The government is to ban referral fees in personal injury cases.
Justice Minister Jonathan Djanogly says the current system encourages a compensation culture that rewards the "middle men" with a "tidy profit" but leaves the rest of the public paying for these costs.
The Ministry of Justice (MoJ) wants to put a stop to the 'no-win, no-fee' claims culture, which sees lawyers, claims management companies and insurers charge each other referral fees. These costs are then passed on to consumers in the form of higher insurance premiums and taxes.
"Honest motorists are seeing their premiums hiked up as insurance companies cover the increasing costs of more and more compensation claims," says Djanogly.
"Many of the claims are spurious and only happen because the current system allows too many people to profit from minor accidents and incidents."
Djanogly's comments come after news that the Office of Fair Trading is investigating the rising cost of motor insurance. Annual comprehensive car cover has reportedly increased in price by 40% for the year ending 31 March 2011.
The MoJ has also proposed to parliament that legal fees, incurred by compensation court cases, should be shared between the claimant and the defendant.
Under the current system, defendants have to pay uncapped expenses, known as a 'success fee'. New proposals from the MoJ would see claimants having to pay this fee instead - although at a capped level.
This law change should result in "a fairer split of costs between parties" and a lower legal bill overall, according to Djanogly. He says: "We have proposals before parliament to end the bizarre situation in which people have no stake in the legal costs their cases bring.
"This will make claimants think harder about whether to sue and give insurance companies and business generally an incentive to pass the savings onto customers through lower prices."
The law change and proposals come following a MoJ consultation published in November 2010 and the Association of British Insurers summer report on the compensation system, which revealed the number of personal injury claims has increased by 72% between 2002 and 2010.
For more on the effects of Britain's compensation culture, read: Compensation culture is driving up your insurance premiums.