Credit hire companies ‘on notice’ that they are in the crosshairs for defendants’ costs

Given the impecunious nature of typical insurance claims fraudsters, it is easy to see why insurers could be tempted to target those with deeper pockets when seeking to reclaim costs.

A big slice of the costs in these cases will be the sums the bogus claimant has claimed for hiring a replacement vehicle.

A case heard in Leicester County Court in March 2021 provides an example of this type of strategy – this legal action resulted in what has been hailed by insurer XS Direct’s lawyers as a landmark victory for the insurance defendant community.

The bulk of a £17,000 claim brought by Mohammad Masud Parvez, following a road traffic accident in February 2018, was for credit hire and related costs. The credit hire claim was £14,706, while storage and recovery amounted to £1,590 via Apex Recovery and Paloma Car Hire.

After finding Parvez’s personal injury claim to be fundamentally dishonest, Recorder Lambert QC struck out the whole claim - including the claims for credit hire, storage and recovery - with an order that the claimant pay the defendant’s costs.

With claimants often unlikely to be able to afford such large sums, this is the point when insurers’ pursuit of costs often runs into the sand.

Instead of abandoning hopes of compensation, the defendant’s law firm DWF pursued the credit hire company for the costs. At the subsequent hearing in August 2021, the car hire company was ordered to pay 90% of the defendant’s costs, rather than the claimant.

The case enabled XS Direct to recoup its credit hire costs directly from the motor vehicle provider rather than the claimant Mohammed Parvez.

Insurers’ fraud fighting ‘gift’

There is nothing intrinsically novel about the mechanism used by DWF here, according to Paul Holmes, partner and head of fraud and technical insurance at the firm.

“The ability to claim non-party costs came in quite a few years ago but, in my opinion, is still underutilised. Essentially, the litigation needs to have been brought partially for the benefit of others or where the third party has perpetrated a fraud themselves.”

Under section 44.16 of the Civil Procedure Rules, orders for costs can be enforced against the claimant where the claim is found to be fundamentally dishonest.

Costs can also be enforced where proceedings include a claim that has been made for the financial benefit of a person other than the claimant.

The qualified one-way cost shifting (QOCS) practice direction gives credit hire as a specific example of a claim that would be to the financial benefit of someone other than claimant.

“This rule change is a gift to insurers wanting to fight fraud claims and other companies hoping to profit from those claims,” said Holmes.

Kirsty McKno, managing director at Cogent Hire, added: “I told credit hire companies that they needed to watch this because [insurers] could come after [them] for non-party costs.”

Credit hire driving litigation

An important question in such cases is the extent to which the credit hire company is controlling the litigation.

Credit hire companies will often indemnify their clients against the cost of litigation by getting them to hire a solicitor from their own panel, McKno explained.

This is because not being involved in the selection of solicitors raises risks for credit hire companies in what is a highly specialised area of law, she said.

“Personal injury firms don’t often understand credit hire and do a poor job,” McKno continued, adding that there is a “whole series” of negligence cases where personal injury claims have been struck off because they didn’t understand credit hire.

“They don’t want you to go [to] any old solicitor but want you to [use] someone who is qualified,” she said.

The relationship between the claimant and the solicitor is typically via a signed, separate retainer.

But Darren Mendel, a partner at Horwich Farrelly who has handled other landmark credit hire cost cases, takes a different perspective.

“Given they were the ones driving the litigation, they should be the ones to pay,” he said.

An important aspect of the aforementioned Leicester case was that the judge didn’t find that the defendant had to prove that the credit hire company involved had colluded with the claimant, noted DWF.

Even though the dishonesty appeared to be solely attributable to the claimant, the court did not allow the credit hire company to hide behind them.

Because of this approach, credit hire companies will no longer be able to “sit back and do nothing”, even if their part of the claim isn’t fraudulent, said Holmes.

This equips insurers with a valuable legal tool. Holmes continued: “This puts credit hire companies on notice that we will be coming after them for costs.”

This message is not just for credit hire companies, but any type of firm that is potentially profiting from the “coat-tails of fraudulent claims”, such as rehabilitation companies, Holmes added.

Eyeing margins

Peter Gomes, chief executive of trade body The Credit Hire Organisation, insists that the association’s member companies are exercising vigilance against this risk already.

He said: “Fraud has no place in the insurance sector, the claims sector and the credit hire sector.

“All members of our organisation have a responsibility to prevent and detect fraud. They need to do [so] for their own sake and for the sake of the industry as a whole. They need to be positive in [the] prevention of fraud on behalf of all stakeholders.”

While the “majority” of the credit hire industry is reputable, there is a “risk” that individual companies can become “embedded whether voluntarily or involuntarily” in fraudulent practices, said Mendel.

However, the fact that the Leicester case is a county court decision means that it is not precedent setting, added McKno.

“You have to go behind the relationship and understand what control the credit hire company has over the process. It has to pass a number of tests.”

As an example, she points to a scenario where a claim for personal injury could be completely dishonest, but there is no dispute that the vehicle damage happened and the claimant required a replacement vehicle.

In such a circumstance, the credit hire arrangement would be “entirely legitimate,” McKno said.

Another safeguard against abuse of the system is that credit hire companies have the ability to pursue the claimant for costs, added McKno.

However, Mendel expects to see growing interest by claimant solicitors in credit hire because such cases are not yet subject to a fixed costs regime, unlike personal injury, which he described as previously being the “historic golden ticket” for such practices.

“Until and unless the fixed cost regime comes in for credit hire, there will be many claims lawyers looking to credit hire as means of improving their margins,” he explained.

“Every time a new regulation or reform comes into place, you think it’s the death knell for these sorts of practices, but I’ve never seen that come to fruit.”