The industry remains fiercely polarised on the merits of the Legal Services Act, with some going so far as to brand it ‘morally wrong’

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The story of ‘Tesco Law’ has evolved into a morality tale that has divided the insurance industry.

While some insurers see the Legal Services Act 2007 – as Tesco Law is officially known – as an opportunity to improve the service they can offer customers, others have slammed the legislation and portrayed it as morally questionable. Others, meanwhile, prefer to simply avoid making public pronouncements on a topic that has proved controversial.

What is Tesco Law? This legislation gives insurers and other companies the opportunity to own law firms or employ lawyers who offer legal services directly to their customers.

Direct Line Group (DLG) is one insurer that views this concept with enthusiasm, so much so that it revealed in its recent listing prospectus that it plans to make an application under the law to establish an alternative business structure (ABS), which is effectively a company that offers legal and non-legal services.

A DLG statement says: “In light of possible regulatory changes to remove dysfunctionality from the motor insurance market, which we support, we are looking at a variety of options including legal services to ensure we are able to sustain our competitiveness and continue to offer customers choice, and great value and service.”

Morally wrong

But not everyone in the insurance industry is as keen on Tesco Law. Indeed, in an interview with the Financial Times, AXA UK chief executive Paul Evans says that because the Legal Services Act enables insurers to set up their own legal firms, it could be equated with the “morally wrong” practice of personal injury lawyers’ referral fees - that is, law firms paying insurers for the details of people involved in accidents to make speculative personal injury claims.

Speaking to Insurance Times, an AXA spokesman says the company is not planning to make an application for an ABS but it will “keep this under review as government reforms are confirmed to ensure that AXA is not competitively disadvantaged”. She adds that AXA’s view is that there are two primary justifications for an ABS application - firstly, to “integrate the management of customer service and costs in connection with personal injury claims” and secondly, to replace referral fee income from “minor, often fraudulent, whiplash injury claims” that would be lost as a result of the referral fee ban in April 2013.

She also says an ABS would enable an insurer to “capture 100% of the extraordinarily high legal fees available under the MoJ [Ministry of Justice] portal, less the minor costs of the claim”, which, she adds, would more than make up for the lost referral fee income. She adds that AXA banned referral fees in 2011 because it believes they represented a “perverse incentive” to promote fraudulent whiplash claims, which drive up the cost of motor insurance premiums.

If, as promised, the government dramatically reduces the MoJ legal fees, then AXA is less likely to make an application [for an ABS]”

AXA spokesman

But crucially, despite Evans’ comments implying that ABS are morally questionable, the AXA spokesman does not rule out the possibility of the insurer making an application under the law. “If, as promised, the government dramatically reduces the MoJ legal fees to remove this incentive to promote whiplash claims, then AXA is less likely to make an application,” she says. “If, however, reforms are not forthcoming, AXA will be forced to abandon its stance so that its shareholders and customers are not disadvantaged.”

AXA’s view is that further reform of the personal injury compensation system is key. The spokesman says that without this, Tesco Law offers a “simple route to replace referral fee income, potentially invalidating the intent of previous reforms”. She adds that the industry’s reputation is at stake as customers consider whether insurers are doing everything in their power to reduce spurious claim costs and thus motor premiums.

Insurers remain cautious

What stand are other major insurers taking on the issue? A Zurich spokesman says it is “looking into what opportunities the regulations allow”. But is the law morally questionable as Evans has implied? “That seems to suggest the potential opportunities related to the Legal Services Act are solely associated with retaining income from representing whiplash claimants, which is not the case,” the Zurich spokesman says. She adds that ABS could potentially “reduce the costs associated with defendant work”.

A spokesman for QBE says the company is “not considering an application at all”, but declines to elaborate on the reasons. However, a source close to QBE says that because it is “not a consumer brand, an ABS would not work as well”. An RSA spokesman is similarly tight-lipped, though she admits the company is considering setting up an ABS. “We are just looking into the possibility of putting in an application and we have nothing else to add on this at the moment,” she says.

An Allianz spokesman says the insurer would prefer not to discuss the issue of ABS and adds that if the company did make any comments they could “misinform and confuse should they end up in the public domain or be discussed in the market place generally”.

Similarly, a spokesman for Aviva opts to sit on the fence. “We don’t want to commit either way,” he says. “We’re concentrating on pushing through the personal injury reforms - a lot of issues will be taken care of that way.”

Tesco Law: insurers’ arguments


  • Improves customer choice
  • Improves customer service
  • Integrates customer service and costs in relation to personal injury claims
  • Provides a source of income to replace that lost by the referral fee ban


  • Could jeopardise insurers’ reputation
  • May make customers doubt that insurers are doing all they can to reduce spurious claim costs and therefore premiums
  • Could be seen as morally wrong