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609 – Government announces the end of referral fees for car accidents

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Referral fees after a car crash: this underhand practice is due to be outlawed by the government

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9 September 2011

Crashed car: drivers are targeted as victims of the accident and encouraged to sue for compensation - a practice which the government intends to outlaw
Referral fees after a car crash: this underhand practice is due to be outlawed by the government

Editor’s Blog on the compensation culture of the car insurance industry

I BET you hate – as much as I do – those spam texts or recorded phone calls suggesting you are in line for compensation following your car accident.

What accident? When?

This grimey, grubby and nefarious practice of the compensation culture that permeates the insurance world was given both barrels by former Justice Secretary Jack Straw back in June. ‘The Economics of the madhouse’ – published in The Times – is well worth a read (if you can get past the paywall).

Mr Straw described it as a “racket” – the passing on of information for financial gain to the ‘ambulance chasers’.

And now the government has announced that it’s going to put an end to this unnecessary compensation culture with a ban on referral fees.

“The ‘no-win, no-fee’ system is pushing us into a compensation culture in which middle men make a tidy profit which the rest of us end up paying for through higher insurance premiums and higher prices,” commented Justice Minister, Jonathan Djanogly.

Otto Thoresen, director general of the ABI (Association of British Insurers) added: “It is important that the ban must be watertight and apply across the board. Banning referral fees is an important first step in tackling our dysfunctional compensation system, and needs to be accompanied by a reduction in legal costs and action to tackle whiplash if honest customers are to benefit from these reforms.”

Too right. In the end, the people that really pay for this is you and me through higher car insurance premiums.

If you’re unfamiliar with how you actually end up paying for the compensation system through higher car insurance fees, this is roughly how it goes:

You have an accident and and are minded through a TV advert or SMS text message to make a ‘no-win, no-fee’ claim.

Your claim is passed between claims management companies, insurance companies and lawyers and others who charge each other a referral fee for ‘referring’ the claim up the line.

The lawyer sues for compensation. If he wins, he can recover his costs from the losing defendant (usually the defendant’s insurance company).

To cover the loss, the losing insurance company is forced to raise premiums – thumping you and your business in the pocket.

I heard on the radio this morning a defendant of the system describing the current referral system as ‘transparent’. What? It’s about as transparent as passing brown paper envelopes stuffed full of notes under the table.

I don’t doubt there are legitimate claims for compensation following a car accident: whiplash can be cruelly debilitating; but do we really have weaker necks than the rest of Europe that results in 1200 claims a year, far higher than the European average? I think we know the answer to that.

So I’m pleased to see the coalition government banning this dodgy referral business. It’s about time the insurance industry was cleaned up. In the end us – that’s consumers as well as businesses – may all benefit with lower car insurance premiums. Instead of losing our money to the racketeering middle men.

More articles you should read
There’s this good pdf download from the ABI: Tackling the compensation culture

For small businesses, there’s also Ford’s ethical free accident management service which does away with referral fees. More on that here: Ford launches free Ford Fleet Accident Management

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Ralph Morton

Ralph Morton

Ralph Morton is an award-winning journalist and the founder of Business Car Manager (now renamed Business Motoring). Ralph writes extensively about the car and van leasing industry as well as wider fleet and company car issues. A former editor of What Car?, Ralph is a vastly experienced writer and editor and has been writing about the automotive sector for over 35 years.

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