Jonathan Smith was handed the keys to his courtesy car. It was a shiny Volkswagen Golf with a turbocharged diesel engine.
Two days earlier the 57-year-old from Peterborough had been in a crash that had damaged his own Golf. Smith ended up driving the replacement car for 55 days. He racked up hire costs of £2,310 — enough for the insurer footing the bill to ask a few questions.
And with good reason. Smith’s story has since sparked off a large-scale fraud investigation. It is by no means the only legal probe into the courtesy car industry, which is estimated to be costing Britain’s insurers £1 billion a year. According to investigators, the costs of these hire cars are being bumped up by a combination of exaggerated claims, fraud and kickback agreements between garages and hire firms. Those costs are passed on to consumers in higher insurance premiums, which are rising at about 30% a year.
The boom in hire car claims is one of the reasons the Commons transport committee last week decided to reopen an inquiry into the motor insurance industry. “It’s all part of the friction costs making motoring more expensive,” said the boss of one big insurer.
Smith is not the driver’s real name in the case outlined above. All details of those involved in the incident have been changed for legal reasons, but the sequence of events is based on a real case.
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Investigators discovered that the same hired turbocharged diesel Volkswagen appeared to have been in three places at once. Rival insurers had already been billed for it.
While Smith was driving the car round Peterborough, it was supposedly also on loan to a taxi company in Leicester. That claim came to a total of more than £19,000. A third claim, meanwhile, suggested the same VW Golf had been on hire to someone else entirely for three days at the end of March.
“There are a number of scenarios that we see time and again,” said Mike Srokowski, chief executive of Validus, the claims investigation firm that uncovered the ruse.
Since the economy turned down, insurers have started scrutinising claims even more closely “Sometimes we encounter what could be genuine administrative errors, sometimes we encounter what appears to be organised insurance fraud involving a vast network of different people.
“Our system has generated information that the police have found invaluable in their investigations into possible frauds across the country.”
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Every year, there are more than 2m car accidents that involve at least two vehicles.
About one-third of those accidents now result in a hire car being provided to the innocent victim. That equates to about 600,000 cars a year.
The firms of middlemen are known as credit hire companies — they offer hire cars on credit. The biggest operators include Helphire, which last week warned of a £27m black hole in its balance sheet after admitting it had overstated the amount it was owed by insurers. Other big operators include Drive Assist, owned by Charterhouse, the private equity firm. There are dozens of smaller operators.
While drivers have a legal right to a replacement car when their policy provides for this, questions are being asked about the role of the credit hire firms. The cars provided by the middlemen cost about 40% more than normal hire cars.
“For those who can afford to do so, it makes sense to simply go and hire a car, then bill that cost back to the insurer,” said David Sandhu, chief executive of AI Claims Solutions, one of the top five credit hire firms, who has led calls to root out bad practice in the industry.
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“Not everyone can afford to do that — and that’s why this industry came into existence.”
Most big insurers are attempting to push the credit hire firms out of the equation. They are trying to offer their own replacement cars directly.
The middlemen, however, tend to be quick off the mark. That’s partly because they are offering incentive fees of up to £1,000 to everyone from tow-truck drivers to insurance brokers who pass on contact details of accident victims. It’s the same fee structure deployed by the no-win, no-fee lawyers who raise claims for personal injury from car accidents.
“The problem all comes down to the referral fees,” said Max Withington, head of credit hire litigation at Horwich Farrelly, a Manchester law firm.
“Often you will find that a garage will get a fee for passing details to the hire company. That fee is often a percentage of the final hire cost. So the garage has an incentive to delay repairs for as long as possible to increase its fee.
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“Where you have performance cars — BMWs, Mercedes or whatever — the situation is worse. The replacement car will be something similar, charged out at a much higher daily rate, so there’s an even bigger fee for delaying repairs.”
Withington investigates questionable car hire claims on behalf of most of the big insurers. In the past two years his team has grown threefold to deal with a surge in suspicious claims.
Since the economy turned down, insurers have started scrutinising claims even more closely. There are three typical scams regularly detected by investigators.
The first is the one outlined above, where the same car has been billed out to more than one insurer at a time.
The second is where an insurer is billed for a slightly better equipped model than the one provided to the customer.
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The third, more common, scam is where it is claimed the car was on hire for longer than was actually the case.
Most of the big insurers are sharing information with the Validus database to detect dodgy claims, Withington said, and kicking back claims or pushing the hire firms to settle for a lower amount.
“There are some very big consumer protection issues here that are not fully understood,” he said. “The cars that are offered by these organisations are not ‘free’.
“If the insurer successfully disputes the claim, then the legal liability for any amount left over falls back on the person who was given the car.
“Usually the credit hire companies don’t pursue their own customers through the courts as it wouldn’t look too good for them if it ever came out that this was what happened. But that’s an entirely commercial decision on their part.”
Straw slams fees ‘racket’
Jack Straw, the former justice secretary, launched a campaign last week to stop insurers from selling details of crash victims to no-win, no-fee lawyers.
Insurers, tow-truck drivers and even some police forces are paid up to £1,000 a time to sell contact details for someone who has been injured in a road accident.
The fees are blamed for causing a steady rise in insurance claims for personal injuries, despite a fall in the number of accidents. Soaring claims costs led to premiums rising by 30% last year.
The widespread payment of these referral fees was exposed in an investigation by The Sunday Times last month.
“This is not a system, it’s a racket,” Straw said last week. “The quicker it’s ended, the better it will be for the law-abiding motorist.”
Axa, one of Britain’s biggest motor insurers, has already said it will stop selling its customers’ details.