LETTER: New bill means attorneys and other agents will be big losers in RAF claims
On March 7, Business Day published a letter by Prof Hennie Klopper that contained information that was misleading, with no thorough analysis based on facts.
Information regarding the Road Accident Fund (RAF) and annual report documents are easily accessible on the RAF website. These could have been used to structure a more objective opinion.
The scheme administered by the RAF is not sustainable. The first actuarial deficit, of just under R1bn, was reported as far back as the 90s. This deficit has grown steadily to R206.6bn, as at January 31.
Liquidity challenges resulting in an inability to pay all debts when due has also been a reality at the RAF in recent years. This has led to the routine attachment, removal and sale in execution of RAF assets.
More recently the attachment of the RAF’s bank accounts has become prevalent. These attachments interrupt claim processing and payments to claimants. A cash management plan has been implemented to queue payments to creditors.
As at February 28, the RAF owed 3,910 creditors more than R8.7bn. The announcement of a 30c/l increase in the RAF fuel levy is therefore welcomed and will assist the RAF to reduce, but not extinguish, the backlog of payments to creditors.
The RAF legislation was amended in 2008 to introduce measures intended to stem the increasing deficit and to alleviate very real liquidity constraints. These measures placed a limit on certain types of damages recoverable following a road crash. No limits were placed on the litigation costs recoverable from the RAF.
In the years that followed the amendments, the RAF experienced a marked increase in litigation, partly due to the fact that the amended legislation no longer authorised the RAF to pay a pre-litigation cost contribution where the claim is settled prior to becoming litigated, and partly because there was an increased effort by attorneys to obtain larger awards through the courts, presumably to recoup losses in fees resulting from the newly introduced statutory limits on compensation.
Represented claims have decreased 1.3% from 47,446 in the 2015-16 financial year to 46,830 in the 2016-17 financial year.
The extent of plaintiff attorneys’ personal financial interest in the outcome of a litigated RAF claim becomes clear when one considers that most attorneys act for claimants based on a contingency fee agreement, which entitles the attorney to charge up to double his normal fee, and up to 25% of the compensation awarded to his client, in addition to disbursements.
Until a recent ruling by the Constitutional Court the use of so called "common-law contingency-fee agreements" was very prevalent, with certain attorneys unlawfully taking fees of up to 80% of the client’s damages award. This exploitative trend is described by Deputy Judge President PM Mojapelo in the matter of MM Nelson v RAF, as "the ever-increasing, rampant and persistent attempt by legal practitioners (especially attorneys) to recover more than the legitimate and legalised success fee".
In addition to the contingency fee deduction, the attorney will also deduct from the balance of his client’s damages award, the fees of the various medical and other experts involved in the matter, the fees of counsel used in the litigation, and other disbursements that cannot be recovered from the party-and-party costs alone.
From the perspective of a plaintiff attorney, the attorney’s personal and direct financial interest in the client’s claim is best served if the matter becomes litigated, and the more protracted the litigation, the better this conflicting interest is served, often to the detriment of the client.
Consider the hypothetical example of a reasonable offer of R1m by the RAF being rejected by the attorney, followed by litigation and an eventual damages award by the court two years later of R 1.2m. The attorney’s client will be extremely fortunate to receive anything approaching R900,000 (after the deduction of the contingency fee, counsel fee, expert fees and other disbursements).
Had the attorney’s client claimed directly with the RAF he would not only have received R100,000 more in his pocket, but the money would have been received two years earlier and would have been paid directly into his bank account.
It is no wonder then that an ever-increasing number of claimants, currently one in three, elect to claim from the RAF directly: 22,524 direct claims were registered in 2015-16 and 25,797 in the 2016-17 financial years, respectively. This trend is further threatening the income streams of attorneys, counsel and the numerous other types of intermediaries that have come to depend on the lucrative income earned from claims under the current system of compensation administered by the RAF.
During the 2016-17 financial year, direct claims registered as a percentage of all personal claims was 38.6% (2015-16: 34.9%), while the total direct claims settled as a percentage of all personal claims was 34.4% (2015-16: 29.7%). Direct claims are processed faster because the process does not lend itself to litigation and subsequent time taken to get to trial.
It takes 909 days to settle a direct claim, which is shorter compared to 1,429 days when a claim is lodged via an attorney. In total, the RAF settled 15,507 direct personal claims in 2016-17. If these claims were to be represented at the average legal cost of R193,959 per claim (extracted from 2016-17 annual report), the estimated additional legal cost bill for the RAF would have been R3bn higher than the current.
The 2008 legislative amendments, and the increased incidence of direct claims, is to a large extent what has been driving the increase in litigation. As the number of direct claims grows, the number of represented claims becoming litigated is likely to increase, and these litigated matters are likely to become more protracted, in an effort by attorneys to recoup the losses from this dwindling income stream.
The RAF supports the Department of Transport’s proposed Road Accident Benefit Scheme (RABS), which will eradicate extended and costly litigation, high administrative costs and prolonged claims finalisation. The clogging of court rolls with RAF cases will also be a thing of the past.
The actuarial funding model for the RABS Bill, introduced in June 2017, shows that the proposed scheme will cost 80% of that of the RAF, but that 40% more road crash victims will benefit. The big losers in terms of the Bill will be the attorneys and other intermediaries, and it is consequently not surprising that this sector has been very vocal in its opposition to the Bill.
The focus on the RAF recently is due to these proposed changes, which are contested by those who have benefited throughout the years. The scheme has become unaffordable and is putting pressure on the fiscus.
Chief marketing officer at Road Accident Fund