Credit hire organisations and insurers are blaming each other for the cost of credit hire. With the Office of Fair Trading conducting a review, will anyone emerge victorious?
When the government launched its inquiry into the rising cost of motor insurance early last year, it focused on the impact of personal injury claims and fraud. However, while it identified these issues as major factors, the impact of credit hire went largely unnoted.
That was until November when, after more than a year of legal wrangling, the Court of Appeal found in favour of defendant and Premier League footballer Darren Bent in the spot rate case of Bent v Highways & Utilities Construction.
A month later, the Office of Fair Trading announced a review into the credit hire industry, concerned that companies were more interested in “competing to extract money from each other” than providing car owners with the best value.
While these two events have forced credit hire further into the spotlight, it is not the first time credit hire has been called into question. The OFT conducted a study into the Association of British Insurers’ General Terms of Agreement in 2004.
It concluded the agreement was beneficial to consumers and satisfied the requirements for an exemption under competition law provided certain conditions were met. Credit hire organisations lived to fight another day and, since then, have had mixed fortunes. For instance, Helphire is among those that have suffered the most, with its share price falling from £4.48 as recently as March 2007 to £0.02 earlier this week.
News that the OFT is to conduct another credit hire review has left some organisations questioning whether the latest study will find anything new.
Steve Evans, chief executive of CHO Accident Exchange, predicts the OFT will draw the same conclusions it did eight years ago. He says: “It will find credit hire acts in the best interests of the consumer as it did some years ago.
“Many of the draft questions in the study are about how much business credit hire firms get from each insurer and what commissions they pay. There may be new guidelines on how much money changes hands between insurers and credit hire firms by way of commissions.”
As part of its investigation, the OFT will examine the role referral fees play in credit hire costs. It claims rival private motor insurers, brokers and credit hire providers are guilty of carrying out practices that generate revenue through referral fees and create inflated costs that will ultimately be met by the public.
Chris Shaw, commercial director at AI Claims, a claims management company that aims to provide an alternative approach to processing third-party credit hire claims, suggests the OFT’s findings may be similar to the 2004 review but hopes it will find that commissions make up a large bulk of credit hire costs.
“A credit hire claim may cost £800 but almost half of the cost is the commission paid back to the insurer as a referral fee,” he explains. “Credit hire firms are making £40 per hire and our current business margin is less than 5%. It is the brokers and third-party insurers that are getting commissions out of this.”
There are fears the investigation could lead to a ban on CHO referral fees, disadvantaging the consumer.
Martin Andrews, director general of the Credit Hire Organisation, explains: “I am concerned the insurance industry has had years of lobbying and misrepresented the credit hire industry, which has, understandably but wrongly, caused people to draw false conclusions.
“There is a trend of making it harder for people to make claims. It is wrong for credit hire to be linked to the personal injury market place. The government is in the process of banning referral fees on personal injury claims but the only money credit hire firms receive is the basic hire rates from the daily charge.
He adds: “If there is a correlation between personal injury and credit hire, and if the government legislates against the payment of referral fees for anything to do with motor insurance, the loser will be the consumer. Credit hire firms will receive less volume and some will go out of business. Insurers will offer less intervention and there would be less choice for the consumer.”
Credit hire firms also bemoan the fact they are criticised for charging insurers excessive spot hire rates. This came to a head when Accident Exchange lodged four appeals in the Court of Appeal on first-party cases where it found its credit hire bills had been reduced. The appeals were granted last month.
Exposing inflated costs
Andrew Dismore, former MP and leader of the Access to Justice Action Group, says it is impossible to predict the outcome of the OFT investigation although he believes it could expose inflated credit hire costs.
AJAG research into credit hire in September last year found that credit hire rates charged under the GTA were disproportionately higher than commercial market rates. To hire a small family car under the GTA would cost £254.35, while the same car using rental firm Budget would cost only £88.31. To hire a large family car under the GTA would cost £521.29, while using Enterprise it would amount to £277.20.
Dismore says: “The going rate is supposed to be the GTA rate but this seems to be higher than what is available on the open market and is leading to increased premiums. It is anti-competitive and resembles a cartel.”
Robin Reames, chief claims officer at Axa Personal Lines is hopeful the OFT will find insurers are at the mercy of crippling credit hire costs.
“The average credit hire invoice being presented is £1500, more than three times higher than if an insurer sourced a like-for-like vehicle on the rental market. Clearly, there is too much money being made by CHOs. Inevitably an insurer is going to challenge those costs for hire and credit repair.”
He continues: “If credit hire firms did not have to pay a referral fee but became traditional car hire suppliers a lot of cost could be reduced. The GTA still does not resolve the problem as the charges allowed within the GTA are higher to allow for the ‘services’ of the CHO. Remove the referral and the costs will come down.”
Tony Newman, claims controller at Allianz believes credit hire is just one symptom of the referral fee process, as commission is paid to various other organisations in the motor insurance industry.
He says: “Whether paid by credit hire operators, credit repairers, medical agencies or solicitors, they have quite simply served to fuel a claims industry that has driven a compensation culture, which insurers cannot afford unless there is a commensurate increase in premiums.”
Evans claims credit hire costs pale in significance to insurer outgoings, making spot rates less of a factor in the rising cost of motor insurance. “In the past five years, three million claims have been settled by the GTA. Credit hire has not led to higher premiums,” he adds.
Evans is even less convinced the OFT study will encourage insurers to take greater control of vehicle repairs for consumers. “It’s all about economics,” he adds. “The majority of motor insurance policies do not provide the same protection as the common law.
“People need to stay mobile. For insurers to provide that mobility, they will have to beef up their policies. If insurers did this, prices would rocket and consumers would be worse off. Only 15% of policyholders will ever have an accident. The majority would pay a higher price for something they don’t need. Consumers wouldn’t want to do this.”
Pointing to the benefits of credit hire, Shaw says: “Insurers would love to take greater control but policyholders don’t have to pay policy excesses on credit hire repair services.”
However, Andrews says insurers are already beginning to take greater control in order to reduce costs and avoid credit hire rates by resorting to “intervention pricing”.
This involves the insurer of the at-fault customer contacting the non-fault customer offering a replacement vehicle at a rate agreed between the insurer and the vehicle rental company, he explains.
“The insurer intervenes because there is a bilateral agreement in place with a vehicle rental provider as opposed to the claimant obtaining a credit hire car at a higher day rate. This creates the certainty of a bill at a vastly reduced day rate.
“When insurers say they can control costs better than credit hire firms they are correct but credit hire companies are receiving a rate legitimately recoverable under tort law.”
He continues: “However, if credit hire companies did not exist insurers would not phone the non-fault parties offering a solution. Insurers only do it because they don’t want to end up with a credit hire bill.
“If insurance companies cared they would offer a standard mobility solution in the policy terms. They don’t because the costs would be substantial and there would not be enough cars to fulfil the rental demand.”
However, some insurers have complained they face serious competition when attempting to provide their own replacement vehicle services.
Newman explains: “Insurers offer replacement vehicles and quality assured repairs to their customers and innocent third parties at preferential rates enabling them to control claims spend and premium rates. Demand is low due to the incentives offered by CHOs, remove those and take up will increase, enabling insurers to control cost which will benefit the customer.”
A Bent precedent
Regardless of if the OFT study sets a precedent, the Bent case has. The Aston Villa striker was involved in an accident in 2007, in which his £72 000 Mercedes was damaged.
Accident Exchange hired an Aston Martin DB9 for the player for 94 days. Insurer Allianz challenged the period of hire, rate and the need for hire. But two Court of Appeal battles later, the courts ruled in favour Bent and the CHO.
Evans is in no doubt the Bent case influenced the legal landscape of spot rates: “Before the decision the lack of clarity and variety of responses being handled was amazing. Now we have a consistent response.”
He states it would have been unfair to deny Bent the same credit hire protection as less well-paid car owners.
“Bent has the same rights as everybody else. We can’t impose a moral safeguard and say because he is a professional footballer he has to pay. Where do you draw the line? When is someone earning enough to pay for a hire car themselves?
“Common law states that if someone has committed a wrong, they have a duty to rectify it. Even if Bent is a footballer driving an Aston Martin he still has the same protection as anybody else under law.”
Sarah Cartlidge, associate at BLM and head of the motor (credit hire) sector focus team for the Forum of Insurance Lawyers, was counsel with Val Jones for the defendants in the spot rates case of Bent.
She says the Bent case marked the first time judges were given clear guidelines on how to examine rate evidence. “Before the Bent case, how judges dealt with rate evidence was a grey area. The first Court of Appeal cases stated that judges could not always expect specific evidence from an exact time and vehicle.
“The latter Court of Appeal decision clarified that courts should handle assessments of rate evidence objectively.”
But she warns against assuming credit hire firms have greater power than insurers as a result of the spot rates case: “There is a risk that, because Bent’s CHO recovered a large amount of money, people will think the power has shifted.
“But really they reinforce that credit hire is a justified industry and credit hire must be looked at from the customer’s point of view. They are the innocent victims that have lost the use of their vehicles. Credit hire is one way to compensate them.”
Shaw concludes: “Credit hire firms have never been in a better position in the legal landscape. The Bent case demonstrates this — but insurance companies are the all-powerful organisations in this sector. They pay our wages. The Bent case is not an opportunity for CHOs to ruffle the feathers of insurers. We are a flea on the back of a very large dog when it comes to getting paid.”
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