is no timetable for when the ban will be introduced, but the plan is that it will be a regulatory offence for firms to pay and receive referral fees.
The government's proposals currently before parliament focus on stopping losing defendants having to pay a "success fee".
The government is changing the law so that in future the person making the claim will have to pay the success fee, rather than the defendant, and the fee will be capped. The intended result is a fairer split of costs between parties and lower legal costs overall, which means lower costs to pass on to customers or taxpayers.
The proposals follow a Ministry of Justice consultation published in November 2010.
Jill Insley
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