Motor insurance—Subrogation—Cost of replacement vehicle

Queen’s Bench Division (Commercial Court)

Morison J

21 December 2006

The claimant’s insurers were entitled to recover the full cost of a hire vehicle from the defendant’s insurers, although they had negotiated an undisclosed discount from the hire company. There was no suggestion that the cost was unreasonable, given the potential cost to the claimant of a retail hire had he arranged one himself. The claimant’s insurer was not obliged to pay the profit made from the hire arrangement to the defendant.

Christopher Butcher QC and Benjamin Williams (instructed by Burges Salmon) for the claimant.
Julian Flaux QC and Jonathan Hough
(instructed by Badhams Law) for the defendant.

The defendant’s car collided with the claimant’s car while the latter was stationary. The claimant’s car required repairs and during the time he was without his own vehicle he was provided with another car by his insurers. The defendant admitted liability.

The claimant had insurance with the Co-operative Insurance Society (CIS), and legal expenses and assistance insurance provided by DAS Legal Expenses Insurance Co Ltd (DAS), which was part of a group of companies. The DAS benefits included the provision of a replacement vehicle at no cost to the insured in the event of accident caused solely by another identified and insured driver if the insured’s own vehicle could not be driven. The hire transaction had to be approved by DAS in advance. Where DAS provided the service the insured agreed to DAS attempting to recover the hire charges in its name and to account to DAS for the receipts.

In this case, the claimant was provided with a hire car by DAS, at a cost of £610. His insurers brought proceedings seeking to recover the cost from the defendant’s insurers. The dispute centred on the cost of the hire car.

Morison J:

In a nutshell, the case was about the arrangements between DAS and the hire company, Helphire. It was not contended that the charge for the hire to the claimant of a replacement vehicle was higher than the spot retail rate which he would have been charged had he personally arranged for the hire of a replacement vehicle. What was argued was that DAS had provided the replacement vehicle through Helphire and could have done so more cheaply than it did—by corporate hire rates—and should have given credit for the introduction fee which Helphire might have paid to DAS or an associated DAS company.

In other words, if the claimant was entitled to recover the amount claimed, his insurers would have made a significant profit from the transaction at the expense of the defendant‘s insurer. The amount of any such profit and of the introductory fee remained unknown, and would not be disclosed unless and until the court decided that the defendant was correct in principle.

The defendant contended:
(i) When claiming its outlay:
(a) DAS had to give account for a commission payment made by Helphire in respect of each hire; and
(b) damages should be limited to the reasonable cost to DAS of providing hire cars, namely a corporate rate of hire.
(ii) In relation to the first issue, the conclusion followed from two basic principles:
(a) the rule that an insurer could not
recover by way of subrogation more than its true outlay; and
(b) the rule that collateral benefits should be taken into account in assessing damages.
(iii) The essence of subrogation (whether contractual or equitable) was to provide an indemnity and avoid unjust enrichment: Banque Financiere de la Cite v Parc Ltd [1998] 1 All ER 737.
(iv) On a proper analysis of the transactions in this case, DAS had provided a benefit in kind by arranging a hire car at its own expense. Damages had to be limited to the real aggregate cost to DAS of providing the benefit in kind.
(v) The primary submission was that under the hire agreement, the only entity obliged to pay hire was DAS and not the claimant. But even if that argument were not right:
(a) the subrogated right of DAS arose not in respect of an indemnity of the claimant for his liability to Helphire, but in respect of the cost to DAS of providing the benefit of the hire car for which DAS was liable to pay Helphire. Further;
(b) the countervailing commission or royalty payment still had to be deducted when assessing damages. DAS was limited to recovering its true outlay by exercise of subrogated rights.
(vi) English law did not distinguish between insurer and insured in a subrogated claim. Any defence which might be taken against the claim of the insured might equally be taken against the subrogated claim of the insurer.

The claimant submitted that any payment by Helphire to DAS or to another company within the DAS group was incapable in law of impacting on the claim which was for the claimant’s loss. There was no suggestion that the claimant had benefited from any such payment as Helphire might have made. In the traditional phrase, the transaction
between Helphire and the group company was res inter alios acta (events which were collateral to the commission of the tort). In law, that was the claim, which was why it was brought in his name. The fact that he did not pay Helphire directly made no difference.
His Lordship had some difficulty in understanding the case presented by the defendant. The submissions were simply wrong and apparently misunderstood the nature of subrogation in context. In the first place, reference to equitable subrogation was confusing. Contractual subrogation—as in insurance cases—and subrogation as a remedy to prevent unjust enrichment were two distinct institutions and were not to be confused. References to unjust enrichment were misplaced.

The defendant was right to accept that whether or not the claimant was liable to pay the hire under the car hire contract, an action could be brought in his name to recover it. The fact that the insurers had paid the charges because they were liable to do so, as opposed to making the insured pay them and indemnifying him against the cost, was inconsequential. What mattered was that, but for the insurance arrangements, the claimant would have been entitled to hire a car and recover the cost of doing so from the tortfeasor. The insurance contract for which the claimant had paid premiums made the arrangements for the replacement car more convenient.

Once it was accepted as a fact, as it was, that the claimant was entitled to hire a replacement car at a reasonable rate and for a reasonable period, he was, entitled to recover those hire costs from the tortfeasor. The tortfeasor was solely concerned with the reasonableness of the charges, assuming a need for a replacement vehicle. If, as they were, they were reasonable he had to pay them, whatever insurance arrangements the claimant might have made and, more importantly, whatever arrangements the claimant’s insurers might have made.

Should his insurers have gone bankrupt then the claimant would still have been responsible for hire.