Motor indemnity issues — challenge or opportunity?

Third party motor insurance claims, and more particularly disputes and challenges in cases where insurers are not indemnifying under the policy, is a very broad and fascinating subject. Mastering these issues and deploying the right arguments will pay financial dividends for insurers. Those who fail to grasp the issues are likely to be financially disadvantaged.

One might be forgiven for thinking that after many decades of disputes, changes and refinements to the law and practice, arguments and areas for challenge would now be few and far between. However, the reality is that the area is as full of potential pitfalls and indeed opportunities for insurers as it has ever been.

With the cost of claims seemingly on an ever upward trend, and particularly with claims inflation raging at present, now more than ever it is crucial that insurers ensure everything possible is done to control indemnity spend and keep leakage to a minimum. Insurers should look carefully at every opportunity to share claims with others who may be liable, and pass claims to other insurers or the Motor Insurers’ Bureau (MIB) where appropriate to do so.

For the UK legal system, the 'roots' of this subject go back to 1930 when compulsory third party motor insurance was introduced for the first time. This was introduced together with some statutory restriction of policy terms aimed at protecting third party victims. As an interesting aside, the law makers at the time were seemingly very determined to punish those who did not comply: Failing to insure your car in 1930 could lead to a fine of £50 (equivalent to over £2,600 today), a 3-month prison sentence and a years’ disqualification!

Several Road Traffic Acts later brings us to the current text which is that of the Road Traffic Act 1988 (the RTA). This is the cornerstone of all issues arising from disputes over insurers’ obligations in third party claims and essential reading for those handling claims or advising on such matters. The 1988 Act has been changed many times over the years since its introduction, some brought about by UK Parliament (such as the Deregulation Act changes to the rules on cancellation of policies in 2015), and some brought about by decisions in the Court of Justice of the EU (such as the decision in Fidelidade-Companhia de Seguros SA v Caisse Suisse de Compensation and Others (Case C-287/16) which held that any right of an insurer to avoid paying a claimant’s claim by avoiding the policy post-accident, was contrary to EU law even where the claim would still be picked up by the MIB.)

Layer onto those changes to the statute itself, a whole catalogue of UK and European case law, the EU Motor Insurance Directives and the rules binding insurers found within MIB’s Articles of Association, notably Article 75, makes a complex yet fascinating 'maze' for claims handlers to work their way through. The challenge being that many cases do not concern any such issues; policies often operate as they should and claims are settled without any difficulty. However, spotting those cases, when an opportunity arises to pass liability on to another compensator, or share the financial burden is the first step. No one person has all the answers, but encouraging handlers to flag potential issues and seek other input makes sound financial sense.

For claims handlers of all levels, a secondary issue arises in understanding the subject sufficiently to challenge the position of other organisations, whether they are insurers, claimant’s solicitors or others. Deep understanding of this subject is not as common as might be expected for the reasons already mentioned i.e. many cases run through the system smoothly. However, it makes sense for insurers to be diligent to see that all opportunities to save costs are explored. It is worthy of note here also that the same issues arise at any level of claim; it is not a subject reserved only for large loss teams. Of course, economics come into play, but having some basic awareness and available support at all levels is prudent.

A good basic framework for claims handlers looking at cases where there might be a reason why the policy is not operating for whatever reason, is to think logically through policy, RTA and Article 75 issues, in that order. Again, this needs considering from both the handlers and any other possible insurers’ perspective.

Policy wordings vary enormously. Motor insurance is highly competitive and each insurer has their own ways of covering various scenarios. Studying the policy wording can sometimes provide a clear route to solving a problem. Closely related to policy wording is process. It’s all very well the policy spelling out very clearly how the policy will be cancelled for example, but has the insurer complied with what is set out in the document? Failure to do so is more common that might be thought and can have significant consequences in the event of an accident after the date of purported cancellation.

If the policy does not require the insurer to indemnify the policyholder, is the situation affected by the RTA? The Act essentially aims to see that motorists are insured, and where there is a policy in place, forces insurers to pay third party claims even in cases where that policy may not strictly operate by its terms. It does this in two ways, the first of which can be traced right back to 1930!

Firstly, the RTA (at Section 148) makes various restrictions in policies 'of no effect' – this amending of the contract forces the insurer to deal with the third party claim as if the restriction was not in the policy; the insurer is then entitled to recover its outlay from its policyholder. This is sometimes referred to as 'hybrid contract insurer' because the insurer’s contract is amended by the statute. Secondly, at section 151, insurers are obliged to satisfy judgments, subject to certain conditions, against motorists as if the policy 'insured all persons'. In this way, the insurer who has written a policy covering the vehicle is liable to compensate an injured third party in many cases notwithstanding various requirements and restrictions being in the policy.

The final piece of the 'jigsaw' is the requirements within MIB’s Articles of Association (at Article 75) which require insurers in certain circumstances to pay claims arising from accidents caused by uninsured drivers. These rules, agreed by MIB’s member insurers, mean that in these cases, insurers act as agent for MIB and deal with claims under the Uninsured Drivers Agreement. From the claimant’s perspective, the route to recovering damages is still via the MIB and its Agreement, but in the particular case, the claim is dealt with and paid for by an insurer.

In simple terms, there is a 'pecking order' where more than one insurer might be liable to compensate a third party claimant. This is sometimes referred to as an 'indemnity tree' with policy liability at the top, followed by the 'hybrid contract insurer', the RTA (section 151) insurer, the Article 75 insurer and then MIB itself at the bottom. The principle being that the insurer closest to the top of the tree will be liable ahead of those below it. Similarly, claims can often be shared with insurers at the same level within the tree.

There have been many developments over the years in this complex and interesting area of insurance law. Further, new arguments emerge from time to time as insurers seek out ingenious ways to get themselves down the pecking order and ultimately share or avoid liability to pay claims.

This subject is full of interesting points and rewards those who diligently steer the right course through the maze of issues and options. It is essential learning for motor claims handlers and others at all levels and continues to fascinate and challenge the writer after almost 40 years working in the claims arena.

This article on motor indemnity issues was first published by the Chartered Insurance Institute which can be found by following the link.