Claims Direct: Risky Business

Claims Direct, the ambulance-chasing compensation firm launched by ex-taxi driver Tony Sullman, has had a rough ride since coming to market last year. Can it find a way to steer a path to success?

Claims Direct, the no-win, no-fees personal injury compensation outfit, would no doubt like to climb into one of the ambulances it is said to chase and be taken to the hospital for sick companies. The business, founded by former taxi-driver Tony Sullman, has suffered a nasty bout of bad publicity, lost more than 90 per cent of its value since it floated last July, and seen customer numbers dwindle by 40 per cent. Last week, it issued its third profits warning in four months, leaving observers wondering whether its business model is seriously flawed. The rumour mill has started to grind, leading to speculation that a major boardroom shake-up, or even an opportunistic takeover, is imminent

Claims Direct, the no-win, no-fees personal injury compensation outfit, would no doubt like to climb into one of the ambulances it is said to chase and be taken to the hospital for sick companies. The business, founded by former taxi-driver Tony Sullman, has suffered a nasty bout of bad publicity, lost more than 90 per cent of its value since it floated last July, and seen customer numbers dwindle by 40 per cent. Last week, it issued its third profits warning in four months, leaving observers wondering whether its business model is seriously flawed. The rumour mill has started to grind, leading to speculation that a major boardroom shake-up, or even an opportunistic takeover, is imminent.

Paul Doona, finance director of Claims Direct, says the company has had a rough ride over the past few months. "There has been a fairly unique campaign against the company, which has come from all areas," he says. "The media has followed up stories from old franchisees [the people who manage individual claims for the company]. I don't blame them for this, but it is frustrating to be on the back foot all the time."

Last Wednesday's profits warning was brought forward by a week, says Mr Doona, to try to reclaim some of the initiative, despite the chief executive, Colin Poole, being on holiday in Jamaica.

Claims Direct was heavily criticised last year because a substantial number of customers who won their personal injury claims did not receive much of their compensation. This was because the company makes all customers buy a £1,250 insurance premium when it takes on a case. The premium covers those who lose, ensuring they do not have to pay costs. But for successful customers the premium had to be paid out of the award, and for many that was barely more than the cost of the premium.

The company tried to deal with the disquiet by announcing a £5m provision to distribute to the 10,000 customers in this position. Those who received only a negligible amount have been written to and could be paid an extra £500 each.

Claims Direct has not provisioned any more cash for customers taken on since 1 April 2000, because the new Access to Justice Act came into force on that date, meaning the premium is now recoverable from the defendant's insurance company, rather than from the victim.

But this is where Claims Direct's second serious problem emerged. Many insurers have refused to pay its insurance premium, claiming it is too high. Kerry Underwood, a senior partner in Underwoods Solicitors, says the Act "was a ludicrous law". He adds: "It did not set out what level of premium was allowed so it was like allowing personal injuries companies to write their own cheques." Most UK insurers which cover personal injury risks have been unwilling to pay those bills, saying that inherent in the Act is the idea that the level of the premium has to be "reasonable".

Mr Poole says insurers have paid out in "substantially less than 100 cases" taken out and settled since last April. In 500 cases the insurer has refused to pay. Claims Direct takes on average 14 months to settle a case so most claims which were started since April are still active. But the trend is worrying for the company and a host of other personal injury companies which have sprung up over the past few years.

Personal injuries firms such as Claims Direct are aimed at a gap in the market which used to be filled by legal aid, until the Access to Justice Act curtailed its use for personal injury claims, among other civil cases. The new companies allowed many people who could not afford to fund private legal actions to pursue their claim relatively cheaply, and through an easily accessible channel. At its peak after the float last year, Claims Direct saw business flood in at 4,000 new cases a month and is now dealing with a total of 60,000 claims.

But the legal definitions surrounding exactly what costs are recoverable from the other side are still undefined and the insurance industry, which realises that there are hundreds of millions of pounds at stake, has dug in its heels. This attitude may be sending shivers down the spine of companies such as Claims Direct. The last time the insurers refused to cough up to a company which deals with after-the-event services for accident victims was over Helphire, which provides cars for customers who have had a road accident and then tries to recover costs from the insurer.

Last December the insurers stood together and objected to the level of the costs, forcing Helphire to negotiate a new tariff which was a third less than its original charges, leaving it with a £43.8m hit in its profits and a negative impact on its future gross margins. The issue is different at Claims Direct. Unlike Helphire, which depends on receiving the costs from the insurers for its revenue, the premium is recoverable from the client if the insurer does not pay up.

Mr Poole says: "We will attempt to recover it, but if we cannot do it the cost will have to come out of the compensation." But, as he has learnt from the dive-bombing of his company's share price, this option is not a popular one ­ the number of new cases dropped to an all-time low of 2,411 in December. As a consequence, the company said last week, the business predicts its loss for 2000 to be £20m. It has also eaten up half of the £40m cash stockpile it had when it floated. New customers were up to 2,500 in January, says Mr Doona, but that was still loss-making and needed to be nearer to 3,000 to break even.

Followings the run of bad publicity, the company tried to rejuvenate its image with a soft-focus advertising campaign about an ill-fated and bespectacled boy called Declan. But, the heavy spending on the campaign has contributed to the erosion of the company's gross margins and has not led to the turnaround in attracting new business at the level Claims Direct would like.

The company has launched a new media campaign, but it has also said it is scaling back on its advertising spending. The budget, set at £500 to attract each new customer, has been cut to £400. Others reckoned the total costs of recruiting each new customer had reached a whopping £800. This compares to earnings of only £650 which new customers yield, according to the company's flotation prospectus.

The cost-cutting does not stop there. Claims Direct has let 60 claims managers go, and wants to reduce the number further. Twelve others at its Telford headquarters were made redundant.

The company is also offering customers a new insurance premium product for its core personal injury business, which ring-fences the first £1,000 of damages. The cover should mean that even if a customers' insurance premium cannot be recovered, and their total pay-out is barely more than the premium, they will still receive that sum. But the premium, which will be offered to new customers and some, but not all, of its existing customers, is more expensive than the existing policy at nearly £1,500. It seems questionable that defence insurers, which will not cover the old, lower, level of premium, would pay for the new premium.

If they do not, the onus falls back on the customer, who may think a guaranteed £1,000 pay-out is still inadequate compared to the amount they could have received without the insurance premium and any interest charged at 15.6 per cent.

In addition, the new premium costs Claims Direct more, because its underwriters are bearing more risk. Mr Doona says it has begun to pay £400 a case to its Lloyd's of London underwriters, up from £100. Claims Direct has negotiated a guarantee that the underwriters will cover it for the next three years as part of the deal, but concedes that the increased fee is partly due to its underwriters' fears about how easy it will be to recover premiums from the opposite side.

The healing balm for all of these problems, the company recognises, would be to achieve clarity on exactly what level of premium is recoverable. "We introduced the new premium because we felt we needed to give claimants confidence," says Mr Doona. "If we got clarification on recoverability, there would be no need for the new policy."

Claims Direct is taking a two-pronged approach to establishing what the law allows. The first is through the courts. No battles between Claims Direct and defendant insurers have reached the courts, but other cases concerning other companies have, and the industry anticipates that a Court of Appeal case this year will provide some clarity.

Andrew Parker, head of the Forum of Insurance Lawyers, the body which also represents defendant insurers, says: "The case will deal will whether after-the-event insurance is recoverable in cases which do not go to court and what level of premium is appropriate." Mr Parker, who is also acting for Norwich Union, the defendant in the case, says the level of premium involved is only £350. He hopes the court gives guidance not just on the specific premium involved but also more generally on what Claims Direct-type companies are allowed to recover.

As well as the test case interested parties, from insurers to personal injuries companies to the National Health Service, are trying to negotiate out of court. Again, the process is long and drawn out. The Association of British Insurers is looking for a suitable retired judge or similar person of high standing to head the talks and a conclusion is not expected before the summer.

But what of Claims Direct? Mr Doona admits if the company's business model proves unworkable, it will change. He says: "We may rethink the model. We would be happy to go back to the old system. Everyone knew where they were with it." When Claims Direct opened for business in 1995, no insurance premium was required and the company simply acted as a conduit for claims, attracting customers,then passing them on to solicitors. The practice is known as "claims farming".

There are many in the industry who think claims farming would be more appropriate. Mr Underwood, whose firm of solicitors also operates in the personal injury market on a no-win, no-fee basis, says: "There should be no connection between farming claims to solicitors and providing insurance. Solicitors might feel that, in return for getting work, they have to sign up to a company's insurance. The solicitor should have no interest beyond getting the best insurance for the client."

Claims Direct says the solicitors it uses do consider each case and decide whether customers should continue. But solicitors cannot take cases from Claims Direct if they want to use other insurance.

After the problems of customers having to pay premiums out of their winnings emerged, Mr Sullman, who started Claims Direct after he experienced a similar compensation business for taxi drivers, stepped down as chairman but still holds the role in a non-executive capacity and retains his 30 per cent stake in the business.

There is also speculation that the company is likely to shake up its marketing division, following the lack of positive impact from the Declan campaign. The question is, will others follow? Mr Poole, a lawyer who was Mr Sullman's right-hand man, is only 36 and lacks blue-chip experience, but is regarded as being able. Mr Doona is also regarded as a capable pair of hands.

But some UK and foreign financial services outfits are said to have eyed up the company, which could lead to wide-ranging board changes. Mr Doona denies Claims Direct has had any takeover approaches, but says a bidder would have to be "mad" to make an approach before the annual results for the year to the end of March, due in June. Any prospective bidders may be encouraged by some of the plans which Messrs Poole and Doona have for the business.

These include wanting to turn Claims Direct into a "mini-AA", which offers a broad range of financial services to its customers. "Now we spend so much money attracting a client who, unless they are dramatically unlucky, we do not see more than once," Mr Doona says. "We could widen out what we provide for our customers to a broad range of financial services. In the long term, for example, we could offer motor insurance."

In the shorter term, Claims Direct is poised to diversify into other types of compensation, including clinical negligence. But it is wary about taking the plunge because its public image has already taken a battering. Mr Doona says: "Our plans for clinical negligence are ready but we have not launched it yet because there are some political dimensions. We are getting a fair amount of stick at the moment for cultivating a claims culture and people may think that we are bringing this to the NHS, which has limited resources."

No one will lose sleep over the big insurance companies having to dig deep into their spacious pockets, although it is likely to lead to rises in everyone else's premiums. Even if the insurers succeed in avoiding much of the bill Claims Direct is trying to press on them, the possibility of a takeover and the option of reverting to its successful former business model, means Claims Direct is clearly not on its deathbed. But its board members who are still standing are well aware they must swallow some unpalatable medicine if they want the business to survive.