'No win, no fee' compensation claims have hidden costs says Assembly Member

10.18.47pm GMT Fri 17th Nov 2006

The Welsh Liberal Democrat Assembly Member for South Wales West, Peter Black, has written directly to the Westminster Government seeking urgent action to clamp down on the dubious practices of some 'claim farmers', who are persuading people into pursuing 'no win no fee' compensation claims only to find themselves in financial difficulties.

His actions have arisen out of a case referred to him by a constituent, who had gone to court to make a public liability claim with the assistance of a 'no win no fee' deal with a firm of solicitors. When the case collapsed, the family were left having to meet the costs of the defendant.

"In my discussions with Swansea Council it was made clear to me that it is fairly common for 'no win no fee' cases to lead to costs in excess of five to six thousand pounds being awarded against the person who brings the case," said Mr. Black. "Although there will be insurance it is often the case that the insurers will not indemnify these costs especially if they consider that the case has collapsed as a result of the actions of the claimant."

"One of the features of this sort of action that is not widely understood is that the claimant takes out insurance to cover any costs, but because of the risk involved the premium can be anything from ?1,000 to ?10,000. This is paid for by a loan arranged by the claim farmer and claimants are often given the impression that they do not need to worry about repaying it as if they win then the premium will be refunded to them."

"If somebody enters into a 'no win no fee' claim and tries to drop out then their own solicitors will hit them for their costs and they will still have the premium to repay. Once somebody has signed on the dotted line then backing out will leave them in breach of contract. Even with the statutory 14 day period of grace many people fall foul of this as it is too late before they realise what they have got themselves into."

"Obviously, given the high number of failed claims this can leave vulnerable people facing massive debt that they cannot afford to repay. Also as the claim farmers may well take commission on the sale of the insurance then they do not have an incentive to warn people about all the risks."

"I am told that these claim farmers actively canvass people in the street or by knocking on doors in particular areas to persuade them to put in often fraudulent claims. It has been known for there to be a dozen claims from one street. They will arrange for photographic and medical evidence and anything else needed for a credible claim. They can get up to ?500 for each claim that is accepted by a firm of solicitors and the Courts allow these solicitors to claim back the referral fee from the Council if they are successful. One firm put in 130 claims to Swansea Council."

"Last year there were 600 public liability claims to Swansea Council. Currently 70% to 80% of all highway claims are repudiated but the cost to the Council in doing this is in excess of half a million pounds a year. Claim farmers avoid using local solicitors if they can help it and because those solicitors who enter into this business can make ?40,000 for each successful case it is worth their while championing loss-leaders in return for two or three successful claims. This encourages the practise of targeting vulnerable people in return for commission."

"I do not want to discourage people who have a genuine claim but it is important that people understand that there is no such thing as a free lunch. 'No win, no fee' claims carry enormous financial risks to the claimant if there is even the slightest doubt that evidence may be fabricated or that they are trying it on. Claimants can find themselves thousands of pounds in debt."

Mr. Black has asked the Department of Constitutional Affairs to look into the practice. He wants a statutory code of conduct put in place for claim farmers to ensure that there is no sharp practice. He has also asked that insurance companies and solicitors who pay out commission for business referred to them should be forced to carry out more stringent checks before accepting the business.

Finally, he has asked the government to reduce the success fee payable to solicitors on indemnity claims as part of the awarded costs. At the moment these firms of solicitors can effectively double the amount of money they get in costs from a local authority by adding a 100% success fee. This enables them to off-set the cost of losing cases and offers a real incentive to take on cases without asking questions as to their validity. Council taxpayers are effectively paying a reward to solicitors for taking the action and boosting their profits.