Controlling Credit Hire costs - the secret to cheaper Fleet Insurance

What Is Credit Hire?
Credit hire is where an innocent party to a motor claim is placed in a replacement vehicle, free of charge to that individual. The hire company then invoices the ‘at fault’ insurers directly.

Hire Claims – Why are they so expensive?

Hire claims are regulated by a contract between Credit Hire companies and Insurers called the ABI General Terms Of Agreement. (GTA).

The GTA bands vehicles into groups with standard hire rates  eg:
- Group S1 (1 litre or less) = £31.46 + VAT per day
- Group SP2 (eg mini cooper 1.6) = £78.29 + VAT per day
- Prestige vehicles BMW, Audi & Mercedes are over £100 per day.
- Don’t hit an Aston as these are £600 / day!
- If you are interested can see the agreed costs here.
- Under the GTA the motorist is permitted to hire a like for like vehicle.
- Only if  the hirer’s vehicle is older, they are expected to downgrade at least 2 classes
- It has been established that , if offered, most people would agree to a slightly smaller vehicle as long as they are kept mobile.

What can we do about it?
If we get the claim form immediately we can intervene before a third party is placed in credit hire. Once they are in a credit hire vehicle we are not permitted to take them out due to the GTA rules.

By controlling the hire for the third party...
- We can keep a much closer control over the hire period,
- We can probably put the third party in a smaller car than they would get through a credit hire company.
-  We won’t be liable to pay admin fees

Additionally The GTA sets out specific obligations controlling hire times
• Inspection must take place within 48 hours of hire starting,
• The vehicle must be off hired no later than 48 hours repairs are completed
• Once a total loss cheque is received the vehicle must be off hired in 7 days

We also need to be vigilant on settling the bill quickly
• The insurer has 30 days to pay for the hire.
• After 30 days there is a penalty payment.
•  After 60 days there is another penalty payment.
• After 90 days the rate reverts back to ‘spot rate’.

It is key therefore for us to determine liability early so payments can be made within the first 30 day bracket. It is also vital for any driver to report claims as soon as they occur.

Business Interruption

We have recently been appointed by a client who suffered a damaged roof over last winter’s storms. They had prudently purchased business interruption cover in good faith but due to a number of omissions they were threatened with having no cover at all as they were so grossly underinsured.

Here is how the problem arrived.

Gross profit – setting the sum insured

Gross Profit is a familiar term used in both accounting and insurance circles. There is a key difference however. Gross profit in insurance includes the cost of production wages due to current employment law, in the event of a fire you cannot simply terminate your staff you must either make them redundant or continue to pay them. This common mistake made a 40% difference to the sum insured alone.  The sum insured calculation on below the line purchases was also flawed resulting in a further 10% error.

Period
The client had one or two large customers and so had purchased an 18 months indemnity period. However the sum insured was entered on the policy and brokers summary as a 12 month figure 33% too little.

Growth
The business was growing.  Insurance policies typically give a 30% allowance for growth under the Declaration Linking provision. You would think that this would automatically give you adequate cover for any increase.

However there is a condition to obtain this ‘free’ extension – one which is frequently overlooked by brokers and insurers. You must provide a declaration figure from your accountant providing last year’s true figures and pay any adjustment premium due. This had not been done so allowance for growth was excluded. If you do not do this routinely Castlemead would be happy to undertake this for you

Additional Increased Cost of working

To get a gross profit claim paid you have to show that you will lose the relating turnover. Additional Increased cost of working cover gives you an allowable spend on increased costs irrespective of its effect on turnover. It is an essential component of any programme. This client had the opportunity to temporary roof the factory at a cost of £40,000 but their insurer would not meet this cost.

In total the client had a claim for £250,000. They were offered a payment of just £43,333.

Claim		£250,000
Underinsurance		£125,000
Discount for  12 month sum insured		£83,333
	Add temporary roof cost	£40,000
	Amount not covered	£206,667
	Uninsured amount	83%

The broker and insurer are both household names. Fortunately the client’s bank agreed an overdraft to cover the costs and the client continues to trade.

Castlemead's advice:

• Use a professional broker who can calculate the likely gross profit loss for you and has experience of claims in this area.
• Review this calculation with your operational team and set an appropriate Additional Increased cost of working sum insured
• Get a completed declaration into your insurer annually
• Buy the right number of years for the business to recover – this could be 3 – 5 years in extremis.