A crucial test case mounted by insurers could determine the future direction of Claims Direct. Francis Higney reports
As the veil falls on a torrid financial year for Claims Direct, the personal injury intermediary will be hoping next year won't mean curtains for the business.
For no matter how good the set of figures it presents to the City, and how well received any corporate restructuring plan may be, the truth is that the future well-being of the firm is now out of the board's hands and lies within the power of the courts.
Claims Direct has been fighting a rearguard action against a class action brought against it by a group of major insurers, including Norwich Union and Royal & SunAlliance. They allege its business model is illegal. The outcome of the case will have a bearing on the future viability of all firms involved in similar after the event (ATE) insurance claims, not only on Claims Direct.
This case, in a nutshell, revolves around the allegation by the insurers that Claims Direct is charging its clients far too much in premiums, £1,450 in a one-size-fits-all policy, and they resent having to refund that amount if the claim against them is successful.
The company has already admitted that not all the claims it processes should be subject to its £1,450 ATE insurance premium and has put forward suggestions for a new scheme.
"The test case reflects the historic situation and has nothing to do with what we are doing going forward," says director David Gravell.
However, when new chief executive Ronnie Henderson announced ambitious plans for a radical restructuring of the company last November he could not have known how the court case was going to pan out. He reported interim results that showed the firm had lost £11.5m in the first six months of the year.
The key plank of the new plan was to radically reduce the number of cases it takes on - down to just around 1,700 cases per month rather than the 2,200 it needed to break even.
Henderson is convinced this initiative will prove successful once the benefits of the purchase of loss-making rival firm Claimline filters through.
Claims Direct said the acquisition of Claimline, which made losses of £560,000 in 2000, would give it a new brand and a new business model. The company paid around £1.5m for the acquisition.
Henderson commented at the time: "The acquisition of Claimline and the launch of the new business model should allow the company to break even with significantly fewer cases per month.
"Together with our successful cost reduction programme we are more optimistic that we will achieve our goal of returning to profitability as soon as possible."
But the goal of returning to profitability has been thrown into question by a Court of Appeal decision last month. The court ruled that the senior courts judge was right to decline to hear two preliminary issues relating to "comparative exercises" that attempted to "demonstrate the premiums and costs of other insurance companies" in an effort discover what the correct level of premiums should be set at.
The decision not to allow them was a body blow for Claims Direct. It wanted to demonstrate it was justified in charging its clients, if not a premium of £1,450 in every case, then certainly to lay down a benchmark figure that it believes it should be able to recover in full from the insurers.
Now it appears it is a matter for the courts to define a premium and further to examine whether the charge applied did in fact constitute an insurance premium.
This would mean that the courts could get Claims Direct and similar firms to open up their books to determine how much actually went to underwriters, and if the charge could fairly be described as being an insurance premium.
Any restructuring of the business and the drive to move into profit could therefore be based on false figures, especially if the courts look retrospectively at cases.
Claims Direct is about to make its full-year results statement to the City so Gravell is limited by accounting regulations as to what he can say. However, he confirms that Claims Direct will move to an operational mode that closely mirrors that of Claimline.
Should the insurance companies succeed with their test case it would have implications for similar firms operating in the same marketplace.
Andrew Twambey, a solicitor at Manchester firm Amelans, says: "Should they win, it would spell the end for Claims Direct. Then liability insurers will try to group them all together."
Managing director of legal expenses insurer DAS Paul Asplin agrees.
"The insurers are going to use every possible device to try to get the right outcome for them. What will emerge will be a radically different business model to what we have today," he says.
Asplin cites the credit hire saga as an example. "This ran for years before you had a settlement between insurers and credit hire companies and a high number of businesses went to the wall in the interim. Those that stayed had to remodel their business model drastically. We need an understanding of what everyone considers to be a reasonable premium."
Unusually for court cases, this is one action where the solicitors could end up losers.
Twambey explains: "A win for the insurers would be disastrous for those solicitors on their panel. For a start, money must be fairly tight for those practices to take on that kind of work in the first place. Now they could end up receiving no profit for their work and getting lumbered with all the liability. Many could go to the wall."
However, Gravell is confident that the revamped company will prove attractive to the legal profession.
"We have torn up the old panel of solicitors and are inviting everyone to work under the new conditional fee arrangement business model," he says.
So whereas before, the claimant took out a loan, now cases will be funded through the solicitors by funding agreements.
Even if Claims Direct does manage to strike a deal with insurers and rearrange its business model, the Court of Appeal's decision could have another sting in its tail.
If it were to be established that only a fraction of the money charged to clients was earmarked as premium, there could be reason for the taxman to get involved as Claims Direct would have been paying only 5% insurance premium tax on the total amount, the remainder could possibly be liable for tax at the standard rate.
These cases could be looked at retrospectively by the authorities. If they decided to press for payment, Claims Direct would have to hand over a very hefty sum.
It all adds up to a massive headache for the board. But don't be surprised if Claims Direct is still around next year. It has met many challenges head on in the past couple of years and is still here to fight another day.
The Claims Direct story
1990: Taxi driver Tony Sullman founds Somerford Claims.
1993: Solicitor Colin Poole joins Somerford Claims.
1995: Somerford changes its name to Claims Incorporated.
December 1998: Claims Incorporated acquires Medico Legal Support Services (MLSS).
July 2000: Company changes its name to Claims Direct and is launched on the Stock Exchange with just under 27.8 million shares issued at 180p each. Poole and Sullman together retain 42.8%.
September 2000: Claims Direct buys Poole's claims vetting agency for £9.75m.
October 2000: BBC Watchdog features Claims Direct for charging high premiums and The Sun also slams the firm.
January 2001: The company issues its first profit warning. Sullman steps down as chairman to become non-executive director and Poole becomes chief executive. Share price falls from 80p to 32.5p overnight.
February 2001: Share price hits a new low of 28p.
March 2001: Callery v Gray judgment rules £350 reasonable for personal injury premium. Claims Direct issues second profit warning. Share price drops to new 8p low.
June 2001: Claims Direct announces "very disappointing" results for 2000 to 2001 with a pre-tax loss of £20.2m. Poole resigns and becomes non-executive deputy chairman. He and Sullman offer to buy the company through Barker Securities for a cash price of 10p a share.
July 2001: The Department of Trade and Industry begins investigating the company. Claims Direct's four independent directors urge shareholders to reject Poole and Sullman's offer, describing it as "deeply cynical" and "opportunistic". Only 0.1% of shareholders accept.
August 2001: Poole and Sullman gain a further 12.8% of shares, giving them 55.6% control of the company. Their offer now becomes unconditional. Poole and Sullman negotiate with Simon Ware-Lane to sell Claims Direct on.
September 2001: Ronnie Henderson is appointed chief executive. He says that 25% of the company's 245 franchisees are threatening to sue Claims Direct for misleading them over how much money they would make from the franchises.
It is understood they will claim £16.5m.
October 2001: The company announces it is to introduce three types of insurance policy meaning that premiums charged by Claims Direct for undisputed cases, such as a rear-end collision car accident, could be as low as £500. Two levels of higher premiums would be charged for more complex, specialist cases.
It also announces details of three exit packages for franchisees as part of a negotiated settlement.
November 2001: A national newspaper reports that Simon Ware-Lane had said insurers were holding back payments to 12,000 people who had won their cases through his company's no-win, no-fee legal services. The 12,000 have received their compensation awards but insurance companies, including Royal & SunAlliance and CGNU, are refusing to reimburse the £1,450 premiums that claimants paid to cover their legal costs. It also settles 21 of its 26 legal disputes with ex-franchisees and outlines plans for radical restructuring, after losing £11.5m in the first six months of the year.
January 2002: Claims Direct buys rival personal injury firm Claimline in a deal worth £1.54m. This involves the issue of up to 11million shares in Claims Direct. Half the consideration will be issued on completion of the deal with the rest being deferred for two years.
February 2002: Claims Direct ends its agreement to automatically pass on many of its legal cases to solicitors Poole & Co. It terminates Poole & Co's contract to administer its panel of solicitors, entitling it to cases on an exclusive basis.
March 2002: Director David Gravell reveals that a satisfactory arrangement has been reached with "all but a handful" of the disaffected franchisees angry at paying up to £30,000 then being unable to recoup costs after claim numbers fell dramatically.