Extended recovery

Can the insurance industry take any more? There are strong rumours that a proposal put forward two years ago by the Law Commission will become law. It would mean that in addition to road traffic accidents, insurers would also need to pick up the tab for those involved in other cases requiring hospital treatment - with the brunt borne by liability providers.

Although these are only proposals, this is very much a live issue. The move to extend the NHS's powers to recoup its costs from insurers for a host of accidents is being considered "favourably and has been accepted in principal", according to a source at the Lord Chancellor's department. It is understood a report will be produced by the end of the year, with government riding roughshod over any insurer objections and extending existing legislation.

Indeed, the framework is already in place with The Road Traffic (NHS Charges) Act [1999]. This led to the establishment of the Compensation Recovery Unit (CRU) - basically a government department that hounds solicitors for insurer details and then recoups treatment costs.

The Law Commission, which is an independent body set up to recommend law reforms, is behind the move. In 1999, it produced a consultation document, Damages for Personal Injury: Medical, Nursing and other Expenses; Collateral Damages, and a draft bill, Damages for Personal Injury (Gratuitous Services). It is not reading for pleasure, whichever way you look at it. Located on the Law Commission's website, www.lawcom.gov.uk, as Report LC262, it is phrased tortuously and makes few references to the insurance industry or the potential financial damage the moves could inflict.

However, the implications for insurers are massive, even though the industry appears to be doing little to raise awareness and warn of the consequences. The ABI, although it is referred to as a party in the consultation in the document, says via a spokesman that it is unable to expand on the issue, as it is not under consideration. Various insurers say they are only aware of the road traffic implications.

However, Brian Raincock, managing director of after-the-event insurance provider, Litigation Protection, says he has been following the situation. "I think it is likely that this will get through and is yet another example of the insurance industry not anticipating this. It is not good at strategy and simply starting to put up premiums now suggests it has been caught napping."

If implemented, insurers will start dealing on a regular basis with the CRU, part of the Department for Work and Pensions, and which reports back to the Department of Health.

After a shaky start, the Newcastle-based operation is now coining in the money. Some £98m has been raised to date, according to David Pipkin, a lawyer with David Arnold Cooper, who sits on the CRU's customer liaison panel.

It is understood the departments of health in England, Scotland and Wales contributed a total of £1.5m to the running costs of the unit and this includes the recruitment and training of 53 staff and some residual start-up costs for the new computer system delivered in 1998/99 in preparation for the new arrangements. This could easily be expanded to deal with wider liability cases.

Currently, there is a cap of £10,000 which can be claimed by the CRU, but Pipkin says there are moves to increase this to £33,000, in line with inflation - which would be more crushing news for insurers.

He says it would be relatively easy for the CRU to adapt to wider liability claims, as it currently codes accidents. The government will be well aware of the potential revenue it could raise. This could run into millions of pounds, leading to a massive windfall.

Pipkin says it remains unclear where the money raised from motor claims is going. He says while there is talk that it should be used for better care in accidents, the money is not being ringfenced or, as it is known in the industry, hypothecated.

If the CRU's remit is extended, it will not just be for employers' liability claims, public liability will also become a major focus, for example an individual who is injured in a shop or visiting a company.

Consider also the implications of a major rail disaster and the additional costs to an insurer in these cases.

Rob Fielding, head of operations for Royal & SunAlliance's healthcare operation says the consequences are serious: "It is not even clear if the money is going to the NHS. We already have the situation where national insurance increases are meant to be going to the service, but are not hypothecated. We can do without another stealth tax."

He says private medical insurers have increasingly been looking to work with the NHS to provide support and access to facilities. "There is no doubt that NHS staff are dedicated to providing first rate care, but we don't want to reach the stage where those who are injured have to face questioning on what type of accident they have been in," he says.

"What's more, it is just going to mean higher premiums for people who are already faced with steep increases. If the government insists on this law, then the proposals must involve proper discussions with the industry so that protocols can be laid down."

Insurers may be prepared to put a brave face on the proposed changes, but for the insurance industry as a whole, the consequences could be dire and, according to an insurance lawyer, "could well be the straw that breaks the camel's back".