Legal Background

( please note some amendments, when viewing FSA, it is now FCA, Further amendments are The Consumer Insurance (Representation and Disclosure) Act 2012 and the 2015 Insurance Act.)

Legislation

The main legislation covering motoring in the UK are a series of Road Traffic Acts. The first was passed in 1930 and made motor insurance compulsory for personal injury to third parties. The legislation has been replaced and updated over time and consolidated in the Road Traffic Acts of 1988 and 1991.

Road Traffic Acts

The Road Traffic Act 1988 consolidated many aspects of road traffic law in England, Scotland and Wales, , it consists of seven parts dealing with road safety, construction and use of vehicles, driver licensing, driving instruction and insurance. It came into force on 15 May 1989 and has since been amended by the Road Traffic Act 1991 and certain other regulations. The main parts of the Act (as amended, where appropriate) are as follows.

Part I: Principal Road Safety Provisions

This section relates to driving and cycling offences, including breath tests and drink and drug offences. The 1991 Act removed the offence of “death by reckless driving” and instead created the new offences of “causing death by dangerous driving” and “causing death when under the influence of drink or drugs”. This section also deals with road safety measures including the use of seat-belts.

Part II: Construction and Use of Vehicles and Equipment

The key elements of this section are concerned with general regulations for construction and use, vehicle testing, design, construction, equipment and vehicle markings, and maintenance and loading of goods vehicles.

Part III: Licensing of Drivers and Vehicles

This provides the minimum ages for driving different types of vehicle and also requires those holding driving licences to inform the Secretary of State should they become aware of a “relevant or prospective disability”. An insurer who has declined to provide a quotation for motor insurance on health or disability grounds must also notify the Secretary of State, giving information in a prescribed form. The Motor Vehicles (Driving Licences) Regulations 1996 (SI 1996 No. 2824) amend these age limits in certain circumstances.

Part IV: Licensing of Drivers of Heavy Goods Vehicles

This section is concerned only with regulations for those driving heavy goods vehicles.

Part V: Driving Instruction

This section relates to driving instruction given for payment. Such driving instructors must meet the stated standards and be listed on the Register of Approved Instructors or the instructor must hold a current driving instructor’s licence.

Part VI: Third Party Liabilities

This section is by far the most significant so far as the practice of motor insurance is concerned. It deals with compulsory insurance requirements and acceptable statutory alternatives to insurance. Importantly it also caters for situations where insurance may be invalid and seeks to ensure that innocent victims are not prejudiced by this.

Compulsory Insurance or Security against Third Party Risks (s.143)

This section provides that, other than for invalid carriages:

… it shall not be lawful for a person to use, or to cause or permit any other person to use, a motor vehicle on a road unless there is in force in relation to the use of the vehicle by that person or that other person, as the case may be, such a policy of insurance or such a security in respect of third party risks as complies with the requirements of this Part of this Act.

The Motor Vehicle (Compulsory Insurance) Regulations 2000 (SI 200 No. 726) extend section 143 from “road” to a “public place”.

The only exemption from prosecution for using a vehicle on a road without adequate insurance or security is provided for any person using the vehicle in the course of his or her employment who neither knew nor had reason to believe that there was no insurance or security in force for the vehicle.

It is an offence for a person who causes or permits any other person to use a motor vehicle without insurance. Case law has held that the guilty party could be sued by an injured third party. Use will include being in charge of a stationary vehicle as well as driving it, and will even extend to a vehicle jacked up with its wheels off the road and with its battery removed — Elliot v Grey [1960]. A passenger may be deemed to be using the vehicle — Cobb v Williams [1973].

Exemption from Compulsory Insurance (s.144)

This section provides that insurance need not be effected for:

1. a vehicle owned by and being driven under the control of a person who has deposited and keeps deposited with the Accountant General of the Supreme Court the sum of £500,000 (it should be noted that the sum of £500,000 does not have to be deposited in respect of each vehicle involved); the figure of £500,000 is now realistic but still below the level of damages in severe bodily injury and some fatal accident cases (the sum mentioned was £15,000 until 1 July 1992 when the Act was amended by the appropriate Regulation)
2. a vehicle owned by and being driven under the control of a county council or county district, the common council of the City of London, the council of a London Borough, the London Fire and Emergency Planning Authority, an authority established for an area in England by an order under section 207 of the Local Government and Public Involvement in Health Act 2007 (joint waste authorities), a joint authority (other than a police authority) established by Part 4 of the Local Government Act 1985, an economic prosperity board established under section 88 of the Local Democracy, Economic Development and Construction Act 2009 or a combined authority established under section 103 of that Act, or a local government authority or a joint committee including representatives of such a council
3. a vehicle owned by a police authority at a time when it is being driven under the owner’s control or a vehicle at a time when it is being driven for police purposes by or under the direction of a police constable or by a person employed by a police authority or employed by the Receiver
4. a vehicle at a time when it is being driven on a journey to or from any place undertaken for salvage purposes pursuant to Part IX of the Merchant Shipping Act 1995
5. the use of a vehicle for the purpose of its being furnished in pursuance of a direction under s.166(2b) of the Army Act 1955 or under the corresponding provision of the Air Force Act 1955
6. a vehicle owned by a health service body, as defined in s.60(7) of the National Health Service and Community Care Act 1990 by a Primary Care Trust, a Local Health Board, or an ambulance owned by a National Health Service Trust established under Part I of the same Act (or its Scottish equivalent) at a time when the vehicle is being driven under the owner’s control.

Whilst HM Forces or the Government do not usually buy insurance, most county councils and police authorities usually arrange insurance for these risks.

Requirements for Policies of Insurance (s.145)

In order to comply with the 1988 Act, a policy of insurance must satisfy the following conditions.

1. The policy must be issued by an authorised insurer, ie a person or body of persons carrying on motor vehicle insurance business in Great Britain. They must be a member of the Motor Insurers’ Bureau.
2. It must insure such person(s) or classes of persons as may be specified in the policy in respect of any liability which may be incurred by him or them in respect of the death of or bodily injury to any person or damage to property caused by or arising out of the use of the vehicle on a road in Great Britain and must (in the case of a vehicle normally based in the territory of another Member State) insure him or them in respect of any civil liability that may be incurred by him or them as a result of an event related to the use of the vehicle in Great Britain if, according to the law of that territory, he or they would be required to be insured in respect of a civil liability that would arise under that law as a result of that event if the place where the vehicle was used when the event occurred were in that territory, and the cover required by that law would be higher than that required in Great Britain. In the case of a vehicle normally based in Great Britain, the policy must insure him or them in respect of any liability that may be incurred by him or them in respect of the use of the vehicle and of any trailer (whether or not coupled) in the territory, other than Great Britain and Gibraltar, of each of the Member States of the EC according to the law on compulsory insurance against civil liability in respect of the use of vehicles in the State of whose territory the event giving rise to the liability occurred or, if it would give a higher cover, the law that would be applicable under this Part of the Act if the place where the vehicle was used when that event occurred were in Great Britain. (As a result of the Fifth EU Motor Insurance Directive (see later) the UK has passed the Motor Vehicles (Compulsory Insurance) Regulations 2007 (SI 2007 No. 1426) which increased the minimum third party property damage to £1m.)
3. It must also insure him or them in respect of any liability that may be incurred under the provisions of this Part of the Act relating to payment for emergency treatment.

Restrictions may be imposed in a motor insurance policy as follows.

1. Under the terms of this section of the Act, no cover is required in respect of damage to property or injury sustained by a person arising out of and in the course of his or her employment. However, the position has altered since its enactment. The Motor Vehicles (Compulsory Insurance) Regulations 1992 came into force on 31 December 1992 to implement the Third EC Motor Insurance Directive, under which there is a requirement for motor policies to cover all passengers (including those in the employment of the insured when travelling in the course of their employment). The Employers’ Liability (Compulsory Insurance) Exemption (Amendment) Regulations 1992 came into force on 1 July 1994, permitting employers’ liability insurers to exclude the “arising out of and in the course of employment” element of road traffic liability, which they have done. It follows that all passenger liabilities, whether or not arising out of and in the course of employment, are now catered for by the motor insurance policy. While there was concern that the regulations were poorly drafted and that the driver injury risk could also be picked up by the motor insurer, the courts have indicated that there is no ambiguity and driver risk remains an EL matter. This is important because, in most cases of driver injury, the cause is either driver negligence or vehicle defect, the latter coming within the ambit of the Employers’ Liability (Defective Equipment) Act 1969. Also, there is the possibility of industrial disease claims from drivers, notably deafness from noise, and there have been some claims from tractor drivers. Both of these categories of claim are clearly EL and not motor, and insurers have voluntarily agreed between themselves that the driver risk should be handled by EL insurers. It is anticipated that the regulations will be amended.
2. Cover may restrict liability to £250,000 in respect of damage to property caused by or arising out of any one accident involving the vehicle. In practice, insurers will retain current procedure in respect of unlimited liability for private cars and motor cycles but the point is relevant to commercial vehicle insurance and to Motor Insurers’ Bureau (MIB) claims for damage to third party property by uninsured motorists. It will also be relevant when in exceptional circumstances an insurer offers only Road Traffic Act cover for a private car or motor cycle risk.
3. There is no requirement to cover damage to the insured vehicle. Thus the proposer may select comprehensive or third party cover as desired.
4. There is no requirement to cover liability in respect of damage to goods carried for hire or reward in or on the vehicle or in or on any trailer (whether or not coupled) drawn by the vehicle. The view taken here is that goods in transit insurance is readily available.
5. The policy is not required to cover any liability of persons in respect of damage to property in their custody or under their control.
6. Contractual liabilities need not be covered.

Compulsory third party damage was introduced at the end of December 1988. The owner of damaged property enjoys similar security to the security that Road Traffic Act (RTA) legislation and the MIB give to injured road victims. If the motorist is liable, compensation is available from the insurer of the vehicle (or if the vehicle is uninsured, from the MIB, subject to an excess of £175). The “untraced” motorist agreement does not extend to property damage.

All motor policies now provide unlimited cover for death or personal injury and in most instances unlimited third party property damage, as required by the RTA. The limits contained in commercial policies for third party property damage comfortably exceed the limits embodied in the Act, the average limit being £1 million.

Certain aspects of compulsory cover for vehicles registered in Great Britain and used in other EU territories (and vice versa) were brought about by the Motor Vehicles (Compulsory Insurance) Regulations 1992. The intention is to ensure that there will always be cover in force to meet the requirements of the home State or the State in which the event giving rise to a claim occurs, whichever is the greater level of cover.

Requirements for Securities (s.146)

If a security in respect of third party risks is offered as an alternative to a policy of insurance from an authorised motor insurer, then under s.146 that security must be given either by an authorised insurer or by some body of persons which carries on in the UK the business of giving securities of a like kind and has deposited and keeps deposited with the Accountant General of the Supreme Court the sum of £15,000 in respect of that business. The security must take the form of an undertaking by its giver to make good subject to its conditions any failure by the owner of the vehicle or such other persons or classes of persons as may be specified in the security, duly to discharge any liability which may be incurred by them, being a liability which is compulsorily insurable by s.145. The deposit has been kept at £15,000 despite the requirements of s.144. This may appear incompatible on the face of it but the logic is that the givers of such securities are supervised to a great extent under other legislation and the Department of Transport took the view that s.146 did not require amendment.

The section also states that in the case of liabilities arising out of the use of a motor vehicle on a road in Great Britain the amount secured need not exceed £25,000 for public service vehicles or £5000 in any other case.

Issue and Surrender of Certificate of Insurance and of Security (s.147)

This section states that motor insurance is not effective until a certificate in the prescribed form has been delivered to the policyholder who may expressly or by implication authorise his or her agent to accept delivery of the certificate on his or her behalf. However, an insurance broker will normally be unable to maintain that he or she has accepted delivery of a certificate of insurance as agent for the insured. Nevertheless, where the post is used and is the normal channel of communication between broker and client, then the Post Office is the agent of the policyholder and the certificate is effective from the time it is posted to that policyholder. This section also applies to temporary cover notes.

A change to this law has been announced by the UK Government which will allow motor certificates to be issued electronically in the future.

Although the format of the certificate is controlled by the Motor Vehicles (Third Party Risks) Regulations 1972, by the terms of the Road Traffic Act 1991, it is now permissible to print a certificate on material other than paper. This has given rise to plastic card certificates.

The question of the surrender of certificates of motor insurance is also dealt with in this section. It provides that, where a certificate has been delivered and the policy or security to which it relates is cancelled by mutual consent or by virtue of any provision in the policy or security, the person to whom the certificate was delivered must, within seven days from the taking effect of the cancellation:

1. surrender the certificate to the person by whom the policy was issued or the security was given, or
2. if the certificate has been lost or destroyed, make a statutory declaration to that effect.

This latter requirement is of particular importance because the insurance market has tended to adopt the practice of requiring the completion of a lost certificate declaration rather than the swearing of a statutory declaration before a Justice of the Peace. So far as the Act is concerned, the motorist has committed an offence by failing to comply with the more stringent requirements set out in this section.

This section of the Act is concerned with the duties of a policyholder or holder of a security regarding evidence of a valid contract to comply with the minimum requirements of the Act. It does not affect the contractual obligations that exist between insurer and insured. Even if there is a technical breach of the requirements of the Act, insurers will still be liable under the terms of the policy if a valid contract exists. Its validity will be determined by the usual laws governing contracts (dealt with under Legal Principles of Insurance in section 1, General Principles and Market).

Avoidance of Certain Exceptions to Policies and Securities (s.148)

This section of the Act stipulates that an insurer cannot deny liability under a policy in respect of a claim brought by a third party for which insurance is required under s.143, because of either the failure of a person insured under the policy to observe any condition in the policy precedent to the liability of the insurer to pay the claim or any restriction in the policy relating to:

1. the age or physical or mental condition of the person driving the vehicle
2. the condition of the vehicle
3. the number of persons that the vehicle carries
4. the weight or physical characteristics of the goods that the vehicle carries
5. the times at which or the areas within which the vehicle is used
6. the horsepower or cylinder capacity or value of the vehicle
7. the carrying on the vehicle of any particular apparatus, or
8. the carrying on the vehicle of any particular means of identification other than any means of identification required to be carried by or under the Vehicles (Excise) Act 1971.

These provisions relate to general policy conditions, conditions specific to the vehicle or driver and conditions precedent to liability such as reporting procedures for claims.

Certain uninsured drivers (such as authorised drivers whose actions are not covered by the policy) are included within s.148. The insurer is liable to indemnify the person or classes of persons specified in the policy in respect of any liability that the policy purports to cover in the case of those persons or classes of persons. An insurer issuing the policy is therefore now liable under the Act, whereas previously they were under an obligation imposed by the MIB Domestic Agreement as “domestic regulations insurer”. Insurers cannot deny liability from a “Road Traffic Act” type claim if the policyholder does not comply with a policy condition subsequent to an accident occurring, eg completing an accident report form.

One restriction not included in the list relates to the use of the vehicle, eg social, domestic and pleasure. The question of use has come before the courts on a number of occasions. Insurers have argued that they do not have the status of a Road Traffic Act insurer where the vehicle insured is being used outside of the cover granted by the policy at the time of the accident. Court decisions have offered no precedent on this point, but in order to ensure market consistency, the Motor Conference of the ABI has organised an agreement that states insurers will not raise the “use” defence to avoid subrogated claims presented by a third party insurer. The agreement was signed unanimously by insurers and relates to all motor accidents which occurred after 1 July 1999.

Avoidance of Liability to Passengers (s.149)

This section prevents the driver of a vehicle from entering into any prior formal agreement or understanding that purports to restrict his liability towards any person being carried in the vehicle or the imposition of any conditions related to cover being effective. Passengers are defined as those entering into or alighting from vehicles as well as those actually in the vehicle.

Car Sharing (s.150)

This section relates to the formal agreement made in the early 1970s when car sharing arrangements became popular and there was a need to ensure that insurers would not avoid the policy by relying on the hire or reward exclusion. For arrangements to be treated as falling outside the exclusions of “hire and reward”, “business or commercial use” or “for specified purposes of a business or commercial character” certain conditions must be met. The vehicle must not be adapted to carry more than eight passengers and must not be a motor cycle. The fare or aggregate fares must not exceed the amount of the running costs for the journey, including depreciation and wear, and must have been agreed in advance of the journey.

Duty of Insurer to Satisfy Judgments (s.151) and Exceptions (s.152)

These sections taken together state that an insurer must make payment to a third party in respect of any liability required to be covered by the Act even if the insurer is entitled to void or cancel a policy or even if it has already been voided or cancelled unless:

1. the insurer has not been given the required period of notice of third party proceedings (the notice must be formal). Under subsection 1 the claimant or his or her solicitor must give notice to the insurer of the bringing of proceedings either before they commence or within seven days of the issue of the summons or writ (now called a claims form). In Harrington v Link Motor Policies (1989), a letter from solicitors to insurers threatening proceedings if liability was not admitted or the claim met was not sufficient notice. The later case of Wake v Page (2000), a Court of Appeal decision, confirms this. Here it was held that the insurers were entitled to avoid paying damages where no letter had been sent to the insurer even though they were aware of proceedings against them through their client
2. the policy had been cancelled before the event occurred and the certificate had been delivered to the insurer (or a statutory declaration had been made in lieu) within 14 days of the cancellation; if following cancellation of a policy the certificate or statutory declaration in lieu is not delivered up to the insurer then he or she must start proceedings under the Act within 14 days of the date of cancellation in order to make the cancellation of the motor insurance policy completely effective, or
3. the insurer can succeed in getting a court to declare that he or she was entitled to cancel the insurance because it was granted as a result of non-disclosure or by false representation and provided that notice is given to the third party not later than seven days after the start of the action for damages by such third party.

Section 151 states that liability is not incurred in respect of the death of, bodily injury to, or damage to the property of any person who at the time of an accident was allowing himself or herself to be carried in or on the vehicle and knew or had reason to believe that the vehicle had been stolen or unlawfully taken, not being a person who did not know and had no reason to believe that the vehicle had been stolen or unlawfully taken until after the commencement of the journey and could not reasonably have been expected to have alighted from the vehicle.

The case of White v White & Anr (2001) sheds light on the interpretation of the expression “knew or ought to have known”, which appears in a clause in the MIB agreement and is therefore relevant here. The point at issue in this case was whether the MIB had a duty to satisfy judgements in circumstances where the passenger was, or ought to have been, aware that the driver had no insurance cover. An individual was very badly injured when his brother lost control of the car and there was no insurance cover in force. The driver was at the time disqualified from driving and had not passed a driving test. However, his brother did not know that he was uninsured or that he was unlicensed although he had known of his brother driving without a licence in the past.

The House of Lords looked at the purpose of the EEC Directive 84/5/EEC (which is the basis of the MIB Agreement) and the Law Lords concluded that the fault on the part of the passenger had to be more than mere negligence. The decision was not unanimous. However, on balance, the Law Lords ruled in favour of funds being paid by the MIB. It follows that, in order for the MIB to rely upon the exemption, there must be provable knowledge on the part of the injured party that the driver is uninsured.

Provision is made for the usual right of recovery by the insurer against the policyholder or other party insured where payments are made to third parties only because of the requirements of the Act.

There must be a judgment in favour of the third party against someone covered by the policy. The guilty driver must be identified and sued. If this is not possible the case would be dealt with by the MIB.

Bankruptcy of Insured not to affect Third Party Claims (s.153)

This section is designed to protect the legal position of an injured third party so that if the person whose liability is required to be covered by a policy of insurance becomes bankrupt, or makes a composition with his creditors, or, if a company, otherwise goes into liquidation, then notwithstanding the provisions of the Third Parties (Rights Against Insurers) Act 1930 liability required to be covered is not affected.

This section does not affect the position under the TP (RAI) Act. However, that Act will apply so that the third party can claim directly against the insurers but only where a judgement has been given. Neither does this section conflict with the TP (RAI) Act because rights under the RTA appear unaffected without that transfer.

Duty to Give Information as to Insurance or Security where a Claim is Made (s.154)

Anyone against whom a claim is made within the scope of a compulsory insurance must on demand by or on behalf of the claimant:

1. state whether or not he or she was insured or had a security in force, or would have been so insured or have had such a security in force if the insurer or the giver of the security had not avoided or cancelled the policy or security, and
2. furnish particulars in respect of such policy or security.

If a certificate of insurance was not delivered, then the registration mark or other identifying particulars of the vehicle, the insurer, the policy number and the period of cover must be supplied. Non-compliance without reasonable excuse or the making of a false statement constitute an offence.

Regulations Relating to Deposits and Applications for Vehicle Licences (s.155 and s.156)

Section 155 seeks to ensure that, if a deposit is properly made with the Accountant General of the Supreme Court, it is not applied to any other liabilities until those required by the Act have been met.

Section 156 refers to s.37 of the Vehicles (Excise) Act 1971 and gives the post office or other issuing body the duty of requesting evidence of insurance or an explanation for exemption when the keeper of the vehicle applies for a road fund licence.

Hospital Treatment for Traffic Casualties (s.157)

This section requires an insurer who has made any payment (whether or not with an admission of liability) in respect of any person who has been killed or injured in an accident arising out of the use of a motor vehicle on a road or a place to which the public have a right of access to pay the expenses reasonably incurred by a hospital in providing treatment to the injured person as an in-patient or out-patient. The limits imposed are amended in line with inflation on a regular basis. Insurers are normally advised by the ABI of the revised figures. The terms and method of collection of recoveries are now defined in the Road Traffic (NHS Charges) Act 1999. Liability attaches as soon as compensation has been paid to the injured third party and exists even if the third party claim is paid on an ex gratia basis.

Payment of Emergency Treatment (s.158)

This section similarly requires a person who is using a motor vehicle that is involved in a road accident to pay a fee to any qualified medical practitioner who provides emergency medical treatment to an injured person including the driver and regardless of liability. A travelling allowance has also to be paid to the medical practitioner; a mileage allowance exists where the distance is greater than two miles.

Because payment is made regardless of liability, the motor policy will state that such payments will not affect a policyholder’s no-claim discount.

There was a suggestion that the emergency treatment fee might be abolished but it remains and, because of the Government attitude towards NHS charges and recoveries, appears likely to remain and, if anything, increase.

Supplementary Provisions as to Payments for Treatment (s.159)

This section defines the bodies and/or authorities who may claim payment for emergency treatment or hospital treatment.

Further Definitions (ss.160–162)

These sections give further definitions of the terms used in the Act.

Part VII

Although this Part is headed “miscellaneous and general” there are some important elements, including the defining of the terms “road” and “motor car” and rules regarding the production of certificates of insurance. The more significant sections are outlined here.

Production of Certificates of Insurance or Security (s.165)

This section empowers the police to require the production of a certificate. If it cannot be produced immediately, it must, where practicable, be produced at a police station within seven days.

Duty of Driver Following an Accident (s.170)

This section requires that the driver of a motor vehicle involved in an accident on a road causing personal injury to another person or damage to certain prescribed animals must stop. They must also produce a certificate of insurance to a police constable or some other person who, having reasonable grounds for doing so, has required its production. If it cannot be produced immediately, it must be produced within 24 hours of the accident at a police station or to a police constable. It is significant, however, that the police authorities will not necessarily become involved in recording “damage only” cases.

Definitions

This section provides a number of definitions including that of “motor car” (s.185), which means a mechanically propelled vehicle, not being a motor cycle or an invalid carriage, constructed to carry a load or passengers and meeting certain weight criteria that vary according to its construction and use.

A “road” (s.192) is defined as any highway or other road to which the public has access and includes bridges over which a road passes. If the public has access to a private road then it is included within the definition. The Vehicles (Excise) Act 1962, which requires the licensing of most vehicles used on a public road, defines a road as one that is “repairable at public expense”. Therefore, although a vehicle may not require licensing because it is used only on roads that are not repairable at public expense, if the public have access to them a certificate of insurance will still be required for the vehicle.

In practice, roads within the boundaries of such places as docks and airports are within the definition of s.196. In considering the status of car parks, the House of Lords (overturning the Court of Appeal decisions) decided in 1998 that the test to be applied in Clarke v Kato and Others and Cutter v Eagle Star Insurance Co [1998] 4 All ER 417 , 1 WLR 1647 was one of the function and character of the car park. Since a car would normally be in a car park in order to stand and wait, it was only incidental that there was the possibility of movement within the car park. It did not therefore constitute a road within the meaning of the RTA.

The interpretation of a road has been clarified in some areas by case law. A road includes any road to which the public have access or on which they are to be found provided that they have not overcome a physical obstruction or defied an express or implied prohibition. It also includes roads or road systems accessed by the payment of a fee, such as those in a caravan park.

EU Motor Insurance Directives

The purpose of the various motor insurance directives has been to harmonise the laws of Member States to facilitate the freedom of movement of EU citizens by motor vehicle and to ensure that when claims arise outside the home State, handling procedures are effective and policy cover set at an appropriate level. Originally there were five directives which are shown below. These have now been codified under the EU Motor Insurance Directive 2009/103/EC.

First Motor Insurance Directive

The First Motor Insurance Directive 72/166/EEC provided that there must be compulsory third party personal injury cover within each EC Member State, which would apply to vehicles normally based in that country. In the event of any dispute regarding what is “normally based” it will be determined by the registration plate. Every motor policy issued must cover loss or injury sustained in any other member country for at least its own local minimum compulsory requirements. There were still some problems that remained, however. The directive did not standardise cover, though it took away some of the previous anomalies. There were some countries that had modest compulsory limits for personal injury and some (like the UK) that had no compulsory third party property damage cover requirement. Problems still remained about drivers who were unlicensed or in breach of some technical insurance requirement.

The directive required the local motor insurers’ bureau (MIB) to pay valid claims and then to recover the money from the “home” State bureau. Very importantly there were to be no more checks at national borders on insurance documents for those travelling from other member countries. Under this directive, road accident claims are dealt with according to the law of the country where the accident happened and not the country of residence of the claimant.

Second Motor Insurance Directive

The objective of the Second Motor Insurance Directive 84/5/EEC was to harmonise the scope of cover provided and set minimum levels within each member country. They were set at 350,000 euro per victim of a motor accident and 100,000 euro per claim for property damage.

Member countries were permitted to use other limits of 500,000 euro when more than one individual is involved or 600,000 euro where both personal injury and property damage are concerned. Importantly, the directive limited the exclusions that were permitted. It stated that liability cannot be excluded for those:

1. unauthorised to drive, for example thieves, except for passenger liability in circumstances where the passenger knows that the vehicle is stolen
2. without licences
3. in breach of a technical requirement concerning the condition or safety of the vehicle.

It specified that a compensation fund should be set up to compensate victims where there is no insurance in force at all. This already existed within the UK. Other measures that were required by the directive were brought into effect as part of the Road Traffic Act 1988. The limit for third party property damage was pitched at a level which at the time represented about twice the required monetary level. Third party personal injury was already unlimited in amount and had been so since the passing of the Road Traffic Act 1930.

Practice still varied between member countries. Some were insisting that all other avenues should be exhausted before the MIB should be required to pay. Where this happened it could involve extensive delay before settlement. There were occasions when it would not be clear whether the matter should be settled by the insurer or the MIB. This also added delay. Confusion existed because there was no standard practice about exchanging details in the event of an accident. Practice varied about making extra charges to extend cover to other EC countries. Some insurers would only extend their policies to cover the local minimum requirements when policy cover in the “home” country may have been much wider.

Third Motor Insurance Directive

Many of the outstanding issues were addressed in the Third Motor Insurance Directive 90/232/EEC. This effectively calls for policies to cover the minimum level of cover for the Member State where the vehicle is normally kept, or the minimum level of cover required in the Member State visited, whichever is the higher.

Payment of compensation must be made as soon as liability is established. Where there is a dispute, Member States must oblige the insurer or the MIB to pay once liability is established and sort things out between themselves afterwards.

All parties involved in an accident are required to exchange insurance details. The directive included the requirement that passenger liability (including pillion passengers on motor cycles) must be included in motor insurance policies.

For simplicity, a single premium charged for a motor policy must cover use in the whole of the EU. Cover provided in any Member State should not be less than that provided in the “home” State.

In the UK, passenger liability cover was already compulsory. Other elements requiring legislation were incorporated in the Motor Vehicles (Compulsory Insurance) Regulations 1992.

Fourth Motor Insurance Directive

This directive is concerned with further aspects of harmonisation relating to claims. The basic intention of the directive is to simply claim against a foreign insurer when an EU citizen is involved in a motor accident outside his or her normal country of residence.

An injured party has direct right of action against the insurer concerned. Where the insurer is not known the injured party can contact the Motor Insurers’ Information Centre (MIIC) in the UK. Each EU country has its own information centre and these will have access to information which will enable the claimant to establish the relevant insurer. As a result of the directive, the Motor Vehicles (Third Party Risks) (Amendment) Regulations 2001 have been passed which allow an injured party seven years from the date of the accident.

As part of the directive, specified bodies exempt from insurance have had to provide details to the MIIC for inclusion on a Motor Insurers’ Database, as have motor fleet policyholders.

Each insurer in the EU must appoint a claims’ representative in every other Member State who is able to deal with the injured party in their own language. These representatives will collect information and take the necessary action to settle any claim. This provides local claims handling in the claimant’s own State and avoids any procedural or language problems.

Fifth Motor Insurance Directive

The directive is aimed at creating a single market to ensure all motor vehicles in the EC are covered against third party liabilities. Much of the directive has implications for the Motor Insurers’ Bureau (MIB) rather than insurers. It provides for:

• an increase in the minimum amount for third party personal injuries (liability in the UK is already unlimited and is greater than that recommended by the directive)
• a system of compensation for victims who are injured by vehicles that have false registration plates
• compensation for victims where the vehicle was not required to be conventionally insured
• increased minimum legal cover for third party personal injury and property damage claims of €1m. This will have repercussions when a claim is being dealt with as Road Traffic Act cover only – which is how the vast majority of MIB claims are dealt with
• claims to be allowed for property damage where an unidentified vehicle causes significant personal injury
• removal of the excess for property damage caused by an uninsured vehicle
• liability towards pedestrians and cyclists
• UK insurers will not be allowed to use the Road Traffic Act 1988 to exclude passenger liability when passengers are knowingly being carried in a vehicle driven by a drunk driver
• insurance for stays abroad
• insurance cover for imported vehicles for up to 30 days which are to be re-registered
• rights to ask for a statement of claims experience
• a direct right of action against insurers for domestic victims (extending the Fourth Directive)
• an extension of the role of Information Centres.

EU Motor Insurance Directive 2009/103/EC

The aim of the 2009 Directive was to reinforce the free movement of vehicles in the European Union. The Directive establishes a single market in the field of motor insurance and obliges all motor vehicles in the EU to be covered by compulsory third party insurance. It also abolishes border checks on insurance so that vehicles can be driven as easily between Member States as within one country.

The Directive codifies all the previous five EU Motor Insurance Directives, which consequently are no longer in force. It was published in the Official Journal of the EU on 7 October 2009.

The Directive guarantees a better protection of third party victims of road traffic accidents, including those caused by unidentified or uninsured vehicles. It sets the minimum amounts of compensation for both material and physical damage at in the case of personal injury, a minimum amount of cover of EUR 1,000 000 per victim or EUR 5,000 000 per claim, whatever the number of victims. For damage to property the limit is EUR 1,000 000 per claim, whatever the number of victims. Member States may have a transitional period until 11 June 2012 to adopt these amounts.

The calculation of compensation awards rest with the Member State. All passengers in the vehicle (including the family of the driver) are covered by compulsory insurance.

All compulsory motor insurance policies should cover the entire territory of the European Union, including for any period in which the vehicle remains in other Member States during the term of the contract. It must be remembered that the Directive does not apply to comprehensive insurance cover.

The Directive provides for a mechanism to compensate the local victims of accidents caused by vehicles from another Member State. It relies on the private sector network of bureaux and the Green Card System set up by insurers which handle the victims’ claims. It also establishes an efficient mechanism for the quick settlement of claims where the accident takes place outside the victim’s Member State of residence (the so-called “visiting victims”).

Under the Directive a policyholder has the right to request at any time a statement concerning the claims, or the absence of claims, (i.e. proof of bonus) involving the vehicle or vehicles covered by the insurance contract at least during the preceding five years of the contract. The insurer should provide this statement to the policyholder within 15 days of the request. This would enable policyholders to switch more easily from one insurer to the other. This is in line with the FSA’s ICOBS rules.

The Directive states that motor vehicles should be registered in the country of residence of the policy holder and/or vehicle owner. Motor vehicles may – provided that they are in a regular situation with respect to the national registration rules – be insured by an insurer established in the Member State of registration or by an insurer established in any other Member State. Insurers willing to provide cross-border insurance services must fulfil certain formalities following from the relevant EU insurance legislation. They also need to be willing to offer a contract (according to the fundamental EU principle of commercial freedom, neither an insurer nor a consumer can be forced to enter into a business relationship).

Motor Vehicles Regulations 2003

These Regulations provide for a UK resident to be compensated by the Motor Insurers’ Bureau if he or she is injured in an accident involving an uninsured or unidentified vehicle in an EU Member State. In Jacobs v Motor Insurers’ Bureau the courts were asked to decide which law should be used to assess damages caused to a UK resident by an uninsured German driver, then resident in Spain. In cases of dispute over which law applied EU Regulation 864/2007 – known as Rome II – is used. This came into effect in January 2009. The court ruled that Spanish law applied.

Directive on Freedom of Services for Motor Insurance

The Directive on Freedom of Services for Motor Insurance 90/618/EEC was adopted by the Council on 8 November 1990.

Motor vehicle liability is added to the “large risk” classes listed in the Non-Life Services Directive (see section 10,Insurance of Overseas Risks later dealing with Insurance and the European Union).

The other main points are:

1. an insurer wishing to write service business must join the guarantee fund in the country of the service, and
2. such insurer must have a claims settling representative in the country of service.

The requirement came into force on 8 November 1992.

Transport Act

Part V of the Transport Act 1968 lays down the regulations for the carriage of goods by road, including the provisions for the licensing of goods vehicles.

In s.60, the Act requires operators of goods vehicles (other than “small goods vehicles”) whether used for hire or reward or for the carriage of the operator’s own goods, to obtain an operator’s licence. There are three classes of good-carrying vehicle.

• A small goods vehicle is defined as a vehicle with a plated weight not exceeding 3.5 tonnes or if it does not have a plated weight, with an unladen weight not exceeding 1525kg. A plated weight is the total weight of the vehicle when fully laden.
• Medium goods vehicles are between 3.5 tonnes and 16 tonnes.
• Large goods vehicles are over 16 tonnes.

In s.71, the Act imposes further controls on the use of large goods vehicles. In addition to obtaining an operator’s licence, special authorisation is required for:

1. the use of large goods vehicles on controlled journeys, ie basically the carriage of goods over 100 miles, or
2. any other journey where the goods carried exceed 11 tons in weight.

A large goods vehicle is defined as a vehicle with a plated weight of more than 16 tons, or if it does not have a plated weight, with an unladen weight of more than 5 tons.

Transport Act 1985

This Act deals with the management of passenger services following the dissolution of the National Bus Company. It provides for the licensing and control of various operators but especially

• modifications to the permits required to operate buses for educational, religious, social welfare or other beneficial community activities
• PSV operator’s licence
• taxies and hire cars
• regulation of road passenger transport in the UK.

Unfair Contracts Terms Act

Contracts of insurance were excluded from the provisions of the Unfair Contracts Terms Act 1977, but are now included, because of the terms of the EU Unfair Contract Terms Directive. However, a statement of insurance practice was agreed between the Association of British Insurers (ABI) and the Department of Trade and Industry (DTI) concerning the protection afforded to policyholders against unfair treatment, and this statement of practice embodied a number of the recommendations made previously by the Law Commission. The statement applies only to persons insured in their private capacity. It has necessitated some changes to documentation in the classes of insurance mentioned, and has been amended to provide further protection to policyholders. The Unfair Terms in Consumer Contracts Regulations 1999 protect consumers against unfair standard terms in contracts they make with traders. The Office of Fair Trading, together with certain other bodies, can take legal action to prevent the use of such terms.

Road Traffic (New Drivers) Act 1995

The Road Traffic (New Drivers) Act 1995 was enacted because of the very high preponderance of accidents and road traffic offences committed by those having recently passed their tests, particularly young drivers.

Under this Act, any person who accumulates six points on his or her licence within two years of having passed the driving test will automatically have the licence revert to the status of provisional. The driver must then comply with the rules of holding a provisional licence, including the requirement to be accompanied at all times by a driver holding a full licence, and must take and pass a further driving test in order to regain a full licence. From an insurer’s perspective, this information may become known at renewal or as a result of the completion of an accident report form at the time of a claim. It is a material fact since it will affect the premium charged or the terms to be applied.

Road Traffic (Nhs Charges) Act 1999

The potential for recovering costs from insurers has been available for some time to individual NHS Trusts in situations where a casualty of a motor accident receives treatment in an NHS hospital. Recoveries from insurers had, however, been spasmodic, varying according to the time and effort made by the particular NHS Trust to effect the recoveries. This legislation changed the system for recoveries in some important respects, one of which is the centralising of the collection of recoveries from insurers.

The terms of the Act apply if:

1. a traffic casualty has suffered injury (or suffered injury and died) as a result of the use of a motor vehicle on a road
2. a compensation payment is made by an insurer
3. treatment was given to the casualty at an NHS hospital.

Treatment as a private patient is excluded, but the terms of the Act specifically embrace situations where the Motor Insurers’ Bureau is involved (rather than an authorised insurer) and clarify that the indemnity payment triggers recovery under the Act even if a compensation payment is made with no admission of liability. The insurer may apply to the Secretary of State for a certificate of NHS charges any time before making a compensation payment but must in any event apply for a certificate at the time of making the payment.

The insurer must pay the recovery amount identified in the certificate either 14 days after the date of making the compensation payment or 14 days after the issue of the certificate, if later. Allocation of the amounts collected to the appropriate NHS hospitals is the responsibility of the Secretary of State.

Appeals are considered only after payment by the insurer of the sum stated as being due on the certificate.

Rehabilitation Of Offenders Act

Full details of the provisions of the Rehabilitation of Offenders Act 1974 will be found in section 1, General Principles and Market. Highlighted here are the major features relevant to motor insurance.

The Act itself is concerned with ensuring that those who have committed offences should, after an appropriate period of time, be freed from the continuing burden of the offence by treating the offender as having been totally rehabilitated. The rehabilitation period, after which the conviction is treated as having been “spent”, varies according to the severity of the penalty imposed. Motoring offences are relatively commonplace and it is important that proper attention is paid to the terms of this Act. An insurer cannot take into consideration a conviction that is “spent” under the terms of this Act. Insurers must therefore have appropriate acceptance and renewal procedures that ensure that they are able to comply with these requirements. For example, if a premium increase or special terms have been imposed as a result of a known conviction and that conviction becomes “spent” during the current period of insurance, the increase or terms must be removed at the next renewal (assuming that there was no other factor involved).

The case of Power v Provincial Insurance plc [1997] is important for motor insurers. When completing a proposal form, Power indicated that he had had no convictions, although five years and two months previously he had been convicted of driving under the influence of alcohol. It had generally been felt that the offence would not be rehabilitated for a period of 11 years because this is the period that is prescribed before a “clean” licence may be requested. However, the judges in the Court of Appeal went back to the original intention of the Act and decided that the ineligibility to apply for a licence was not the determining factor: it did not represent a “disability” or “other penalty” referred to in the Act. The usual period of five years therefore applied by virtue of the fine imposed (seeLegal Principles of Insurance in section 1, General Principles and Market).

Disability Discrimination Act 1995

The terms of this act (together with the Disability Discrimination Regulations 1996) impact upon motor insurers in a number of different ways. The purpose of the Act is stated as establishing “a statutory right of non-discrimination for disabled people in employment, access to goods, facilities and services and in connection with the disposal or management of premises”. Clearly, insurers fall within the scope of providers of services and the only grounds where discrimination is justifiable are those of health and safety or cost.

Motor insurers have always treated the proposer’s health — and particularly known physical disabilities — as material so far as rating and underwriting are concerned. It can be assumed that the legislation will permit this discrimination only so far as the additional cost or terms can be justified. Most insurers will only apply terms in the case of serious disability and generally quote at more or less standard rates. Of course the issue is taken out of insurers’ hands if a licence to drive is withdrawn by the DVLA on health grounds.

Issues were clarified somewhat by the Disability Discrimination (Services and Premises) Regulations 1996, which stated that less favourable treatment of disabled people can be justified if assessment of the risk can be demonstrated as coming from a reliable source. This may include statistical data and medical evidence.

The issue extends beyond underwriting measures to such things as the provision of a courtesy car. It may be that the insurer’s provision of a modest-size standard hatchback as a courtesy car when the insured’s vehicle is off the road will not meet the insured’s needs. If the provision of the courtesy car is a contractual one, it is unlawful to discriminate. The easiest way for insurers to meet their liability under the policy would seem to be to make a payment for a suitable temporary replacement vehicle rather than actually provide one.

Road Safety Act 2006

This Act deals with new penalties for drink driving and speeding and a new system of endorsements. Under section 21, there is a new offence of causing death by driving an unlicensed or uninsured vehicle or where the driver is already disqualified. Section 22 amends the Road Traffic Act 1988. If a motor vehicle does not meet the insurance requirements, the person in whose name the vehicle is registered is guilty of an offence. The effect of this should be that every vehicle that is registered with the Driver and Vehicle Licensing Agency should have a current motor insurance policy unless it has been declared as being off the road by the registered keeper using a statutory off the road notification. This section also allows for the seizure, clamping and disposal of vehicles where there is evidence or suspicion that the vehicle is not insured.

From 2011 the Driver and Vehicle Licensing Agency (DVLA) will be working with the Motor Insurers’ Bureau (MIB) to reduce the number of uninsured drivers under what is known as the Continuous Insurance Enforcement Scheme. The DVLA will compare their data with that held by the MIB to see if a vehicle is insured if it is on the road. If no insurance is traced than a letter will be sent to the registered keeper. If no action is taken the keeper will face a fine, prosecution and have the vehicle clamped, seized and destroyed.

Contractual Background

Legal Principles of Insurance in section 1, General Principles and Market applies to motor insurance. The following is therefore a supplement to this text.

Making the Contract

Cover notes

In circumstances where it is not possible to issue a policy or certificate straight away, it is necessary under the Road Traffic Act 1988 to issue a cover note to act as temporary evidence of the insurance until the policy document and the certificate of insurance can be prepared. Modern electronic practices allow agents to issue the annual certificate of insurance at the point of sale. Most internet sales allow the customer to download documentation whilst most brokers’ quotation/policy administration systems allow the immediate printing of cover notes. However, strict regulations still exist for both manual and electronic systems. Manual cover notes must be kept in a safe and secure place.

The cover note will provide evidence of cover in the normal form of policy issued by the insurer. It must show both the date and time when the insurance starts and the period for which it will run, often 30 days. It is an offence to backdate RTA cover, so a cover note must not show a time of commencement prior to the time and date of issue. They must be complete in black ink. To meet the definition of certificate under the Act, the cover note has to be delivered. The cover note also provides the main details of the cover granted.

Insurers will always insist on their own procedures and security measures in the operation of any cover note system. The period for which cover notes can be issued varies from 15 to 60 days. Insurers usually insist that cover notes may not be issued unless a proposal form has been completed or full details of the risk have been disclosed. All sections of the cover note must be completed to prevent fraudulent alterations. They may be cancelled by the insurer immediately or within seven days by giving written notice to the customer. Cover notes should not be altered or amended. If a mistake is made, the cover note should be cancelled and a new one prepared.

Deposit premium

It is good practice for a broker or agent never to issue a cover note for a new motor insurance without securing an adequate deposit premium from the client. “Adequate” in this context would mean an amount calculated to be at least equivalent to the “short period” rates that would apply for that period of cover.

Policy forms

Normally, cover is arranged on a comprehensive, third party fire and theft or third party only basis, as required by the proposer. A unique feature of motor insurance is that policy terms and conditions cannot be relied on to repudiate claims by third parties for any liability provided for in the RTA 1988. Such claims have to be dealt with as if the policy exceptions and conditions did not exist, although insurers have a right of recovery against the insured in such circumstances.

Certificates of insurance

(See Issue and Surrender of Certificate of Insurance and of Security (s.147) earlier in this section for requirements under the RTA 1988.)

The layout and content of a certificate is laid down by the Motor Vehicle (Third Party Risks) Regulations 1972. The Regulations permit two types of certificates: A where the registration number is stated on the certificate; and B where the vehicle is referred to but not specifically identified. Today a blanket certificate is usually offered only to large commercial risks to take out the administrative burden of issuing new certificates for every vehicle the insured acquires. The terms and conditions stated in the certificate must permit third parties to recover in respect of “Act” liabilities despite any contractual terms and conditions in the policy to the contrary.

Certificates issued on or after the 31 December 1988 must contain the notice (as supplied by the ABI) “Advice to the Third Parties. Nothing contained in this certificate affects your right as a third party to make a claim”.

There is a requirement in force that certificates of insurance are displayed on Hackney Carriages operating in the London Metropolitan Police Area.

In the Republic of Ireland, legislation has been passed making it compulsory from 1 July 1986 that all vehicles which are licensed for road use (excluding certain categories such as motor cycles and agricultural vehicles) must display an insurance disc. This is a similar concept to the “road fund disc” and it is the responsibility of motor insurers to print and issue these, together with the usual RTA certificates.

Because certificates of insurance are valuable documents and photocopying may be straightforward with attendant risks of fraud, many insurers now issue certificates with an identifying mark that is treated so as to change colour when modest heat is applied (such as when held between finger and thumb).

The certificate can vary in size, shape, colour, typeface, watermarks, company logo and name. The insurer must authorise the certificate. It must show the registration mark or the description of the vehicle must be shown on A certificates. The name of the insured must appear on the certificate as must the date of commencement and expiry. The person entitled to drive and the limitations of use must also be shown. Modern certificates can be produced on plastic cards.

The Motor Vehicles (Electronic Communication of Certificates of Insurance) Order 2010 amends the Road Traffic Act 1988 and the Motor Vehicles (Third Party Risks) Regulations 1972 and allows the delivery of the certificate by email or website access.

The Act says that where delivery is via a website, the insurer must take reasonable steps to make the certificate continuously accessible to the insured throughout the policy term – including remedying any temporary unavailability. It also says if the insured wants to surrender their policy or make a statutory declaration that a certificate has been lost or destroyed they will be able to do so by emailing the insurer. Where the police require evidence of insurance the insured can give them electronic access to the certificate or provide a printed copy.

Alteration of the Contract

When an alteration is required to an insurance contract it is often necessary to issue a cover note until such time as an endorsement and a fresh certificate of insurance can be issued. Some companies issue blanket certificates for commercial policies and word their policies accordingly so obviating alterations to the policy or certificate where there is a change of vehicle, but such changes still must be notified to the insurer. With effect from 31 December 1997, the market agreed that all certificates issued for personal private car policies shall specify the registration details of the insured vehicle.

Foreign use

The EU regulations are intended to provide that visiting motorists from one EU state should not be impeded by the need to comply at each border point with the separate insurance requirements of another EU state. They are also intended to provide that road traffic victims of an EU state should not suffer if the driver causing an accident was from another EU state.

Although EU regulations provide minimum cover as laid down by the directives, most motorists will want wider cover and need to contact their insurers for a “Green Card”. A Green Card is an internationally recognised document which serves as evidence that the holder has the minimum insurance cover required by law in the country being visited. The same situation applies in a number of other countries namely Croatia, Gibraltar, Iceland, Liechtenstein, Monaco, Norway, San Marino, and Switzerland. Some insurers may exclude cover for these countries and the insured should contact their insurers to confirm cover.

There are a number of countries that use the Green Card system and this extends beyond the EU. Each country who subscribes to the scheme will appoint a bureau to handle claims. The bureau for the UK is the Motor Insurance Bureau and the principles of the scheme form part of the Road Traffic Act 1988. If a loss occurs abroad the injured party makes a claim against the relevant Bureau. The Bureau will handle the claim and any legal proceedings and will then seek payment from the Bureau of the country of the visiting motorist.

The insurer should be notified early of any proposed journey abroad. Some insurers will give a free extension of foreign use cover for up to 60 days. Minimum cover in EU countries is provided automatically.

The Green Card may be issued at no cost or a charge may be made, not for the cover, but for the issue of the document. The Green Card will be issued for a minimum period of 15 days, irrespective of the period required by the policyholder.

For visits to Spain a “bail bond” is no longer required — although some insurance companies still issue them, they have not been required since 2000. The bail bond was a guarantee provided at an additional premium by an insurer to secure the release of the policyholder or his or her vehicle from the custody of the authorities following an accident. The guarantee was usually for a limit of £5000. The bond is a guarantee and not insurance, so being refundable to the insurer. If the whole or any part of the guarantee is retained permanently by the authorities for the payment of a fine or costs the policyholder must reimburse the insurer.

Renewal of the Contract

Renewal notice

The insurance company normally offers to renew the contract by issuing a renewal notice which will indicate the renewal premium, any changes in cover that the insurer wishes to apply and normally state that any no-claim discount will not be operative if there is an accident before renewal date. The FSA’s ICOBS rules set out the procedures an insurer must follow when offering a renewal. The offer to renew is normally accepted by the policyholder paying the renewal premium on or before the renewal date. There are no days of grace for renewal in motor insurance. Traditionally, as a concession, insurers normally included on the reverse of the renewal notice a certificate of insurance granting “Act” only cover for a period of 14 days after the renewal date. If the policyholder then accepted the offer by paying the renewal premium, and provided that they had not previously rejected it, they received the renewal certificate date with the cover to commence on the renewal date with the cover during the period from renewal date until the date when the premium is actually paid having been “Act” only cover.

This practice has often been misunderstood and has been interpreted as providing a temporary extension to existing cover whilst the policyholder shops around for alternative quotations. As there is no legal obligation to provide this extension, many insurers have removed this cover from their invitations to renewal, as recommended by the Motor Insurers’ Information Centre. Some insurers have continued the practice, but have reduced the number of days to seven or ten.

If the insurance is not renewed on time it is normal practice to send a reminder. If the premium is eventually paid after the “Act” only certificate has expired, then the renewal certificate must be dated to start on the date when the premium is actually paid.

We have so far assumed that the policy is of the usual 12 month annually renewable type. However, under the direct debit system insurers are prepared to accept monthly payments direct from the policyholder’s bank and to issue policies and subsequently renewal documentation to the policyholder. The system relies on specific instruction from the policyholder if the arrangement is to end. Part of the market is prepared to issue monthly policies. These represent the purchase of one month’s cover at a time, not payment by instalments.

Renewal system

Whichever system operates it must take account of the Insurance Conduct of Business Rules (ICOBs) issued by the Financial Services Authority. These were updated on 6 January 2008 and state under rule 6.1.5 that a

“firm must take reasonable steps to ensure a customer is given appropriate information about a policy in good time and in a comprehensible form so that the customer can make an informed decision about the arrangements proposed.”

The previous rules provided that customers should receive renewal terms in a durable medium not less than 21 days prior to expiry and most insurers will provide renewal information within this period. Where payment is by direct debit policies are renewed automatically unless the insured tells the insured otherwise or the insurer no longer handles this class of business.

The information to be provided on renewal will be the same as that for a new policy. It will include any changes to the policy, the renewal price, and terms for cancellation. If the insurer does not wish to renew the policy they must inform the insured usually 21 days before expiry.

An insurer could rely on the operation of the no-claim discount system to deal with premium increases that may be justified because of adverse claims experience. Equally, the computer system could be designed in such a way as to apply different rates and terms that the insurer would wish to offer as a result of the changed age or driving experience status of the policyholder or driver. However, there will always be cases where such automatic procedures will need to be ratified or amended in the light of the underwriter’s experience.

Risks that may be specially considered would fall within the following categories.

1. Risks where some special terms may have been applied at inception or last renewal to check whether they remain appropriate. An insurer will not wish to lose business where what may have once been considered a sub-standard risk becomes more attractive to the market as a whole by the passage of time.
2. Risks where there is a greater accident frequency than the norm. The insurer may feel that the loss of no-claim discount is insufficient in itself to produce an adequate premium.
3. The occurrence of a single large loss. What is “large” may vary from one insurer to another but there will always be a threshold for losses that will trigger the need for individual consideration.
4. Convictions must be reviewed both for commercial reasons and to ensure compliance with the terms of the Rehabilitation of Offenders Act 1974. Any new convictions will need to be taken into account.
5. Agreed value policies must be reviewed each year to check and amend if necessary the agreed value.
6. Certain vehicles of particular types, performance characteristics or exceptional value will be monitored annually.
7. Older drivers or policyholders with known medical conditions. For most insurers “older” means over 70 or 75, when it would be usual to request some confirmation from a medical practitioner of continuing good health and the ability to drive competently. Medical conditions are of many different types. Insurers will be concerned particularly with recently diagnosed serious conditions and those of a progressive kind.

Cover note

If a revision of cover is being negotiated at renewal a cover note is often issued to ensure that policy cover is maintained while negotiations continue.

Making a Claim

Notification of accident

Policies normally contain a condition requiring the policyholder to notify the insurer of every accident involving either the vehicle specified in the policy or any other vehicle being driven by the policyholder for which insurance is provided by the policy as soon as possible. Today the majority of accidents are advised to insurers by telephone. Direct writers prefer this method of operation. Where an intermediary is involved they are often asked to use this method. Some insurers no longer use accident report forms. They use the telephone call to produce a fully or partially completed report form that is sent to the insured. Other insurers provide an accident report form when issuing a new policy so that there is no delay in the event of an accident likely to give rise to a claim. Some insurers have internet based claims systems that allow reporting of claims and allow online tracking of the claims settlement process.

A telephone call to report an accident or the completion of an accident report form does not automatically mean that the policyholder or other insured is making a claim and hence does not automatically prejudice a no-claim discount. If a policyholder chooses simply to notify a claim to the insurer and deal with the payment or negotiation themselves, they risk the possibility of costs escalating beyond the initial expectation. It is not at all uncommon for what appears to be minor damage to turn out to be very much more expensive. More serious again is the possibility of a latent claim for whiplash or other personal injury not evident at the time of the collision. It is often the desire to protect a no-claim discount that persuades individuals to go down this route. It is clearly important that policyholders recognise the dangers before embarking upon this course of action. All too often these incidents turn into a “late reported” claim to insurers.

In general, insurers that have been made aware of an incident (but where their policyholder has indicated a wish to settle the loss himself and not seek indemnity from them) will take account of the particular circumstances if they are asked to become involved at a later stage in the claims process. Their decision may depend upon whether their own position has been prejudiced by any action taken by the policyholder.

It is a good idea for a broker to produce a questionnaire to show clients what information will be required in the event of an accident. The usual details required are:

1. the driver or person responsible for the vehicle at the time of the accident
2. the vehicle involved in the accident
3. the use of the vehicle involved in the accident
4. details of the damage to the insured vehicle and identification of the point of impact on a pre-drawn diagram
5. details of the third party, his or her vehicle and insurance
6. full details of the accident including a detailed sketch plan
7. names and addresses of any independent witnesses
8. a declaration that the insurer is permitted to instruct a solicitor and conduct legal proceedings on behalf of the insured
9. confirmation regarding the VAT status of the insured (the insured will be responsible for the VAT element of any own damage payment to the extent to which he or she is able to recover it from HM Customs and Excise)
10. a declaration that the information supplied is true to the best knowledge and belief of the policyholder and driver.

It is desirable that firms should issue instructions to their drivers as to the procedure to be followed in the event of an accident and to arrange for them to carry with them internal company notification of accident forms for use in such circumstances.

European accident statement

Many insurers now issue, in addition to a claim form, a European Accident Statement to policyholders who are taking their vehicles to the Continent. Although its completion is not compulsory, the form is designed to elicit the facts about a motor accident to help insurers to settle claims quickly and fairly. Its style is visual to try to minimise misunderstandings of language. The form is carbonated and both drivers can each retain a copy to send to their respective insurers.

ICOBS provide special rules for the handling of motor liability claims in EEA states.

ABI General Insurance Claims Code

In November 2000 a code was introduced by the ABI, applying to those acting in their private capacity. Regulation of general insurance by the Financial Services Authority replaced this code from 14 January 2005.

Icobs rules on claims settlements

These state that insurers must handle claims promptly and fairly and provide reasonable guidance and that claims cannot be unreasonably rejected for

• non-disclosure where the policyholder could not reasonably have been expected to have disclosed
• non-negligent misrepresentation of a fact material to the risk
• a breach of warranty or condition unrelated to the claim.

As with all general insurers, motor insurers must handle claims promptly and fairly.

For motor claims, ICOBs 8.2.6 provides that, within three months of receipt of a claim for damage from a third party, insurers must make a reasonable offer of settlement provided liability is admitted and damages have been fully quantified. Alternatively, insurers must provide a reply stating reasons if liability is denied or not admitted, or if the claim for damages has not been fully quantified.

When a third party claims directly against an insurer (where they have a legal right to bypass the insured) in certain motor claims or because of the insolvency of the insured, the rules do not require the insurer to treat the third party as a client.

FSA rules are that any insurer who writes motor liability business in the UK must have a claims’ representative in each EEA state.

Riot and civil commotion and malicious damage

Cover provided in respect of these risks varies between insurers. However, the following represents the position as it exists in respect of a wide spectrum of UK motor insurers.

1. Own Damage. Riot and civil commotion is normally covered in Great Britain, the Isle of Man and the Channel Islands. It is normally excluded elsewhere, eg Northern Ireland, Republic of Ireland, Continent of Europe.
2. Third Party. Riot and civil commotion is normally covered in all territories covered by the policy although it is difficult to envisage how a claim could occur.
3. Northern Ireland. The position in Northern Ireland is rather special since compensation for loss or damage is available in certain circumstances under the Criminal Injuries Acts (NI) 1956–1970 or the Extra Statutory Compensation Scheme. Riot is defined as 12 or more persons ( Public Order Act 1986), having a common purpose, using or being prepared to use violence, capable of alarming a reasonable man. If these elements are present in respect of a claim for own damage in Northern Ireland the insurer will repudiate and refer the policyholder to the Compensation Commission. On the other hand, civil commotion has never been satisfactorily defined. The best legal definition that we have is from Lord Mansfield in the case of Langdale v Mason (1780) in which he described it as “an insurrection of the people for general purposes, not necessarily amounting to a rebellion”. Generally speaking if a claim for own damage arises from a cause involving some act of violence connected with the current unstable situation but the legal definition of riot is not fulfilled, the insurer will normally pay, provided of course that the own damage is covered under the policy and will then seek recovery from the Commission. Malicious Damage is normally covered in all territories. However, in Northern Ireland recovery by the insurer is possible, depending upon the circumstances, from the Extra Statutory Compensation Scheme. With the current peace initiatives this situation could change.

No-claim discount

The system of offering discounts on a progressive scale for successive claim-free years operates for the majority of private motor policies and for many commercial motor policies. Whatever its original purpose, whether for the retention of good quality business, to encourage better driving or to ensure that small claims would be paid by the policyholder in order to protect the no-claim discount, it is now embedded as part of motor insurance practice. Some package policies under particular schemes do not use such discount scales, using instead a net rating system. Equally, many insurers keep their discounts hidden by quoting on renewal documentation the number of claim free years and the net premium required. Nevertheless, this can be a very emotive area for policyholders who may regard a loss of or reduction in discount as a comment on their driving ability. Often insurers get confused between the “no claims” aspect which they assume means “no blame”. Some commercial vehicles insured on a fleet basis are rated on the basis of their claims experience and there is no bonus reduction.

Most systems operate on the basis of an increasing scale of discounts that reach a maximum after four or five years. In the event of any claim made under the policy, the discount will reduce by one stage at the next renewal date. If there is more than one claim, the whole discount is forfeit. Some insurers offer protected bonus in return for a slightly higher premium. This protects the insured’s bonus at the maximum for, say, up to two claims in three years. The only exceptions are as follows.

1. Those areas of policy cover that are defined as not affecting the discount, such as emergency treatment fees or breakage of glass in windscreens are exceptions.
2. So also are claims where the insurer effects a full recovery of the insurer’s outlay or where the insurer would have done so in the absence of the operation of a market agreement. If an insurer has paid out an amount solely by virtue of an agreement with another insurer, this will not normally affect the discount. However, in order to be certain of the policyholder’s blamelessness an insurer will be looking for corroborative evidence. This will include such things as a full recovery of any excess and other uninsured losses from the third party insurer.
3. Traditionally no-claims bonuses have applied to individual policies. If an insured had two cars each would be insured separately and the bonuses applied separately. This had led to problems where an insured with a full bonus buys a second car and finds that no bonus applies to the second vehicle. Some insurers are now willing to match the bonus for the second vehicle if only the insured is driving.
4. One other contentious issue over no-claims bonuses related to named drivers. A named driver could drive a car for a number of years and yet not earn any bonus in their own right. A number of insurers have recognised this as being unfair and are willing to offer the named drivers a no-claims bonus if they take out their own insurance policy.
5. Often when a driver has the use of a company car and then wants to buy their own policy the insurer will offer an introductory discount provided proof of no previous accidents was provided by their employer.

Indemnity

Apart from the personal accident benefits provided under comprehensive car policies, a motor insurance policy is one of indemnity. However, the principle may be modified. Betterment (an increase in the value of a vehicle following repair) will often be taken into account for the parts of a vehicle that are subject to regular replacement (such as tyres, brake linings, batteries and exhausts). So far as other areas are concerned, the interpretation that was espoused by the now defunct Insurance Ombudsman (replaced by the Financial Ombudsman) is that betterment may be taken into account only where the total value of the vehicle has been increased. However it is still possible for the insured to be asked to pay betterment.

Some comprehensive policies undertake to pay for the total loss of cars not more than 12 months old (from first date of registration) the full cost of replacing with an identical new car without deduction for depreciation. Also, with these relatively new vehicles, in the event of damage exceeding a certain percentage, normally 60%, of the car’s value, the insurers agree to take over the damaged vehicle and replace it with a new car. Furthermore, some insurers are prepared to issue an agreed value policy for special risks such as veteran and vintage cars. The objective is to set a fixed value for the vehicle in the event of a total loss occurring.

It is possible for the amount offered by insurers to be less than the amount owed to a finance company due to the application of interest. To solve any problems it is possible to buy GAP insurance. GAP stands for “Guaranteed asset protection” and provides cover should a new car be in an accident and totalled or written off and the amount offered by insurers is less than the amount due or left on the finance of the vehicle. The insurance also covers stolen vehicles. These types of insurance will pay for the gap (or difference) between the amount due or left on the finance of the car, and the actual cash value of the car at the time of the accident or theft. Guaranteed asset protection insurance is also known as: Return to Invoice Insurance (RTI), Back to Invoice Insurance, Finance Gap, Vehicle Replacement Gap (VRI), Total Loss Gap, Shortfall Cover (or protection) and Car Gap Insurance.

Contribution

In connection with all claims where an indemnity is being granted the principle of contribution will apply. Normally, motor insurance polices are subject to a condition which provides that where policyholders are entitled to an indemnity from more than one insurer they may not claim more from each insurer than their rateable share of the loss and such contribution becomes effective at the time of the loss.

Furthermore, where a motor policy grants an indemnity to a driver of the vehicle who is not the policyholder then a condition will appear in the policy stating that if such other driver is already covered by his or her own policy then the claim must be met in full by the company which has issued that other policy. If both policies are mutually exclusive then the insurance companies must contribute pro rata.

Under a market agreement where the “any driver” and “driving other car” covers operate, the insurer of the car meets the claim.

Subrogation

Normally, a condition is included in motor policies which gives the insurer the right to require the policyholder or other insured to proceed against third parties for recovery purposes as from the date of the loss. Under the policy conditions insurers not only obtain the right to prosecute for their own benefit in the name of the policyholder or other insured but also get the right to handle the claim in any way they see fit. As with other general insurance policies, the policy condition amends the common law position so that subrogation rights are granted to the insurer as soon as they arise and are not dependent on a claim payment having been made. Subrogation is limited to the amount paid out under the policy.

Getting the vehicle repaired

In some policies when the vehicle is damaged the policyholder is permitted to instruct a garage of his or her choice to repair the vehicle subject to a detailed estimate of the cost of the repairs being sent straight away to the insurance company. The insurer does, however, reserve the right to decline the estimate and to call for alternative estimates. Some insurers will charge an increased excess for using a non-approved repairer and may not provide a courtesy car. Most insurers run “Panel or Approved Repairer” schemes to improve service and obtain a discount on rates or parts (or both). Some insurers have in the past been cautious about the use of such schemes because, where a repairer is nominated by an insurer, the latter can be responsible for the repairer as its agent: in the event of delay or bad repairs the insurer may be liable to its policyholder — Davidson v GRE [1979]. Nevertheless, the benefits are seen to outweigh the disadvantages and many insurers operate such schemes.

Insurers employ either independent or staff engineers to inspect damaged vehicles and monitor costs generally. The use of these engineers vary with some insurers instructing an engineer if damage exceeds £1,000 or if the vehicle concerned is over a certain age. If a vehicle is a total loss (actual or constructive) the salvage becomes the property of the insurer who will usually sell it into the motor trade for repair or breaking up for spares depending on the degree of damage.

Some insurers now subscribe to computerised estimating schemes such as Infotek or Audatex where an engineer can, with the aid of a personal computer and using Thatcham times and methods, immediately cost a repair. These schemes are supposed to save time and money but do rely upon the repairer and engineer being at one over the extent of the damage and method of repair.

Most repairers have computer or video assessment link, where video images or electronic data are transmitted back to a centrally based engineers’ department which can, from the link, see the damaged vehicle at the repairer’s garage, have the areas of damage highlighted, and give instructions and agree costs instantly. The use of a computer and TV screen gives only a two dimensional view which may be inaccurate for costing purposes. The additional expense of such systems must be recouped in some way. It may be significant that the cost of accidental damage claims continues to rise inexorably.

Maintenance of the vehicle

Policies require the policyholder to take reasonable steps to avoid loss or damage and to maintain the vehicle in a roadworthy condition. In extreme cases insurers would have the right not to indemnify the insurer as the vehicle was not roadworthy. What is reasonable care depends on the facts. The objective is to impose an obligation of a reasonable nature on the policyholder so that maintenance is carried out to avoid accidents resulting from, for example, defective brakes or worn tyres. The usual interpretation of this is that insurers would have to prove a high level of reckless disregard for the safety of the vehicle. The roadworthiness condition also gives the insurer at all times the right of free access to examine the vehicle.

Loss of use

If a vehicle is lost or damaged and the policyholder is deprived of its use, normally he or she will not automatically be able to make a recovery under his or her own policy for expenses incurred in hiring another vehicle during the period in which his or her own vehicle is being repaired or replaced. Some insurers are prepared to give cover for loss of use at an additional premium; others include the provision of a substitute vehicle as part of their cover, especially where a nominated repairer scheme is in use. In addition some repairers provide courtesy cars whilst the insured’s vehicle is being repaired. However, even where loss of use is excluded, if the insurer has either failed in its contractual duty of dealing with a claim with reasonable expedition, or has provided an agent who is guilty of such a failure, the insurer may be liable to its insured for loss of use by way of damages — Davidson v GRE (1979) above. There is nothing to stop a policyholder successfully pursuing a claim against a negligent third party for such an expense which would be recoverable by the third party under the third party section of his or her policy.

Credit hire

Uninsured loss recovery is a possible addition to some motor insurance policies (see Uninsured loss recovery). Thus, even though motor insurers have been paying the uninsured losses of those third parties who have been the innocent victims of car collisions, this has often been at the end of the claims process. Where blame has been undisputed, insurers have footed the bill for the whole of the third party’s uninsured losses, including any uninsured element for damage to the car itself (by reason of an excess or other limitation in policy cover) and hiring charges for the cost of hire of a suitable alternative vehicle during the repair period.

Insurers have often been reluctant to give a decision in principle about their willingness to meet costs in advance, particularly costs associated with hiring a replacement vehicle. The uncertainty that this engendered about possible future recovery of costs eventually gave rise to a new industry: the accident car hire company. Where there isprima facie evidence of a non-fault situation in relation to a car accident, the car hire company agrees to provide a suitable replacement car and recover the cost of hire from the third party’s insurer.

Some of the companies operating in this new industry were prone to encouraging exaggeration and even fraud. Insurers were very concerned about the high level of costs that they were required to pay for hire of an alternative vehicle. The very substantial storage charges often accompanying these claims meant that in many cases insurers might be liable for costs of hire and storage that represented far more than the total value of the insured vehicle. A protocol (known as the General Terms of Agreement) has now been agreed between motor insurers and credit hire organisations for the settlement of claims relating to hire charges for replacement vehicles offered by credit hire organisations to innocent drivers involved in accidents. Some (known as the first tier) advertise rates; others (known as the second tier) do not publish rates but agree to the terms of the protocol.

The standard agreements produced by the accident car hire company would usually be for an unspecified period, often with no total payment figure included, since this would depend upon the hire period. Often the arrangements would be linked to the services provided by an accident management company that would arrange for specialists (solicitors, medical professionals and others) to become involved in pursuing any personal injury claims. Introductions to hire firms and accident management companies might be made by any one of a number of agencies, including insurance brokers and car repairers, who would receive a fee for the introduction. It was first decided in Giles v Thompson (1993) that hire charge agreements and the arrangements surrounding them are not champertous, nor are they against public policy. The claimant must, however, demonstrate a need for a replacement vehicle. Because of the actual wording of the agreements drawn up by the accident car hire companies, these agreements were challenged in the case of Dimond v Lovell, which is concerned with issues related to the hiring of an alternative vehicle.

The facts are completely straightforward. Mrs Dimond was driving her car and Mr Lovell drove his car into the back of hers. There was no personal injury and Mrs Dimond’s car, though still driveable, had to be off the road in the repairers for three weeks. Her husband consulted insurance brokers who advised him of the replacement vehicle services on offer from 1st Automotive Ltd. The written terms of the hiring did not include the daily rate nor the collision damage waiver and delivery charge for the car. The replacement vehicle was a Ford Mondeo. The insurers refused to meet the cost of hire and proceedings were commenced for its recovery.

One of the major issues to be decided by the House of Lords was the question of whether the agreement fell within the terms of the Consumer Credit Act 1974. Their Lordships were unanimous in their decision that this was a credit hire agreement and as such was unenforceable because the Consumer Credit (Agreements) Regulations 1983prescribe the form and the content of agreements and the 1st Automotive agreement did not contain the necessary terms. However, the unenforceability of the agreement was a technical defect, which more careful drafting could easily have corrected. Indeed, many accident car hire companies have since amended their terms to deal with this problem by ensuring that their agreements fall under the Consumer Credit (Exempt Agreements) Order 1989. Article 3(1)(a) of this Order exempts agreements if total payments do not exceed four and provided that payments are required to be made within a period not exceeding 12 months beginning from the date of the agreement.

It was recognised that there were other important matters of principle raised by this case, in particular, the question of the rates charged by 1st Automotive and the extent to which they might be recoverable from the third party’s insurer had the hire agreement been correctly drafted. It was accepted that 1st Automotive was providing a service that was more than simply the hire of a car. The difference between the rates charged by 1st Automotive and the “spot rates” — those charged by other vehicle hire firms not offering the extra services — represented the payment for their claims management services. There was disagreement over the extent to which these extra costs were recoverable from the third party’s insurer.

Lord Hoffman, in delivering the main speech, agreed with the conclusion of the lower court that Mrs Dimond had acted reasonably. However, he did not agree that she was necessarily able to recover the full amount charged by 1st Automotive. Had the services been unbundled so that someone else had been employed to effect the recovery, any costs associated with this would have been unrecoverable. The rule that he felt the Appeal Court had not taken into account was that requiring additional benefits obtained as a result of taking reasonable steps to mitigate loss to be brought into account in the calculation of damages. The conclusion by a majority of 3:2 was that any amount beyond the “spot rate” for car hire would be unrecoverable from the third party’s insurer. However, Lord Mustill in expressing a contrary view felt that provided the charges are reasonable they should be recoverable, and made reference to the ABI scheme.

The result of this judgment is that insurers will pay nothing under this head of claim because of the unenforceability of the agreement. However, since the terms of the agreement were acknowledged to be a drafting problem, these have been overcome by the accident car hire firms.

The UK motor insurance industry initiative

In order to ensure that payment for car hire is set at a realistic level, the ABI and Lloyd’s Motor Underwriters Association (LMUA) have introduced a voluntary, non-binding agreement scheme for subscribing insurers that identifies those car hire companies that meet the criteria for geographic coverage and cost that are acceptable to insurers. Documentation for all aspects of this scheme and a list of approved hiring companies are available on the ABI website (www.abi.org.uk/TPHire/). For any hiring companies falling outside the scheme, broadly speaking, their charges will only be accepted by insurers on the basis of the agreed scale.

The “non-fault” party is required to sign an agreement with the car hire company in a prescribed form that identifies the reasons for the hire and the fact that the responsibility for payment rests with that party within a period not exceeding 11 months from the date of the agreement. At the same time, a copy of the general terms of the agreement between the insurer and the hire company is also provided. This states the responsibilities of the insurer and hirer, including the terms of payment by the insurer to the hirer.

This scheme carries with it an obligation on the part of the insurer to give a quick decision regarding the availability of the scheme and to arrange an early inspection to agree repair costs, or a write-off figure if appropriate. A suitable car is then delivered, free of charge, to the individual.

While this meets insurers’ requirements and provides a fair outcome to the hiring cost element of claims, concern still remains over other features of non-fault claims. In particular, there are the associated storage charges for the third party vehicle while awaiting inspection or during the negotiation period for “write-offs”. These charges can often form a substantial proportion of the recovery amount claimed.

The ABI developed a points scoring system for the indicators that may be relevant in detecting fraudulent aspects of claims, requesting that insurers pool their resources by supporting a national database of information held by the ABI. Particular concerns were: exaggerated own damage claims, possibly leading to unnecessary write-offs, falsified personal injury claims and exaggerated car hire costs, in some cases where no car hire had actually taken place but an invoice raised nonetheless. These wider issues were not addressed in the court case, which dealt only with the actual hire charges.

In Direct Line v Khan & Anr (2001), the principle was clearly stated that if part of a claim is fraudulent then the whole claim is forfeit. Although the circumstances related to a private house claim, the principle applies much more widely. The case involved a claim where the insurer had paid out £69,000 for fire damage at the defendants’ home. Of this total, some £8,000 covered the cost of renting alternative accommodation. It was discovered by Direct Line that Mr Khan actually owned the alternative accommodation and false documents had been created to show the rent paid. Even though there would have been a valid claim under the policy for loss of rental income for the rental period, the court decision was that Direct Line was entitled to be repaid all the sums that it had paid out. The judge said that policyholders “should make those claims in an honest fashion. If policyholders seek to top up their honest claims by adding bogus claims, they are at peril of losing everything.”

This is something of a landmark case. It does not create new law but reinforces the rule that claims that are fraudulent in any respect result in all benefit being forfeit.

Legal expenses insurance

The purpose of this insurance is to indemnify the insured person up to a fixed sum in respect of:

1. legal costs incurred in proceedings brought to enforce his or her legal rights
2. legal costs in defending civil claims not otherwise covered by insurance or defending criminal charges.

Where such costs arise out of the use of a motor vehicle and where such insured person is covered under the policyholder’s motor policy.

The cover is normally an optional add on to the motor policy, be it comprehensive or for third party risks.

The majority of insurers outsource this cover to one of a small band of legal expenses specialists or, in some cases, to solicitors who, because of the volume of work provided, can keep their fees within what, to the insurer, seem reasonable bounds.

Some brokers will provide the cover, again through an outsourced organisation, sometimes at a more modest fee than an insurer.

Such cover is available both to personal and commercial policyholders.

One benefit of the cover is that if the insured is involved in an accident and can recover his or her excess from the other driver they will not be penalised by the loss of their no-claims bonus. Often legal cost insurance is used to recover this excess.

Uninsured loss recovery

This type of cover was developed particularly with the private motorist in mind, although it is now fairly common for such cover to be included as part of a motor fleet arrangement or for other commercial vehicle risks. It can be added to legal expenses insurance although it is more restrictive, focusing only on the recovery of uninsured losses. The cost of this cover is very modest. Key areas of cover are:

1. legal expenses incurred in pursuing the legal rights of an insured to recover any uninsured losses and costs arising from an insured accident (policy excess, car hire charges etc)
2. compensation claims for personal injury and loss of earnings
3. the provision of a lawyer (and/or claims handler) of the insurer’s choice or at least approved by him) to pursue recovery provided that the lawyer is satisfied that there is at least a 50% chance (ie non-fault) of recovering the uninsured losses.

Exclusions relate to timing (either lateness of reporting or delay that has prejudiced investigation or prosecution of the recovery), malicious acts, conflicts of interest between persons insured under the policy other than personal injury and amounts covered under any other insurance policy. Arbitration is possible in the event of differing views on the part of insurer and insured on the best way of proceeding with the recovery.

It would not be usual to prejudice a no-claim discount because of a payment under this section in isolation.

Avoidance of certain terms and rights of recovery

Motor policies generally include an avoidance clause stating specifically that where the insurer by law must make payments to third parties in circumstances that under the contract he or she would not otherwise be bound to make, then the insurer reserves the right to recover them in full from the policyholder or other insured.

Cancellation of the Contract

Cancellation by the insurer

Normally, a policy condition gives the insurer the right to cancel the policy during the period of insurance. This condition says that the insurer can cancel the policy by giving seven days’ notice and sending such notice by registered letter to the policyholder at his or her last known address. In such cases the policyholder gets a pro rata return of premium. As far as “Act” liability cover is concerned, cancellation will be ineffective if the certificate (or a statutory declaration instead) is not received by the insurer within seven days of the date of cancellation.

Difficulty has been experienced where the premium is payable by instalments, which are usually monthly, and the insured defaults after one or two payments. Cover remains effective until the certificate — normally valid for one year — expires, is withdrawn, or is recovered. The insurer’s only remedy appears to be to sue in debt for unpaid premium, even where a claim occurs.

Cancellation by the policyholder

The new Insurance Conduct of Business (ICOBS) rules have given more rights of cancellation to the insured. These rules provide a right of cancellation for retail customers which allows for a 14 day cancellation period for motor insurance for any reason without penalty. If a claim occurs during the cancellation period, insurers must pay this claim. The insurer may provide for longer periods than the statutory minimum but must make clear the difference between the ICOBS period and the contract (ie policy) period. Insurers can charge for the service already provided in accordance with the contract.

For general insurance contracts this period starts on the day on which the contract is concluded or the day on which the insured received the terms and conditions of the policy, whichever is the latter.

If an insured wants to trigger their cancellation right they must serve notice (without giving any reason if they wish) on the insurer, or the insurer’s appointed representative, or any agent of the insurer who has authority to accept notice of cancellation. If the notice is in a durable medium (ie in writing) the date of dispatch is treated as the date on which notice is served.

If any insurer wishes for any certificate of insurance to be returned, it should put the notice of cancellation on the certificate together with instructions that prior to the exercise of any cancellation rights the certificate must be returned. Without this notice on a certificate, cancellation involving the return of any certificate cannot be implemented.

Some policies give the policyholder the right to cancel the policy during the period of insurance and to receive refund of premium based on short period rates for the period the insurer was on risk, provided no claim has occurred.

Short period policies

Except for insurers issuing monthly policies, it is not usually economical for a policyholder to take out a short period insurance because the rates charged are proportionately higher than annual premiums to allow for the insurer’s administration costs and the possibility of selection against the insurer in terms of the use of the vehicle. A typical short period scale would be as follows.

Period	Proportion of annual premium
1 day	1.0%
3 days	2.5%
8 days	12.5%
15 days	15.0%
22 days	20.0%
1 month	25.0%
2 months	33.0%
3 months	40.0%
4 months	50.0%
5 months	60.0%
6 months	66.5%
7 months	75.0%
8 months	80.0%
9 months	90.0%
in excess of 9 months	in full

For motor cycles short period rates are normally higher.