Inflation, legislation and regulation, changing consumer behaviours and the polycrisis state of the global threat landscape – you name the challenge and it’s pressing on the credit hire market. That’s a significant element of what makes working in the sector so interesting, according to Gary Herring (pictured), partner and credit hire practice lead at Keoghs – the legal consulting arm of Davies.
“It’s very niche and, coming from a lawyer’s perspective, it’s a really dynamic, fast-moving area where there are lots of conflicting decisions from the higher court,” he said. “Arguably, the law and the jurisprudence that underpins the sector is a bit of a mess because of these conflicting decisions which can create a lot of contentious litigation… There are a lot of appeals and even cases that quite a junior handler is dealing with could feasibly be the next big case in the Court of Appeal.”
It’s always interesting from a technical and legal perspective to examine the principles that underpin a lot of credit hire laws, he said, and in the 15 years he has served the market, he has seen it change almost beyond recognition. The decisions that initially went up to the higher courts and established these underlying principles were often centred on claims that were just £200 or £300.
Now you’ve got claims for hundreds of thousands of pounds for replacement vehicles, backed by solicitors and credit hire organisations focused on maximising the value of claims. The market, in general, has moved a lot since then, he said, but arguably the law hasn’t moved to catch up with it.
Herring added that while inflation is the word on everyone’s lips right now, the sector is being shaped by the “vastly uneven playing field” on which credit hire claims are operating. Comparing credit hire claims with personal injury claims offers a clear example of this, he said, because you often get injury claims alongside a credit hire claim.
“When you look at the amount of regulation and legislation around the injury space over the last five years or even longer, we’ve got tariff damages for low-value injury, we’ve got no costs for injury claims under £5,000,” he said. “We’ve had pre-action protocols for a long time and we’ve got FCA regulation, we’ve got specific provisions in the rules for fundamentally dishonest injury claims. None of that exists for credit hire.”
The government has legislated so heavily to drive the cost out of the injury space that it has redirected efforts towards the closely associated credit hire market, Herring claimed. When a claimant has a hire claim of over £10,000, it’s fast-tracked and it unlocks recovery of considerable legal costs. However, with the impact of inflation, claims of over £10,000 are becoming the norm, rather than the exception.
“Fundamentally, there’s not much regulation, and there’s a lot of money in it, so the attraction is obvious,” he said. “That’s the backdrop to a lot of the challenges facing the market. We were involved with a case called Holt v Allianz, resolved in a High Court appeal last year, which sought to address one of those anomalies and inconsistencies between the injury space and the credit hire space. Currently, there’s no pre-action protocol for credit hire claims so you’ve got claimants – or the entities standing behind claimants - who can effectively just issue proceedings without undertaking any specific sanction-backed, mandated pre-action steps.
“It’s commonly the case that they just don’t engage with insurers at all, and just issue the costs from the outset. So, a lot of that litigation is around seeking to enforce some of the existing vague and more generic pre-action rules around general pre-action conduct and enforce those within credit hire claims.”
Against this tumultuous backdrop, 2024 looks set to be a busy year for the credit hire market, Herring said, not least because of the impact of the inflationary environment on basic hire rates. Unless the claimant is able to show that they’re impecunious i.e. unable to afford to hire a normal vehicle, then they’re only entitled to recover the basic hire rate – and that’s what damages are measured at.
“We saw a huge peak of about 300% on the basic hire rate which has driven a huge amount of inflation in the space, because it means settlement rates shot up,” he said. “It also means that there’s pressure on the protocols which are being negotiated upwards. We’re seeing inflation elsewhere as well, for instance, damages for credit repair when it’s been at about 50% for the last three years and there’s a number of drivers of that including the long-tail of COVID and parts delays, etc.
“It really has been a perfect storm of inflation over the last 24 months for credit hire, in particular.”
There are a plethora of other factors that could potentially destabilise the market too, with the developing situation in the Red Sea offering the potential for a serious global supply chain shock. Some 70% of vehicle parts for manufacturing in Europe are reported to go through the Suez Canal, he said, and disruption to this key trade route would have knock-on effects on parts supply, timings and costs.
“Looking into 2024, you’d say that all things being equal, before the Red Sea crisis erupted, you’d expect there to be a drop-off and certainly disinflation if not deflation in the credit hire space as we come off that longtail spike in basic hire rates,” he said. “That will then start feeding into settlements and total spend. So, we’d expect that to be a nice steep downward curve in early 2024. But we can’t ignore what’s happening in the Red Sea - it’s definitely something for insurers to be aware of.”
