On a cold January evening last year, Sandy Van Litsenborgh was driving home from work on an icy side street in Whitechapel, east London. Unable to pass an oncoming motorist because the street was too narrow, she reversed to let the car past and hit a Vauxhall Vectra parked behind her.
“I was doing less than 5 miles an hour,” said Van Litsenborgh, a 54 year-old administrator at the nearby Royal London Hospital. “There wasn’t a scratch on my car. There was a scratch on his car not even an inch long. It wasn’t even dented.” She says she sought out the owner in a nearby shop and passed on her insurance details.
Four months later, lawyers acting on behalf of the Vectra’s owner filed a claim for damages totaling 22,000 pounds ($36,000), saying the car was severely damaged and four passengers were suffering from whiplash injuries. Van Litsenborgh’s insurance premium rose by 70 percent.
The U.K. system creates clear losers -- customers who this year pay average premiums 40 percent higher than in 2010, and car insurance companies, who’ve shelled out more than they take in for 15 consecutive years as personal injury claims soared. Winners include lawyers, vehicle repairers, car hire firms, doctors and even the police, who benefit from a “merry-go- round” of referral fees, according to a House of Commons committee report in March.
“It’s a parasitic system,” said Martin Milliner, director of claims at Liverpool Victoria Friendly Society Ltd., the U.K.’s third largest car insurer. “It increases the opportunity for fraud, malpractice and the more worrying trend of where that fraud money goes,” including organized crime.
U.K. motor insurers paid 10.8 billion pounds in claims in 2009, the latest year for which figures are available, according to the Association of British Insurers, the industry lobby group. As claims rose 20 percent from 2005, the number of accidents involving injuries dropped by 18 percent to about 164,000 in the same period.
Higher costs have forced insurers to raise prices. Britons now pay about 900 pounds a year for comprehensive cover, according to the Automobile Association Ltd.’s Shoparound Index, which tracks the cheapest quotes offered by insurers. Even so, insurers haven’t made an underwriting profit from motor policies since 1996.
The British government says the country risks creating a “compensation culture” and has pledged changes to “prevent expensive and unnecessary litigation” which result in greater payments to lawyers than to claimants.
“Motor insurance fraud is no respecter of age or social status,” said Malcolm Tarling, a spokesman for the ABI. “It happens across the board. The impact is felt by all motorists because the costs are spread over everyone’s premiums.”
Van Litsenborgh, a grandmother who came to the U.K. from South Africa almost 12 years ago, immediately told her insurer, Hastings Insurance Services Ltd., that she and her passenger had not seen anyone in the Vectra and that there was minimal damage from the accident. Hastings agreed and rejected the claim.
“We denied their claims but they carried on pursuing,” said Martin Batchelor, claims director at Hastings. Personal injury lawyers representing the owner of the Vectra “kept coming back” for about a year, Batchelor said. “They basically just denied our position, which is a tactic used to make us settle and get rid of the claim.”
This month, after being contacted by Bloomberg News, Hastings called the claimant’s lawyers and was told they now have “no further instructions” from their client to pursue the claim, Batchelor said. U.K. claimants have up to three years to seek compensation following an accident, he said, so the case is not necessarily closed. No allegation of fraud has been made in this case, which is still unresolved.
A man describing himself as the Vectra’s owner said Van Litsenborgh and Hastings’s claims were false when contacted by Bloomberg News on June 6. He refused to elaborate and declined to give his version of events, beyond saying four people had been injured.
“I wouldn’t say we hear stories like that every day but we know it goes on,” said Andy Goldby, director of motor pricing and underwriting at Royal Bank of Scotland Group Plc (RBS)’s insurance unit, the U.K.’s biggest motor insurer. “We’ve had claims for minibuses when they say there’s more people injured than what the bus can actually hold.”
Fraud is only one of the reasons why premiums are rising. The House of Commons Transport Committee report criticized a complex system of referral fees that inflates the cost of genuine accidents, encourages more people to claim for personal injuries and makes fraud easier.
When a customer has an accident that’s not their fault, they become “extremely valuable property,” Nick Starling, director of general insurance at the ABI said in November.
The customer’s own insurer, mechanic or rescue truck driver can earn referral fees of up to 800 pounds for selling the victim’s contact details on to personal injury lawyers or claims management companies, according to the Legal Services Consumer Panel, which represents customers’ interests. Lawyers and claims management firms can then, in turn, earn more fees by referring customers to a doctor or car-hire company.
Some police forces are charging fees for tipping off wreckage clearance firms after an accident, according to data obtained by insurer Swiftcover.com, a unit of Axa SA, through the Freedom of Information Act. West Midlands Police made 24,891 referrals in 2009 charging 25 pounds each, the data showed.
Insurance companies including RBS, which dislike referral fees, continue to receive them because a refusal “would put us at a competitive disadvantage to everyone else,” said Goldby.
According to Louise Ellman, the Labour parliamentarian chairing the House of Commons Transport Committee, the actions of no-win no-fee lawyers is the biggest cause of rising costs after fraud.
With the number of personal injury claims soaring and the number of accidents involving injury falling, the result is that for 2009 there were an average 4.1 personal injury claims for every accident, according to Bloomberg calculations based on government statistics. The average payout to a victim is 2,430 pounds with a further 2,100 being spent to pay legal costs, according to the ABI.
That helped the motor insurance industry to a record loss in 2009. Insurers paid out 1.19 pounds in claims for every pound they took in premium, according to insurance broker Towers Watson Ltd. Even with record premium rate rises in 2010, the broker forecasts motor insurers to pay 1.14 pounds for every pound of revenue.
The most successful U.K. insurers will be those which raise prices and also “address the key issues of widespread detection of fraudulent claims and controlling the steep rise in settlement awards for bodily injury claims,” said Martyn Street, a Fitch Ratings director in a June 6 report.
One insurer, Admiral Plc, is bucking the trend. The firm, which insures 10 percent of British cars, is the best-performing insurer in Europe over the last five years and last year paid out 89 pence in claims for every pound it took in premiums.
Unlike rivals, the insurer gets half its profit from so- called ancillary income, made from referral fees and selling policy add-ons such as legal cover and windscreen insurance. About 10 percent of its profit comes from referral fees, according to London-based Barclays Capital analyst Andy Broadfield, in a May 31 note.
A government proposal to abolish personal injury lawyers’ success fees published by Justice Secretary Kenneth Clarke in March may erode Admiral’s “competitive advantage” and benefit its competitors, Broadfield wrote.
Efforts to clean up the system have come too late for Van Litsenborgh, who now takes the train to work. “It’s been an absolute nightmare,” she said. “I probably could have driven away. But that’s not the right thing to do.”
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