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.

Security technology that can be defeated for £75

Castlemead Insurance Brokers have become aware that GPS and GSM/3g based tracking and alarm technology can be blocked with off the shelf jammers available on the internet. Sites such as iforgou.com based in China offer gadgets that will jam mobile phones and GPS.

At the moment there is no law against owning one of these devices however use of them is a breach of the Wireless Telegraphy Act 2006. Somehow we doubt that thieves of high end vehicles or those involved with hi jacking high value loads from trucks will worry about this minor offence.

We urge you to be aware of the potential deficiencies in these technologies and ensure that you consider these as part of your security strategy.

Flood Barriers

You may have seen the ongoing debate between the Government and the insurance industry regarding who will pay for flood damage in areas that repeatedly suffer damage.

We act for a Flood Barrier designer and manufacturer and could never understand why these are not regularly used as a method for defeating this issue. Germany has many areas that flood annually and their cities are protected by miles of aluminium barriers installed each autumn. It appears that no UK insurer recognises flood barriers as an effective defence.

The British Standard that is set up is a start - See the video here but the specification does not deal with the depth or require a zero leak result, rather it compares the result to sandbags which cannot stop damage being caused. If you have commercial premises that need protection, we do have an insurance backed solution.

Please talk to Castlemead Insurance Brokers and we will afford you
an introduction.

Motor Fleet Risk Management

Castlemead Insurance Brokers find the haulage business remarkable as it’s one of the few businesses where you send a new employee out of the yard with £100,000 of kit and up to £300,000 of load and say we will see you back in a couple of days time! We've been working at ways to reduce this risk.

Our customer Framptons Transport Services have recently been featured on the BBC1 One Show demonstrating their new camera system. Castlemead were instrumental in getting them to fit cameras to their fleet of vehicles to protect them from fraudulent claims and reduce the number of incidents settled 50/50.

Interestingly the cameras were self funding as Castlemead negotiated a discount on the fleet premium that paid for the cameras in the first year. Motor fleet premiums are driven by claims cost. Every time an accident can be defended it helps in the next year's renewal negotiation.

Framptons have already seen two incidents where the camera has acted as the indisputable independent witness where the truck would have been found liable in absence of the video.

Castlemead have experience in rolling out cameras to large fleets and can help you with understanding the cultural issues that drivers naturally worry about. We are also working with Drivecam.com an American Camera supplier. They have combined cameras with remote monitoring and an analysis bureau. When the camera is tripped by a sudden manoeuvre the in-vehicle footage both out of the windscreen and of the driver gets sent for review to Drivecam's team.

They review the footage to see how the driver has performed in what may be a near miss late braking situation. If they have concerns they email the footage to the transport manager for them to review.

This could be invaluable where a driver has only just started with the business. The hope is that an accident can be avoided by training and good management using the footage as an aid. We also believe that this will change an organisation culturally to make their drivers aware that the business is looking for them to perform safely and professionally.

Need help with this type of insurance? 

Cheque fraud and BACS

Many businesses that Castlemead Insurance Brokers talk to are moving away from cheques due to perceived fraud issues. You may have experienced one of your cheques being changed to an alternative payee?

We have a number of examples of BACS causing a problem. We recently discovered that the Sort Code and Account number does not relate to the payee loaded onto the banks systems. We have seen a client loose a six figure sum due to a clerical fraud.

Their book keeper loaded many low value payments to realistic payees, electricity, sundry suppliers and changed the bank details to one of her nine that she had set up. The business did not become aware of the losses for two and a half years.

A supplier of ours also suffered a similar fate with their financial controller manipulating sales manager’s bonus payments to include 10% to her accounts.

Both culprits have been prosecuted, however neither has been able to pay back the money stolen. A fidelity policy would cover this issue which is something we are now regularly discussing with our clients.

As an aside professional indemnity cover suggests that it gives a fidelity cover as part of the wording, however most restrict cover to losses suffered by clients rather than losses suffered by the business itself.

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Ministry of Justice Reforms Legal Aid, Sentencing & Punishment of Offenders Act 2012

On the 1 August 2013 a new system for dealing with Personal injury claims relating to Employees and members of the public was introduced.

The insurance business has long felt that the costs enjoyed by solicitors dealing with these incidents unreasonably outweigh the compensation awards obtained. It is not unusual to see costs being 300% of the amount of Damages awarded for pain, suffering and loss of earnings.

A compromise has been agreed and the result initially looks positive.

• Referral fees banned
• No more insurance policy taken out to insure the costs of losing
• Fixed fees for claims up to £25,000 of between £900 and £4,000
• Online to make it faster

Naturally the legal profession has also made some gains.

• Strict timescales for response
  - 24 hours to acknowledge
  - Liability to be decided in 30 days
  - Substantial cost penalties if these timescales aren't achieved

Claim amount    Fees In time       Fees time not met           Increase

£2,000                    £900                £1,300                         44%

£15,000                  £1,600             £3,000                          87%

£25,000                  £1,600             £4,000                        150%

• The claimant will never face costs being awarded against them even if their claim fails unless for fraud
• 10% damage award increase, solicitors can now net their fees off the damages
• Allegations relating to the standing of the client or fraud need to be robust enough to withstand scrutiny
• Arguing contributory negligence is now uneconomic

Castlemead concerns

We are not convinced that these reforms will achieve a reduction in claims and that they may even inspire a greater claims culture, indeed there are several unintended consequences.

• Solicitors have bypassed referral fees rules by direct advertising or corporate structures that remunerate advertisers in different ways for example dividend payments
• Solicitors will press hard to push claims outside the portal to maintain their fees
• Next day 1st class post delivery is used as the measure for the 24 hours to start
• Our experience of the post system is that it is not reliable enough for this
• Settlement should now take 3 months unless medical evidence is complex or the injury is ongoing, solicitors will be able to advertise this fact promising a speedy payment
• By waiving rights to costs insurers have little incentive to go to court as any barristers and solicitors fees expended are unrecoverable and will form part of the claims experience
• We believe insurers will move to settle as many incidents as possible under £25,000 chasing the perceived benefit of reduced fees
• Fraud and contributory negligence arguments used in the past to 'horse trade' with claimants solicitors over damage awards are now eliminated as negotiation tactics leading to higher damage awards, this is together with a 10% automatic increase in damages award 

What we need our clients to achieve

• Deal with post promptly get the claim documents to us by email same day, a big ask but necessary
• Provide investigation documents by return following a claims investigation or better on the day, we will provide a list of documents to you when we are notified
• Draft a process for this internally for us to share with your insurers

Why?

• We are concerned insurers will recharge the increased solicitors costs to those clients who fail to forward documents in time in a similar way to Pre Action Disclosure requests not being met in the past
• At £1,500 a time this could mount up

Outlook

• Claims for £25,000 or less will result in insurers taking the most economic, if not the most robust strategy and paying claims
• Castlemead believe we are likely to see an increased volume of low value claims, similar to the whiplash phenomenon, processed under this system due to speed of process and solicitors needing larger volumes of work to make up lost revenue
• Claimants still get 3 years to make a claim, however the rules are not retrospective
• Claims experiences will change in profile, it is very unlikely that we will see claims reserves sitting on policies for years on end.  
• This is a positive although it reduces insurers limited opportunities for investment returns, it makes client exposure very quick to establish
• Some insurers invest much more heavily in claims investigation at early stages to defend claims
• We believe insurers performance on defending claims will become homogenous meaning that the larger process driven household name insurers will be able to deal successfully with claim intensive clients
• The increased number of claims will increase premiums serving to increase insurance company premium volumes and margin return typically 30% is aimed for by insurers
• We believe that clients with large footfall exposures may well be better off considering a self insurance excess that will take out claims and reduce overall cost of risk
• Taking the self insurance option means that a client’s health and safety systems and controls need to be exceptionally robust to make it worth investing in the fees incurred in defending this type of claim  

If you would like to discuss any of these issues raised in this blog regarding MOJ and how they may affect your business over the next 18 months please contact Richard Ingleby richard.ingleby@castlemead.com, direct dial  0117 9453907.