Credit hire: the beginning

The credit hire industry developed from the 1980s onwards as a result of the simple fact that many innocent but impecunious victims of road traffic accidents, whose cars were damaged or destroyed found themselves inconvenienced and undercompensated.

The poorer echelons of society, use vehicles of modest value, insured on a third party only basis, which are nonetheless of immense value to them in their daily activities enabling them to travel easily and conveniently to work, and to enhance their own domestic and social lives.

If as a result of such an accident, the vehicle is rendered an economic write off or physically destroyed the motorist will usually be without savings or resources, to immediately replace it, or to hire a substitute vehicle.

Moreover although such a motorist, will have a good claim for “loss of use” in respect of the destroyed vehicle what the motorist will really want is a replacement of the vehicle he has lost.

Even if a motorist does have a comprehensive policy of motor insurance they may choose not to claim upon it, either to avoid affecting their own claims history or the loss of a “no claims bonus”, or because the benefits provided under the policy, such as a small courtesy car do not adequately mean their needs.

Insurance companies would prefer to pay modest damages for loss of use, rather than pay for a replacement vehicle because it is much cheaper for them. The litigation between credit hire companies and insurance companies is underpinned by the essential conflict between the credit hire companies who provide services to innocent victims of road traffic accidents and pass on their costs and profit to the insurance industry, and the insurance companies who would rather they did not and had no obligation in law to pay such claims.

Cases started to be fought through the courts from the 1980s onwards, as the insurance industry sought to stifle the credit hire industry at birth. One set of arguments which reached the then highest court, the House of Lords concerned whether the very existence of the credit hire companies and their role in supporting the prosecution of claims, was unlawful by reason of the principles of champerty and maintenance. This was the case of Giles.v.Thompson  [1994] 1 AC 142

It is interesting to note more than 20 years on, the counsel who appeared in this case: the then Stephen Stewart (now Mr Justice Stewart) being led by Brian Leveson QC (now Lord Justice Leveson).

This decision of the House of Lords repays careful consideration, not so much these days for the actual decision on the arguments of champerty and maintenance (the credit hire companies won) but because it set the scene for many of the arguments that followed.

Lord Mustill noted the following at pages 154 to 155 of the law report:

The question has arisen in this way. A substantial proportion of motor accidents take place in circumstances where there is little room for doubt that one party is exclusively to blame: typically, where the car of one driver (hereafter “the motorist”) is stationary, for example at a traffic light, and where a car driven by another person (“the defendant”) is carelessly driven into the back of it. There are two types of damages which may be awarded to the motorist in any resulting litigation. First, there are damages for any personal injury which the motorist may have suffered. These will usually comprise general damages for pain, suffering and loss of amenity, and special damages for past and future loss of earnings. Secondly, there are damages related to the loss of or damage to the motorists’s vehicle. These will or may have two elements: a figure representing the diminution in value of the motorist’s vehicle, and another figure representing the financial loss suffered by the motorist because he or she cannot use the vehicle whilst it is either being replaced (if written off) or undergoing repairs. In practice these various elements are dealt with in various ways. The damage to the car itself is settled between insurers, apart from the excess on the motorist’s policy, which he may not trouble to pursue except as an appendage to a larger claim. The motorist’s claims for personal injuries may be substantial in amount, and will be made the subject of an action, if the motorist can finance the action either from his own resources, or from some form of insurance, or (if he is of very limited means) by legal aid.

There remains the claim for loss of use of the car. In principle, if such a claim is made it will often be quantified by reference to the cost of hiring a substitute vehicle, and will be recoverable upon proof that the motorist needed a replacement car whilst his own was off the road. I say “if such a claim is made” for two reasons. First, because the loss of use is not recoverable under a comprehensive policy, so that there are no subrogated insurers to stand behind the claim, and in situations where there is no personal injury claim and where the damage to the motorist’s vehicle is dealt with as between insurers there are few motorists who will have the time, energy and resources to go to law solely to recover the cost of a substitute vehicle. Secondly, because there are many motorists who lack the inclination or the ready cash to hire a substitute on the chance of recovering reimbursement from the defendant’s insurers. Thus, there exists in practical terms a gap in the remedies available to the motorist, from which the errant driver, and hence his insurers, frequently profit.

It is hard to resist the conclusion, that Lord Mustill identified a very real social problem, in that there innocent motorists who were not being compensated for the true extent of the losses they were entitled to claim for a common law.

The role of the credit hire companies in addressing this problem was commented on by Lord Mustill at page 155

In recent years a number of commercial concerns (hereafter “the companies”) have identified this gap and have sought to fill it in a manner advantageous alike to motorists and to themselves, by offering to motorists with apparently solid claims against the other parties to collisions the opportunity to make use of the company’s cars whilst their own are off the road. The terms on which this opportunity is given are said to be, in broad outline, as follows. (1) The company makes a car available to the motorist whilst the damaged car is under repair. (2) The company pursues a claim against the defendant, at its own expense and employing solicitors of its choice, in the name of the motorist for loss of use of the motorist’s car. (3) The company makes a charge for the loan of the replacement car, which is reimbursed from that part of the damages recovered by the motorist from the defendant or his insurers which reflects the loss of use of the motorist’s car. (4) Until this happens the motorist is under no obligation to pay for the use of the replacement car. (5) These arrangements are conditional on the co-operation of the motorist in pursuing the claim and any resulting legal proceedings. (6) The companies aim to confine the scheme to cases where the motorist is very likely to succeed in establishing the defendant’s liability, without any contributory negligence on the part of the motorist.

He went on to note the response of the insurance industry:

Transactions on these general lines have been entered into in large numbers, to the discomfort of the defendants’ insurers, who have been faced with claims of which an element reflects the cost of a replacement vehicle which would not have been hired but for the existence of the scheme. The insurers have counter-attacked by alleging that the hiring agreements are champertous and accordingly unlawful, or otherwise contrary to public policy. Whilst no longer contending that actions which include an element of damages referable to the charges made, or said to be made, by the companies are an abuse of the process of the court, and should be therefore be struck out in their entirety, the insurers say that damages cannot be awarded for the hiring charges, since to do so would enable the motorist to rely on an unlawful contract.

Lord Mustill noted at page 165 that it was contended by the insurance industry that this would lead to inflated claims. He ruled against this proposition, by pointing out the “tools” that a shrewd and experienced insurance company could readily deploy to prevent inflated claims.

The other danger to the administration of justice, of which the defendants and their insurers urge the court to beware, is that the existence of the scheme will encourage motorists to hire cars which they do not really require, at inflated rates, which have to be paid for by the insurers. As to rates of hire, shrewd and experienced insurers will be well equipped with information about local tariffs for the hire of cars of the same type as the motorists’ damaged vehicles, with which they can expose any exaggeration. and as to the possibility that the scheme will encourage motorists to hire cars which they do not need, at the ultimate expense of the insurers, I am confident that resourceful lawyers are well able to press by interlocutory measures for a candid exposure of the motorist’s true requirements, and, if all else fails, to fight the issue at an oral hearing, as happened in the present case. If the motorists are found to have been tempted by the hire companies into the unnecessary hiring of substitute vehicles, the claims will fail pro tanto, with consequent orders for costs which will impose a healthy discipline upon the companies.In these circumstances I find the perils to the proper administration of justice much exaggerated.

Finally at page 167 he noted that in order for a claim for credit hire charges to be made at all, it had to be demonstrated that there was a need for a replacement vehicle.

Whilst I have sympathy with this point of view I think it too broad. The need for a replacement car is not self-proving. The motorist may have been in hospital through the accident for longer than his vehicle was off the road; or he may have been planning to go abroad for a holiday leaving his car behind; and so on. Thus, although I agree with the judgments in the Court of Appeal that it is not hard to infer that a motorist who incurs the considerable expense of running a private car does so because he has a need for it, and consequently has a need to replace it if, as the result of a wrongful act, it is put out of commission, there remains ample scope for the defendant in an individual case to displace the inference which might otherwise arise.

In 2016, this passage along with later comments in more recent appeal decisions often forms the starting point for submissions, on the three essential variables of a claim for credit hire: need, rate and duration.

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