horwich farrelly

Strike out for ‘Fundamental dishonesty’ and the banning of inducements: what will this mean for insurers?

February, 3, 2015

Two clauses of particular interest to insurers in the Criminal Justice and Courts Bill passed through Parliament without amendment last week. Clause 56 which requires the entire claim to be struck out in the event of a finding of ‘fundamental dishonesty’, and Clause 57 which bans inducements to bring claims will both become law when the Bill receives Royal Assent. This is expected to happen before the general election.

The potential impact of both these clauses has been widely discussed across the market since the Bill was introduced, so we summarise here the key points as we see them in terms of their implications for insurers:

Clause 56: Insurers should review their Part 36 offer strategies

An unambiguous interpretation of ‘fundamental dishonesty’ has still not been provided – but we don’t believe this to be a problem

  • The power confirmed in the Supreme Court decision of Summers v Fairclough Homes in 2012, to strike out a claim in its entirety in the event of the presence of fraud, has been rarely wielded. This is unsurprising given the caveat that it would only likely be exercised in very exceptional circumstances.
  • Clause 56 will significantly change the position by requiring a Judge to dismiss the whole of a personal injury claim should there be a finding that the claimant has been fundamentally dishonest in pursuing any part of it. Under Summers a claimant could reasonably expect to recover the genuine element of a claim even if it was found that he or she had dishonestly claimed other losses. Clause 56 reverses that position such that it should be the exception for the whole claim not to be struck out in these circumstances.
  • Claimants who lose their entire claim under the clause will only be for liable for defendants’ costs to the extent that those costs exceed the value of the (dismissed) genuine element.
  • It is worth noting that the term ‘fundamental dishonesty’ is already applied in the CPR in the context of QOCS. The effect of such a finding is to make a claimant liable for the defendant’s full costs. The QOCS rules will therefore need to be amended such that the claimant who loses a genuine claim will retain QOCS protection up to its value.
  • Many commentators have focused on the fact there is still no formal definition in the Bill in terms of what constitutes ‘fundamental dishonesty’. The claimant community are certainly continuing to loudly and publicly criticise Clause 56 on this basis. They cite, for example, that insurers may raise the spectre of pursuing a vague ‘fundamental dishonesty’ challenge as a way of leveraging lower settlements with honest claimants.
  • In the House of Lords debate on the Bill last year the Justice Minister, Lord Faulks, QC, said that it was “well within the capacity of any judge” to determine the presence of ‘fundamental dishonesty’.
  • We tend to agree with Lord Faulks. ‘Fundamental dishonesty’ will be very much a case-specific issue that will not lend itself well to a rigid definition.   In the many suspect cases we have successfully defended at trial we have never found the judiciary to have any problem with the interpretation of the term.

Large Loss claims may initially be a ‘grey area’ in terms of the application of Clause 56

  • There is a question over how willing Judges may be to make the finding of ‘fundamental dishonesty’ in high-value personal injury claims. For example, if a claimant presents with a genuine severe injury but then exaggerates his loss of earnings claim will a judge rule ‘fundamental dishonesty’ knowing that the whole of the, otherwise genuine, claim will be struck out?
  • There are, however, likely to be cases where the evidence is so strong that the judge is compelled to make the finding

Clause 56 will allow insurers to review their approach to Part 36 offers in suspect claims – but a considered, case by case, approach will still be required

  • Under the current rules it has been best practice for insurers to protect themselves by making Part 36 offers for any elements of a claim that they reasonably consider genuine. The Court of Appeal has made it clear that if Parties want Part 36 cost consequences then they must make Part 36 offers, even when faced with exaggerated claims.
  • When Clause 56 becomes effective, insurers will need to review their strategies in fraudulently exaggerated cases. There will be claims where it may be better not to make any offers whilst key investigations, for example surveillance, are incomplete.
  • In cases where Part 36 offers have been made prior to evidence of fraud coming to light insurers will need to carefully consider whether to withdraw those offers.
  • It should also be remembered that even where their whole claim is dismissed a claimant will still only be liable for defendant’s costs to the extent that they exceed the costs associated with any genuine elements.

The ban on inducements introduced by Clause 57 is unlikely to have an enduring impact

Only a very small proportion of claims is likely to be affected by the provisions of this clause

  • Clause 57 of the Bill seeks to extend provisions in the LASPO Act. It makes illegal the offering of inducements, either directly or indirectly, to submit a claim and seeks to deal with the issues not addressed by the abolition of referral fees.
  • It remains to be seen, however, whether the public be less tempted to submit LSI claims or claims that happened several years ago in the absence of the ‘make a claim, get an iPad’ type of promotion run by some claimant solicitors.
  • In the impact assessment published in September 2014[1], the MoJ estimated that around 10,000 claims would not be made if a ban on inducements from claimant lawyers was introduced (a similar ban already exists for CMCs). If their assumptions are correct, then based on current Portal volumes this represents a reduction of only around 1.2% to 1.5% in the total annual number of claims submitted.
  • Many current offers contain exclusions for LSI claims and late intimated claims so the ban is unlikely to have a significant impact in these areas.

The claimant community will develop ways to adapt  

  • Some members of the claimant market have developed a number of novel, legal, ways to adapt to the ban on referral fees introduced in the LASPO Act. Despite some initial disruption, these schemes have helped to maintain the of flow of claims across the claimant supply chain
  • Consequently, whilst the claimant solicitor market has consolidated to some extent and the number of CMCs has significantly reduced the number of motor claims being presented via the Portal has steadily increased since the post-LASPO hiatus in 2013.
  • Indeed, in 2014 the Portal recorded its highest December motor CNF figures since its launch. Allowing for the pre-LASPO rush of claims submissions, 2013/14 is on track to be a record year for the Portal in terms of motor claims.
  • Based on this past experience there is therefore little doubt that the claimant community will continue to innovate in order to maintain the levels of claims available to them.

 We continue to follow the progress of the reforms and will provide further information and guidance for clients as and when appropriate.

If you would like any further information or to discuss these matters further please do not hesitate to contact Paul Brandish on 0161 214 5727 or by e-mail at paul.brandish@horwichfarrelly.co.uk

[1] Impact Assessment Number MoJ 022/2014

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