UK insurance premiums are being forced up by the personal injury claims companies which encourage people into litigation, say leading insurers.

Amid growing concerns about the booming personal injury market, consumer groups warn that some claims firms charge excessive insurance premiums to people who win settlements.

The personal injuries market has taken off quickly since deregulation two years ago, with high-profile companies such as Claims Direct, the Accident Group and National Accident Helpline leading the way.

All three companies advertise regularly, urging viewers to seek compensation on a 'no win, no fee' basis if they have been involved in an accident. A recent advert from National Accident Helpline said: 'Keith Early was knocked from his bike and suffered a broken ankle which meant he was off work for three months. National Accident Helpline helped him secure £6,000 compensation.'

However, the companies' adverts do not fully explain how 'no win, no fee' works. Accident victims who contact a personal injuries lawsuit specialist first have their claims checked. Once accepted, the victims have to take out an insurance policy to cover the cost of legal fees.

Only people who actually win compensation have to pay for the policies, but they often find the premiums excessive. Claims Direct charges about £1,500, the Accident Group demands closer to £900, while Accident Line charges from £300 to £3,000, depending on the size of the claim.

In some cases, almost all the compensation is swallowed up by the premiums.

Accident Line is one of the few firms that tiers its insurance policy charges rather than levying a flat fee, and it is also the only personal injury claim firm endorsed by the Law Society, the professional body for solicitors in England and Wales.

A society spokeswoman says: 'Lots of firms offer "no win, no fee" deals, but Accident Line is the only one that actually puts people in touch with a solicitor. The others have someone inhouse who deals with a claim. We advise members of the public to get advice from a solicitor and cut out the middle men.'

Once a claims firm has established how an accident happened, its first step is to identify the person or company potentially liable. This may be a car driver or an employer, but those being sued would typically expect their insurers to pay up. For this reason, the numbers being encouraged to sue is worrying many insurers.

Malcolm Tarling, spokesman for the Association of British Insurers, warns: 'The increase in personal injury claims is a concern. It is contributing to increased premium rates, particularly for car insurance.'

Duncan Bowker of Co-operative Insurance Services agrees: 'It is definitely a contributory factors to increases in motor premiums.

'When insurers adjust their premium rates, they look at claim frequency and the amounts they are paying out. We are experiencing far greater numbers of third-party injury claims, so we have to raise premiums.'

Though some victims do win substantial payments, personal injury claim specialists are effectively profiting at the expense of insurers and their policyholders.

'The money doesn't come from a bottomless pit,' says Tarling. 'Ultimately, a premium increase is the price that has to be paid.'

Bower warns: 'We are fast approaching the US situation, where a claim is made if someone stubs their toe. There will come a point when nobody is winning.'

The exception is the personal injury specialists themselves. With the Accident Group planning a stock market flotation, the sector is clearly booming.

• This article is from the July issue of our sister magazine, 'Money Observer', which is on sale at newsagents, price £3.50. For 12 issues at £31.97, a £10 saving, call 0870 870 1324 and quote reference MYGH001.