Car insurance and the little-known world of credit hire companies

When another driver hit Jane Ashdown’s car she was given a temporary replacement vehicle with gratifying speed. The reason for this alacrity became clear when she discovered that the company which organised the three-and-a-half week rental was demanding £4,216 from the third-party insurer.

Now Ashdown* has been drawn into a legal action involving the insurer of the car she was hit by and the company which arranged her hire car. The insurer refused to pay and to Ashdown’s horror, hire company Claimfast is taking it to court in her name to recover the money. The case shines a light on the poorly understood area of credit hire companies (CHCs) which have caused controversy within the insurance industry.

CHCs emerged in the 1980s and pay insurers and brokers large referral fees to manage no-fault claims. Their profits are made from arranging repairs and replacement cars at often greatly inflated cost, then demanding the money from the third-party insurer.

“My insurer, the AA, put me in touch with Claimfast, saying if I went direct with the insurance company I might lose my no-claims bonus,” says Ashdown, from Crowborough in East Sussex.

“I agreed to what I thought would be going to court to state the facts of the incident if the third-party insurer didn’t pay up. It never crossed my mind that I would have to be the claimant. Now I’ve received a letter from their [Claimfast’s] lawyers asking me to sign a huge legal document and stating I may be liable for legal costs. I’m worried that if we lose I will have to pay the hire charge too.”

When the CHC makes a claim the driver could be held liable for the costs if they were found to be at fault in the accident or if the third-party insurer refuses to pay, since the contract, and therefore the bills, are in the driver’s name.

The CHCs insist that they are filling a vital gap by looking after no-fault accident victims when, previously, insurers often failed to fulfil their legal obligations. Insurers, who may face bills more than double the cost of a high-street car rental, claim CHCs have created a dysfunctional market which leads to expensive litigation and higher premiums for customers.

Ashdown found it would have cost £800 to hire the same vehicle from the same local rental company, instead of the £4,216 Claimfast is charging.

“They often hire posher cars for a longer period than necessary to maximise their income. It’s an abuse of the system,” says Rob Cummings, manager of general insurance at the Association of British Insurers (ABI).

A two-year investigation by the Competition and Markets Authority (CMA) in 2014 concluded that the hiring of courtesy cars via CHCs costs consumers an extra £84m in increased premiums and distorts the market.

The investigation began with plans to regulate how insurers set about putting drivers back on the road after accidents, addressing the role of expensive middlemen such as brokers and claims management companies and tackling the soaring costs of credit hire. However, its ambitions have since shrunk steadily. Despite identifying “significant consumer detriment”, it decided it could not provide an “effective and proportionate remedy” to address the problems and abandoned all its suggested solutions, leaving it to the insurers and CHCs to sort it out among themselves.

“We found that a fully effective solution to the problem would require a fundamental change to the law, and we questioned whether the scale of the problem justified such a fundamental change,’ says a CMA spokesman.

“The fact the insurer of the at-fault party in an accident pays for the hire car provided to the non-fault party but has no control over what is provided (so long as it is reasonable) or who provides it creates incentives which are counter-productive overall. But to get the business in the first place CHCs pay non-fault insurers huge referral fees. Most of the money therefore passes round the circle.”

The CMA admitted that its own inability to find a solution was deeply unsatisfactory, but the Credit Hire Organisation, the trade body for CHCs, hailed its inaction as a “victory for consumers”.

“We think the report was stitched up,” says CHO director general Martin Andrews. “The ABI has spent years trying to convince people that CHCs are the devil incarnate, but they exist solely because insurers would rather not have courtesy cars provided as it involves a cost they don’t want to pay.”

Non-fault drivers are allowed to claim sufficient costs to put them back in the position they were in before an accident, meaning drivers whose cars are damaged are entitled to a temporary vehicle. According to Andrews, insurers used to be reluctant to tell customers this: “There’s nothing to stop insurers providing the cars themselves. Most choose not to. We keep them honest because we tell customers what they are entitled to.”

The ABI says insurers rarely get the chance to hire cars directly since the brokers who tend to deal with their customers refer their cases on to CHCs before the insurer gets a look in.

Many insurers and CHCs subscribe to a voluntary agreement which sets out the maximum daily hire rates that can be charged for replacement vehicles including administration and late payment fees. Nonetheless, the CMA found that at-fault insurers end up paying an average of £607 extra for vehicle hire arranged through CHC’s than through direct hire, a cost ultimately passed on to policyholders through higher premiums. “We’re not a charity,” says Andrews. “We’re in this to make money, but profits are less than 5% per rental.”

In Ashdown’s case, Claimfast says that its charges include a late payment fee. “The costs do appear higher than simply finding a car online, but this is because it is not a like-for-like comparison,’ says a spokesman. “For example, the car is provided with no policy excess, which can be over £1,000 for a hire car, and with a nominal deposit of just £1. The hire charge also includes the cost of arranging delivery and collection of vehicles, and dealing with the insurer.”

The company says there is no question of Ashdown being charged legal fees or having to foot the hire bill if the court case fails: “Because the car hire documentation was in Ms Ashdown’s name she would have been named as the claimant if we were then forced to take the third party insurer to court. Unfortunately this is unavoidable, but it is very rare that an individual will be asked to attend court in such a case.”

The ABI is calling for referral fees to be banned and hire charges capped to keep costs down and avoid expensive litigation, but the CMA is in no hurry to oblige. Having declared it has no powers to do either it says it will not commit to another investigation, although if matters got worse it might take another look and “possibly reconsider some of the remedies which we have decided not to pursue”.

Until such time, motorists should take care. If, after an accident, you find a luxury car suddenly at your disposal, make sure you know who is providing it. If it is a CHC rather than your insurer, scrutinise the small print. You could be entering into a credit agreement which, unless the CHC has indemnified you, could cost you thousands should the third-party insurer balk at the charges.

* Not her real name