The CMA sets out its proposals
Back in December last year the Competition Commission published its provisional findings, following its investigation into the private motor insurance market. Since that time the CC has received responses to its provisional findings and to its proposed remedies. Hearings have also taken place and in the meantime the CC has also been absorbed into the Competition and Markets Authority. Following that period of activity and in accordance with the timetable for completing its investigation the CMA has now published its provisional decision on remedies.
In December, the CC identified that the separation between costs liability and costs control was leading to the party managing the claim to focus on generating revenues with little or no regard for the cost. The CC suggested a number of proposed remedies, some of which were controversial, some less so.
The CC had suggested seven ways to address the separation of cost liability and control, including the introduction of compulsory first party insurance for replacement vehicles and a prohibition on referral fees. Of the seven remedies put forward, it appears that the CMA is proposing to only introduce two of those measures:
A measure to control the cost of providing replacement vehicles to non-fault claimants; and
Improved mitigation in relation to the provision of replacement vehicles to non-fault claimants.
In an effort to drive down hire costs in fault accident claims, the CMA is proposing to introduce a cap on the cost of non-fault replacement vehicles and to improve efficiencies in the hire claims process. It intends that this is done by:
The introduction and application of a “dual rate price cap”, with a low rate cap based on average direct hire daily rates plus fixed replacement vehicle arrangement costs, and a high rate cap calculated as a multiple of the low rate cap. The rate cap would be indexed to a publicly available index; and
A prohibition of financial inducements from replacement vehicle providers, where those inducements encourage claimants to take a hire vehicle at rates above the rate cap; and
Insurers telling claimants promptly if they are not at fault; and
Hire duration to end 24 hours after completion of the repair or seven days after the submission of the total loss payment.
In tandem with those measures, the CMA then proposes that mitigation can be improved by:
The completion of mitigation declaration statements by first notification of loss (FNOL) providers and countersigned by non-fault claimants upon receipt of a replacement vehicle.
An introduction of requirements on replacement vehicle providers, to monitor the hire and payment arrangements.
The introduction of a rate cap will be the headline grabber here, as it appears to effectively signal the end to the rates prescribed by the Guaranteed Terms of Agreement (GTA). The cap will apply irrespective of who is supplying the vehicle to the claimant. The level of the rate cap is something to be determined by the CMA and it will do so having regard to the evidence that it has already received and the responses to the consultation process that has now begun.
How will the rate caps operate?
If an at-fault insurer accepts liability within a “short period of time” (the CMA propose three days from notification that a replacement vehicle is being provided) then the low rate cap will apply. The caveat here is that the at-fault insurer will be committed to meet the cost of the replacement vehicle at the low rate cap irrespective of any subsequent change to the decision on liability. If fault is not accepted in the “short period of time” from notification that a hire vehicle is being used, the high rate cap will apply, which will be twice the low rate cap. In the event then that the claim is determined to be a fault accident, the insurer will have to pay the hire charges at the high rate cap.
Interestingly, if the at-fault insurer choses to withdraw its acceptance of liability, then the insurer will be liable to meet the hire charges up to that point at the low rate cap, and it will only be in relation to the remainder of the hire charges incurred after the withdrawal of the admission that liability will arise at the high rate cap. The decision on liability would not be binding on any other head of claim.
The GTA lives on
In the past, insurers have expressed frustration at the failure of some claimants to end hire, once repairs have been completed or total loss cheques dispatched. The CMA has concluded that the current GTA framework for tying replacement vehicle hire to repair duration provides the right measure for limiting hire periods. It proposes to limit hire duration to 24 hours after completion of repairs, or seven days after submission of total loss payments. This does not mean that the claimant cannot make use of a hire vehicle after the expiry of those time periods; rather the cost of doing so will not fall to the at-fault insurer.
The CMA has also looked to the GTA in respect of mitigation declaration statements. The proposal is for the replacement vehicle provider to complete a mitigation declaration prior to providing a replacement vehicle which the CMA sees as more effective way of ensuring that the legal duty to mitigate is met. The CMA’s draft mitigation declaration can be found at Appendix 2.3 to the provisional decision on remedies.
Perhaps surprisingly, the CMA has found much that it likes in the GTA generally and it intends to apply many features of the GTA which it sees as helpful, such as the “first to customer” principle, the need to perform a number of monitoring checks during the hire period itself, and the late payment principle.
The CMA have also made clear that, whilst their investigation only relates to the private insurance market, there is no reason why its proposals to address the failure of the claims process in this area could not be extended to other sectors, for example taxis and private hire vehicles.
No ban on referral fees and no Credit Hire Portal
The report assumes that because the rates of hire will be capped, the ability to pay referral fees will be reduced as there will be no money left out of which to pay a referral fee, and there is no proposal as an alternative to bring forwards a ban.
Whilst a credit hire portal was thought to be a good idea, it was something that credit hire organisations and insurers could implement by agreement between themselves, and was not therefore something that needed to form a recommendation of the report.
The CMA has invited interesting parties to respond to the provisional decision on remedies and the additional working papers by 4 July. There is much to consider here and we would be happy to assist where we can with your response. We will also be responding to the consultation. We would encourage you to get in contact with us directly, or follow the story on our dedicated insurance law website In Touch
For further details please contact Gavin Perry, Partner on 0151 907 3493.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.