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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.

Claims Process

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.

Commentary

Have the stated aims of removing the separation of cost and control, and the reduction of frictional costs been achieved with these proposals? Possibly not given that the rate cap only addresses the issue of rates, with the CMA hoping that other areas of friction may reduce given that the rates themselves would be reduced.

Much of the litigation we see relates to the period of hire e.g. 30 day hires for vehicles that remain driveable with an estimated repair period of a couple of days, or where the CHO has failed to take steps such as complying properly with the GTA obligation to monitor repairs or giving instructions to the garage or engineer in a timely fashion. If they fail to take these steps now, why would that change under the new regime? The report acknowledges that “some incentive to prolong hire might remain”, and therefore the frictional cost to the Insurer may still be there, as there will still be a need to monitor the hire period.

The proposed mitigation statement is open to abuse (as it is now), depending on the way questions are asked. CHOs will replace a BMW with a BMW citing like for like. If the claimant is asked what vehicle they require, most claimants will be reasonable, and a 4 door saloon is likely to meet their needs, whether it is a BMW or not. The suggested questionnaire assumes like for like will be reasonable, the question remains as to what is like for like? There appears to be no suggestion that the GTA guidelines in respect of the provision of sport or prestige vehicles when the damaged vehicle is over 6 years old is to be the exception to the rule. There was already widespread abuse of this guideline under the GTA. DWF defended one case where a £250k Bentley replaced a 20 year old Bentley, worth £4k. Will this practice change under the new regime?

The insurer will still be permitted to challenge these points, and in doing so the frictional costs may remain the same. Straightforward hires of reasonable vehicles for reasonable periods have never been the issue, in that respect the GTA was largely successful. While the proposals will be seen as very welcome by the industry, they do not when taken together in our view spell the end of disputes over lengthy hire periods, such as the one that was subject to the scrutiny of the Court of Appeal in Umerji v Zurich.

The absence of a credit hire portal may be an issue. There have always been concerns about CHOs by mistake or otherwise sending payment packs to the wrong address. When would the 3 day timescale start to run? The existence of a portal would have removed that frictional element as it has largely done with the MoJ RTA Portal.

Taxis, motorbikes (and pushbikes) and fleet vehicles remain an area of contention not covered by the proposals. Whilst the CMA express the view that the recommendations could be extended to cover these claims (which form about 25% of CHO turnover according to the figures in the report), we have to question the incentive on the part of the CHOs who specialise in those markets to want to cap their rates, which are substantially in excess of the rates for a standard car.

The report acknowledges that there will still be benefits to insurers in capturing claimants and therefore removing the separation of cost and control in those cases, and that process may in fact be beneficial to the claimant as well. On that basis it appears that if the recommendations were introduced in their current format, there will still be a race to the claimant, as there is now.

Next steps

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

Contact

For further details please contact Gavin Perry, Partner on 0151 907 3493.

By Gavin Perry

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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.

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