Previously drivers were automatically receiving pounds 50-pounds 300 for the psychological trauma of an accident.
Car insurers expect the decision to keep down premiums because it will save them around pounds 60m a year in damages and legal costs.
The Appeal Court decision was based on the case of Pamela Nicholls, who told the court that her 'legs were like jelly' after a 20 mph crash. The head-on accident had jammed her car door, preventing her from geting out. The upset caused was only temporary and Wakefield County Court had awarded her pounds 175 for 'shock and shaking-up'.
The Court of Appeal has overturned this award and said the usual temporary trauma caused by an accident was simply a 'normal human emotion'.
'There are thousands, if not tens of thousands, of these types of claims which are being withdrawn in the light of Nicholls vs Rushton,' says Brian Moore, of solicitors Edward Lewis. The solicitors won the case, which was based on legal arguments related to compensation claims in the Hillsborough Stadium disaster.
Apart from the rare instances of a crash resulting in psychiatric illness, the only cases where shock will now be claimable are when it is a a direct result of physical injury.
While only one in 20 motor insurance claims involves physical injury, the trend was towards tacking on shock claims in virtually every case, and there was no medical evidence being produced.
Some legal expense lawyers were not advising claims for shock simply for the benefit of their clients. They were adding shock and shaking-up to a claim so that it totalled more than pounds 1,000 - the level at which full legal costs can be recovered.
Simon Newman, of The Legal Protection Group, uninsured loss-recovery (ULR) specialists, acknowledges that some ULR companies had been using shock as a means of passing legal costs on to insurers, but is emphatic that his company did not 'automatically' add it to all claims.
Mr Newman says he also understands the perspective of the insurance companies, which felt they were getting a raw deal. 'A claim for pounds 600-worth of damage to a car would then have an extra pounds 200 added for shock and shaking-up. Then another pounds 400 would be banged in for probably unnecessary car hire, bringing it to a pounds 1,200 claim. That means that it would go out of the small claims court in to the hands of a lawyer, who would charge pounds 300.
'With damages in other areas continually on the increase, the Nicholls vs Rushton decision will help us to contain those costs,' says Mike Swingler, personal claims manager at Eagle Star, which says the decision could save it nearly pounds 3m.
Mr Moore says if shock and shaking-up could have been claimed for every car accident - and there is estimated to be one every eight seconds in Britain - then it 'would have been the first step down a slippery road to claiming psychological distress for tearing your jacket or laddering your tights. That's what has happened in America.'