Raise the Titanic!

If the Liesbosch lies at “full fathom five” and is beyond salvage, the question may be posed whither impecuniosity? In particular how might the yawing anomaly be addressed, that damages are awarded for the “market cost” of hiring a replacement car, but that market is not a market at all in any real sense, nor subject to the force of competition and market pressures that act as a de facto check on levels of damages?

I would suggest that if some further fundamental alteration were to be made to what are now settled common law principles of the assessment of damages, it will require statutory intervention. The Civil Liability Act 2018 is now on the statute books, and is meant to come into force next year. The effective abolition of whiplash claims has had a particularly tortuous progress onto the statute books, and the initial legislation was lost, due to the 2017 election intervening with the dissolution of parliament. But at anterior point the government published a consultation document which can be found here:

Reforming the soft tissue injury (‘whiplash’) Claims Process

This document (although largely to with whiplash as the title suggests) flew various kites on other ways in which the measure of damages might be reformed. The government never published a response to the views it had sought consultation on, and the Civil Liability Act 2018 concentrated on whiplash and discount rate reform. The document is now nearly 3 years old, but offers an interesting insight into the way things could go, if a renewed Conservative government post Brexit, decides to pick up unfinished business.

123.This consultation document seeks views on the detail of a number of reforms affecting PI cases as set out above. However, it is also an opportunity to seek stakeholder views on a number of further areas of interest to the government. These are:
i. Credit Hire;
ii. Early Notification of Claims;
iii. Rehabilitation;
iv. Recoverability of disbursements; and
v. Introducing a Barème type system.

124.The government is not minded to undertake reform immediately in these areas but will reflect carefully on responses to this consultation and decide how best to proceed. We would be very interested in views and supporting evidence from stakeholders.

i. Credit Hire
125.As this document has made clear, the government’s new reform programme is about more than tackling fraud – it is also aimed at dealing with the costs arising from minor claims and addressing the wider compensation culture. Credit hire affects insurers, credit hire organisations and claimants, and, like RTA soft tissue injury claims, the costs associated with credit hire affect all motorists through increased insurance premiums. The government has therefore decided to look again at the issues around
credit hire.

126.There have been a number of previous studies and inquiries into this sector by the then Office of Fair Trading, which ultimately resulted in a full market investigation, report and recommendations by the Competition and Markets Authority (CMA). Despite the work done by the CMA, we believe that more can and should be done, and that it would be helpful to use this consultation paper to seek further views on potential remedies to the problems found in this sector.

Pausing there, the question might be posed: what problems? The CMA actually listened to the responses put into its own investigation and noted the marginal effect that credit hire claims have on insurance premiums and the claims process. No further action was judged necessary.

127.Under Section 145(3)(a) of the Road Traffic Act 1988, following a RTA in Great Britain, the insurer of the driver who is at-fault for the accident is responsible for the costs of reinstating the non-fault driver to the position they were in before the accident. If the accident results in the non-fault driver’s vehicle being temporarily unavailable due to repairs, the at-fault driver is also responsible for compensating the non-fault driver for the temporary loss of use of their vehicle. Accordingly, it is within the non-fault driver’s rights to recover the reasonable costs of car hire, as long as the need for a Temporary Replacement Vehicle (TRV) can be established.

128.Non-fault drivers should typically be provided with replacement vehicles that are equivalent to their own vehicle for a duration that is considered necessary. Arrangements for repairs and the provision of a replacement car are usually made by the non-fault party’s insurer who may refer the claim to a Claims Management Company (CMC) or a Credit Hire Company (CHC).

129.However, the CMA found that as a consequence of tort law, cost liability lies with the at-fault party in an accident whereas cost control lies with the non-fault party, leading to a separation of cost liability and cost control. Further, the party paying for the service is not the party receiving the benefits and therefore does not face ordinary budget constraints, which can lead to additional costs. This is because the at-fault party has no right to choose the provider of services for the non-fault driver or to specify the terms of services and consequently cannot control the cost.

130.Accordingly, there is a real issue in that there is no incentive for the non-fault insurer or a credit hire company to keep costs low since costs are largely paid by the at-fault insurer. This has led to inflated charges and hire periods and has contributed to the rise in overall insurance premiums of between £3 and £10 per policy. If this issue is not tackled now, there is potential for these charges to escalate, resulting in insurance premiums rising further.

£3 to £10 a policy, does not exactly scream that there is a problem here that is significant.

131.The government is interested in the views of respondents to this consultation on a number of options to control costs within the credit hire market. These are:

a) First Party Model – under the first party model, the provision of a TRV would be provided by the policy holder’s own insurer, regardless of who is at fault for the accident. The policy holder would therefore be required to use their own insurance cover. Such a change would require primary legislation and would remove the separation of cost control and cost liability. In addition, the CMA noted that such a model may result in increased premium costs in the future to cover the routine use of the policy, although price competition between insurers may mitigate this risk.

b) Regulatory Model – a regulatory model would involve the introduction of formal regulation of TRV providers. It would provide effective controls for the behaviours which cause frictional costs (i.e. direct and indirect costs associated with financial transactions); permit the capping of rates for TRV provision; and enable a ban on referral fees for TRV claims to be introduced. Many argue that regulation is the minimum solution required to help tackle the problem of credit hire as it would provide the right level of power to control costs. This model would introduce objectivity into the process but it would take time to prepare the necessary primary and secondary legislation.

c) Industry Code of Conduct – the industry owned code of conduct would be reinforced to set out values, ethics, objectives and responsibilities for the sector. ‘The code’ could build on action already taken by the industry e.g. the ABI’s General Terms of Agreement (GTA). The code would allow businesses to regulate themselves and each other through the establishment of clearly defined and agreed guidance for interactions that can be used alongside the industry’s own ethical guidelines. The government believes that if such an approach is taken the core principles to be embedded into the code would include elements based on behaviour, honesty, impartiality and reporting. This may help to cut costs, for example it could help to ensure that non-fault drivers only use a TRV for as long as they need one rather than using a TRV that is substantially beyond their requirements for a longer period of time. This model may allow the at-fault insurer to challenge the non-fault insurer’s costs to make sure the final cost is reasonable and justified. This would need cross industry support if taken forward, and the government would need to continue to monitor adherence to the code, with a view to further action if required.

d) Competitive Offer Model – this model would allow the at-fault insurer in effect to get their own quote, which could be used to challenge the cost of the TRV from the non-fault insurer. This would help to keep costs at a minimum by reducing the period in which the non-fault driver’s vehicle is off the road and could also give the at-fault insurer the opportunity to provide a suitable replacement vehicle at a more competitive cost than under current credit hire terms. However, there may be issues around the time it would take for at-fault insurers to turn this around, especially since credit hire claims are time sensitive. There are also questions around how much the non-fault claimant would have to be involved in the process which may lead to unnecessary stress and could result in poor customer satisfaction.

132.Another area in which the CMA identified the scope for further action was in educating consumers about the cost of dealing with credit hire claims, price comparison and a general improvement in the way information is communicated. This could help to make sure that claimants better understand their legal rights and would increase the level of transparency that is needed in this area, particularly in relation to fixed costs for groups of vehicles and length of hires. A second point relates to the transparency of credit hire agreements themselves, with many consumers unaware of the terms and conditions of the agreement they have signed. This can lead to the situation where a driver who was not at fault in an accident is unexpectedly held liable for paying a large bill for the period of credit hire.

In point of fact, the insurance industry could already take steps to deal with credit hire claims without the need for further legislation: free-at-the point of delivery hire with a like for like replacement and swift provision of £2000 interim payments within 2 weeks of report of an accident, as part of an invigorated intervention strategy, would dramatically curtail both the number and amount of credit hire claims. But at the current time, there seems little likelihood of this happening.

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