Where there's blame...

In the second part of our investigation into the compensation industry, Jon Robins assesses the legacy of Claims Direct, the once-thriving 'ambulance-chaser' that is now terminally ill

There will have been few tears shed by lawyers at the news that the receivers were finally called in to Claims Direct last month – perhaps, a few pangs of regret from those 300-odd law firms that advised it in its heyday. But what about those 40,000-odd accident victims, left in limbo and without money, by the claims giant? "It's good news because they have now been exposed for what they are," says Elroy Hogan, who is still waiting for damages of £1,400 following a car crash over two years ago.

His is a typical Claims Direct story. One dark, drizzly night, more than two years ago, Hogan, a computer technician, was waiting in his car outside his friend's house. A speeding driver shot around the corner shunting his parked car into a school gate and writing it off in the process. Hogan was left with serious whiplash and had nightmares for months after the accident.

Hogan had legal-expenses insurance that would have covered his accident. None the less, he rang Claims Direct when he saw the ads on television. Before long, a representative came round and advised him not to go with the insurance option. "I was told that the insurers would 'sort it out for themselves', whereas he would seek 'to maximise the benefit'," he recalls.

That was the last Hogan heard from Claims Direct. "I haven't had a single penny," he says. "I feel I had an accident and went through all that pain to make Claims Direct rich." Hogan was obliged to take out very expensive insurance, supplied through Claims Direct, to cover him if he lost the case and was ordered to pay the legal costs. Like so many clients, he was left with nothing because the insurance premium came out of his damages, as the defendant's insurer has refused to pay it.

"I don't understand how Claims Direct ever thought that they could get away with it," says Ian Walker, senior partner at Russell Jones & Walker and former president of the Association of Personal Injury Lawyers.

For many PI lawyers, following the plummeting fortunes of the claims giant since it floated two years ago has become a spectator sport. The unexpurgated story is there for all to see in last month's ruling by the senior costs judge, Peter Hurst, in the Claims Direct test cases. He held that only half of the £1,250 insurance premium is recoverable from defendant insurers. Now the company has run out of cash, it is unclear how that's going to help Mr Hogan.

The ruling lays bare the business model that so seduced the City and netted its founders, the cabbie Tony Sullman and solicitor Colin Poole, £50m. Their first scheme ran between 1996 and 1999, and worked on the simple principle that the company would take 30 per cent of any damages recovered and pay for the opponent's costs if the claim were to fail. Franchised claims managers drummed up work and were backed by a huge TV campaign that set the tone for the "Where there's blame, there's a claim"-style ads. Solicitors, barristers and medical experts were arranged through panels.

The prototype was hugely successful and the claims giant was buoyed by the prospects of a post-legal aid world. Sullman & Poole began looking into flotation in March 1999, however, according to Judge Hurst, they were advised by their accountants that flotation would be "handicapped" by "the contingent liabilities" of the 30 per cent scheme. So they scrapped it and brought in the insurers.

The relaunched product had a £1,250 "insurance premium" that included insurance costs of only £140. The City loved it – share prices leapt from 180p to 353p in its first two months – and the public was equally besotted, with 5,000 new clients signing up every month at one point.

The only problem was that the defendant insurance industry refused to foot the bill. According to Judge Hurst, no sooner had the company floated than it was "rocking from one disaster to another", and management was "firefighting" within weeks. The extent to which the company and its City backers got their sums wrong is revealed in the judgment. The underwriters had worked on the assumption of a failure rate of cases of between 4 per cent and 6 per cent (optimists at Claims Direct put it at 3 per cent or less), but in reality it was 25 per cent. From there on it was downhill all the way, pursued with boundless enthusiasm by campaigns by the BBC's Watchdog and The Sun, which memorably dubbed the company "Shames Direct".

Now, the ambulance-chaser is terminally ill. According to the receivers, Deloitte & Touche, they have received "half a dozen serious offers" and a sale is expected to be agreed any day. The main asset is the intellectual property for the claims management system but, apparently, there is "considerable interest in the brand itself".

So, what is the legacy of Claims Direct? Many lawyers believe that the case for regulation is now unstoppable as concerns about the insurance costs and hard-sell tactics persist. It was not so long ago, February 2000, that the former Army officer Brian Blackwell completed his report into non-legally qualified claims, which many commentators feel missed the point.

Professor John Peysner of Nottingham Law School was on the committee. "It was about the wrong thing, as it turned out, because it was set up in response to trade- union concerns about unqualified claims assessors," he recalls. "But by the time it was up and running, these people were marginal compared to the claims companies. They were a totally unpredictable response to the abolition of legal aid for personal injury claims."

The Law Society takes a measured line on regulation. "We are concerned about the activities of some of the less reputable players in the market and, ideally, we would like to see some regulation to protect customers from unqualified claims advisers," a spokesman said. Others believe that the lawyers should take the rap. "My argument's more with the solicitors than with Claims Direct," says Kerry Underwood, senior partner at Underwoods and a leading commentator on the after-the-event insurance market. He reckons that claims management companies have "done for PI work what the estate agents did for conveyancing", but they have only got away with it because of the compliance of the solicitors. It is a view shared by Stephen Tranter, of Manchester firm Tranters Freeclaim. "If you look at the professional-conduct rules of solicitors, there are duties upon lawyers to act in the best interests of their clients," he says. "If they receive instructions from their clients packaged up, we would say that it is wilful blindness that they aren't aggressively pursuing their client's interests." Tranters is advising 150 clients, such as Elroy Hogan, from a range of claims companies.

The impasse between the defendant insurance industry and the claimants looks far from over, despite 18 months of ferocious litigating including Callery vs Gray, which went to the House of Lords earlier in the year. "I am not sure that it has taken us any further forward," says Dominic Clayden, head of claims at Norwich Union. "The reality is that unless we get some regulation or some form of agreed rates, we're heading for a significant volume of test litigation."

Clayden believes that the problem of inflated premiums is endemic, and not just about Claims Direct. "I wouldn't want to single out any individual firm because we can't understand how the majority of premiums being claimed are calculated," he adds.

But as the insurers and lawyers slog it out in the courts, the likes of Elroy Hogan are still waiting for their compensation. Does he think that he will ever see his money? "To be honest, I gave up a long time ago," he says. "I have crossed that hurdle now and moved on."