A landmark case has opened in the Supreme Court that will finally decide whether insurers can bypass solicitors and settle claims directly with injured people. The outcome could either cost insurers millions in extra payments to solicitors or potentially threaten hundreds of firms that depend on personal injury work.

Haven Insurance is appealing to the court to overturn a Court of Appeal ruling handing north-west firm Gavin Edmondson Solicitors around £12,500 in costs.

The law firm had sought its fixed costs after issuing claims notification forms for six individuals, only to find Haven settling the claims without its further involvement. The insurer insisted it did not ‘cheat’ the law firm and denied any ‘collusion’ to deny lawyers what they were entitled to.

Appeal judges had allowed Edmondson’s claim on the basis of equitable interference after the six claimants cancelled their conditional fee arrangements following settlement.

The case, in which the Law Society has intervened, is worth potentially millions to insurance firms who have sought to capture claims before they enter the pre-action protocol and resulting costs burdens.

Lord Marks (Jonathan Marks QC), appearing for Haven, insisted that the claims firm had no entitlement or contractual provision to any costs and indeed that the aim of the protocol was not to ensure a solicitor can achieve a right to payment simply by issuing a claim notification form. Notification gave solicitors ‘no more than a contingent expectation’ of costs, he said, suggesting that the Court of Appeal had created a new jurisdiction where solicitors were granted costs in the absence of any payments from their clients.

Marks said the claims notification forms had given notice that Edmondson was instructed and working under a CFA, but crucially did not establish any right to costs. ‘Haven believed they were perfectly entitled not to pay the fees – they are not trying to cheat anyone,’ said Marks. ‘The bona fide compromise is valid in the absence of notice that the solicitor has an entitlement.’

Haven, which has never admitted liability, argued that the Court of Appeal had placed the interests of solicitors above the interest of insurers and indeed the public interest.

Marks added: ‘The right of parties to settle disputes directly is a matter of individual freedom and the protocol should not be as a tool for preventing private settlements. All the evidence suggests the claimants were delighted to be able to settle their claims quickly.

‘[This arrangement] ceases to be an option available if the insurer is bound to pay the costs come what may. There is no reason why it should be made more complicated for the client dealing with the insurer to be told they have to go through solicitors because they are going to have to pay costs anyway.’ He added that Edmondson failed to protect itself by working on a funding arrangement that did not prevent direct settlements, and included no provision for costs if settlements were made.

Edmondson will set out its case today, with the Law Society intervening on behalf the law firm. The hearing continues.