What was the case about?
Coles v Hetherton [2013] EWCA Civ 1704 concerned an insurer's approach towards the recovery of motor repair costs.
The claimant insurer operated a model which was based around a group repair company. Its policyholders' vehicles were repaired either by the group repair company or by a subcontracting garage. The insurer then sought to pass on the profit costs of the group repair company as part of its recovery from the insurer of the third party vehicle.
A number of insurers objected to the model, arguing that it increased repair costs by approximately 25%. The insurer argued that, as the group repair company centralised the procurement of repair services and brought down the overall cost of repair, it should be entitled to recover its profit cost.
What were the issues?
The case raised an interesting issue concerning the amount of subrogated recovery claims. Is the claim of a subrogating insurer limited to its actual cost of repair, or should the insurer be entitled to claim the notional cost which the individual policyholder would have incurred when having the vehicle repaired without the benefit of group procurement?
What did the Court decide?
The Court of Appeal held that:
- Damage to a policyholder's car is ascertained by the diminution in its value, which is usually the reasonable cost of repair.
- The reasonableness of the repair cost is assessed by reference to the notional cost to the policyholder, i.e. without the benefit of group procurement.
- Where the insurer's actual repair cost is comparable with the notional cost, it is recoverable. However, an insurer is not permitted to claim a repair cost which exceeds the notional cost.
- Where the insurer has provided a courtesy car, that cost is also recoverable as the policyholder would have been able to claim for the cost of hiring a replacement car.
What are the implications for insurers?
First party motor insurers can take comfort that they can recover the notional cost of repair, even if their centralised procurement departments can arrange repair services at a lower cost.
Third party insurers will be adversely affected in that they will face more expensive repair claims from subrogating insurers. They will also be affected by inflated claims from other entities such as the Highways Agency (HA). Highways contractors frequently enter into contracts with the HA which allow them to pursue assigned or subrogated recoveries against motorists who damage highways infrastructure. This case will have a significant bearing on the rights of those contractors to recover their profit costs.
The case might also affect property insurers who have paid cash settlements of buildings or contents claims. Although it is often said that subrogating property insurers may only recover the costs which they have actually incurred in reinstating the property (see, for example, Brit Inns v BDW [2012] EWHC 2143 (TCC)), those insurers might now argue that they should be entitled to the notional cost of reinstatement, whether or not they were able to buy out their contractual obligations with a cash deal. If such a recovery can be made, it is an open question whether the proceeds of recovery must be shared with the insured.
Will there be future appeals?
It is very likely that the case will be appealed to the Supreme Court. The outcome of that decision will be eagerly awaited.
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