Press release -
High Court Judgment Paves The Way For Insurers To Inflate Claims
Today Mr Justice Cooke has given judgment on preliminary issues in Coles v Hetherton, at the heart of which lies a challenge to the RSA repair model.
The RSA repair model has been the subject of many County Court proceedings and previous media comment.
This judgment has been much anticipated given the concerns over motor premium inflation. That concern has been the subject of an OFT inquiry into activities within the insurance market.
The Decision
On two preliminary issues, the judge ruled that:
1. the measure of loss in a case where the damaged vehicle has been repaired is the reasonable cost of repair, but that “is not necessarily the repair cost actually incurred…”
2. the cost of repairs should be determined by reference to what an individual would pay for repairs if they arranged them personally, even if the repairs were in fact arranged and paid for by the insurer.
Allianz Insurance is one of the insurers involved in the litigation, contesting the right of RSAI to recover more than the actual cost of repairs. Martin Saunders, Head of Technical Claims, Allianz Insurance said:
“The person on the street who pays their motor insurance premium will be bewildered by this.”
He added:
“The problem is that no insurer can operate in a vacuum at a competitive disadvantage and survive because the commercial environment in which we operate is too challenging. If this decision stands we can expect the rest of the market to feel forced to move in the same direction as RSA which we estimate will add up to approximately 25% on to motor insurance repair bills which will ultimately impact significantly on premiums.
“Additionally we can expect to see a far higher volume of County Court litigation as insurers challenge “notional reasonable repair costs to policyholders” presented on evidence such as engineer’s reports.
“I fear that this judgment will exacerbate the issues that the OFT is seeking to address by adding a further and new layer of “dysfunctional” competition. In my view that cannot be allowed to happen. For our part we welcome the OFT’s intervention and referral to the Competition Commission, and we fully intend to appeal this decision.”
Ends.
Topics
Regions
Media Notes:
1. *This figure is Allianz’s estimation of the potential impact on claims cost as a result of this judgement.
2. Background information
(Quotes are from the judgment of Mr Justice Cooke in Coles v Hetherton, also known as Woodard v Ward, except where shown as taken from the OFT report)
The RSA repair model
RSA Insurance (RSAI) engage RSA Accident Repairs Ltd (trading as MRNM) to undertake repairs to their policyholders vehicles. MRNM bill RSAI in accordance with an agreed "Retail Adjustment Criteria". The "Retail Adjustment" allows MRNM to "make a profit over and above the charges paid by it" to the repairer they instructed. The adjusted amount ignores the substantial discounts RSA negotiate and includes certain additional charges over and above the amounts charged by repairing garages.
At the hearing RSAI accepted that their repair model "generates income for MRNM which is a company in the same group as itself, though not a subsidiary". That profit is the difference between the actual cost of repair to RSA and the notional cost of repair to their policyholders arrived at after "Retail Adjustment".
The opposing side argued that RSAI should only be entitled to recovery the actual cost of the repair from the at-fault driver.
Evidence from RSA Insurance described their understanding of different models operated by other insurers where they do not take account of profits earned by related companies or rebates or referral fees when presenting claims for recovery to at-fault drivers or their insurers.
Mr Justice Cooke gave the following decisions on the two preliminary points heard.
1. Is the measure of loss the reasonable cost of repair?
It was decided that the measure of loss is the reasonable cost of repair but that “is not necessarily the repair cost actually incurred…”
2. Whether the repair charge to be judged by reference to:
(a) what a person in the position of the not at fault driver could obtain on the open market or
(b) what his or her insurer could obtain on the open market.
The judge said: "The court is not concerned with the arrangements made by the insurers for repair…….The profitability or otherwise of the insurance is not a matter for the court… it is neither here nor there whether the insurers put in place a repair company such as MRNM, which subcontracts to repair garages, or whether they subcontract further to other specialist repairers, or
whether RSAI contracts directly with a garage or repairs the cars itself. The only issue is the reasonable cost of repair to the individual claimant…”
It follows that he decided the cost of repairs should be determined by reference to what an individual would pay for repairs if they arranged them personally.
Mr Justice Cooke went on to say: "An overall figure for the reasonable costs of repair of damage to a vehicle may be justified, even if individual items in the repair costs paid are not reasonable, since the cost of repairing the damage must be treated in the round…” In other words providing the bottom-line cost is with the reasonable cost to and individual an insurer can include the value of goods or services that they were not charged for when asking the at-fault driver, or their insurer, to pay their claim.
3. OFT Report
The OFT in direct contrast and conflict with this judgment said it "found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers…” They specifically refer to
"Adding administrative charges”
4.16 It also appears that at least one insurer adds on additional charges onto not-at- fault repair claims bills, through its use of a subsidiary, before sending the claims bill to the insurer of the at-fault driver for payment. This activity is currently the subject of an ongoing legal dispute … so is not covered in detail in this report.
As a consequence of its findings the OFT has indicated its intention to refer the insurance market to the Competition Commission for a market investigation.
