A new entitlement to replacement vehicle hire costs

A recent New Zealand court decision confirms that drivers who are not at fault in accidents may recover the cost of a replacement hire vehicle from the at-fault parties’ insurers.  The decision will have substantial cost implications for motor vehicle insurers.

The case was brought by a specialist hire company that provides replacement vehicles at no cost to not-at-fault drivers.  The claims were brought in the names of drivers who fell victim to accidents caused by other drivers. They each hired replacement vehicles from Right 2 Drive (R2D), a credit hire company, while their own vehicles were being repaired.  R2D assured them that it would not pursue them for hire costs, provided they co-operated in recovering the hire fees from the at-fault drivers’ insurers.

The insurers refused to pay so the drivers commenced proceedings against the at-fault drivers for the cost of hire, together with other, associated costs incurred by R2D.  The proceedings were consolidated into a “test” or “lead” case that was in reality driven by R2D and defended by the at-fault drivers’ insurers.

The Court treated it as a claim for mitigation costs.  The drivers initially sought to claim special damages, arguing that the at-fault drivers caused their loss, being their expenditure on replacement vehicle hire. However, their loss was fully mitigated by the replacement vehicle.  The Court therefore posed the key question as whether “the plaintiffs are entitled to recover their mitigation expenses – that is, whether those expenses have been reasonably incurred.”

In defence of the claims, the insurers argued that the drivers had completely mitigated their loss by obtaining replacement vehicles from R2D. They had not suffered any loss as they had no obligation to pay R2D for the vehicle hire.  Not only had R2D promised them that they would not have to pay, but the contract was arguably defective, as it did not specify rates or charges.

The Court rejected the insurers’ arguments. Although the drivers had arguments to resist a claim by R2D if they were pursued for hire charges, there was still a risk of liability. The Court relied upon the drivers’ agreement with R2D that it obtained their authority to recover the costs of a replacement vehicle on their behalf and recorded their obligation to pay. The replacement car had a cost, which is the mitigation expense claimed. R2D was entitled to waive its rights against the drivers. The Court held that any ‘sloppiness’ in the operation of R2D’s business did not entitle the at-fault drivers’ insurers to avoid liability.

The Court relied upon the general principle that, once an at-fault driver is found liable for the normal measure of damage (the cost of repairs and other losses flowing directly from an accident), they are generally also liable for the cost of the reasonable steps taken by the not-at-fault driver to reduce their loss, whether or not those steps are effective.

The issue was therefore whether the drivers’ hiring of the R2D cars was reasonable.

The insurers argued that the drivers’ choice to take the R2D cars was unreasonable, as they would have explored other vehicle hire options if faced with the prospect of having to pay R2D’s charges, which were higher than other hire companies. Alternatives included other hire companies, a courtesy vehicle provided by a repairer or taxis/public transport. In assessing reasonableness, the Court held that the most helpful test is whether a prudent driver would take up R2D’s replacement car offer while they waited for damage they caused to their own car to be repaired.

The Court heard evidence from other car hire companies, demonstrating that R2D’s fees were in the vicinity of their fees. While other companies offered lower prices for longer term hire rates, this was a counsel of hindsight, as the drivers did not know how long it would take to repair their vehicles, so it was not clear from the outset that longer term hire rates would be available. The Court also considered the additional cost of R2D’s pick-up and drop-off service and considered that to be reasonable.  Not only was it comparable to one hire company’s similar service, but it provided continuity of availability of a vehicle, thereby mitigating further potential loss.

The key question for insurers when faced with a claim for mitigation costs such as this is whether the costs are reasonable in the circumstances.  It is not for the not-at-fault driver to prove that they are reasonable, but for the at-fault driver (really, its insurer) to prove the contrary. As the English Court of Appeal has said in a similar case, it is for an at-fault driver to demonstrate, by evidence, that there is a difference between the credit hire charge agreed between the not-at-fault driver and the credit hire company and the [basic hire rate].”

Reasonableness is not to be determined with too critical an eye in hindsight, but what would have appeared reasonable to the driver at the time. Factors include:

  • whether the not-at-fault driver can afford to take other mitigation steps or whether they have to resort to “credit hire”;
  • the not-at-fault driver’s insurance position is not to be considered; i.e. whether they could have claimed on their own insurance for a hire car, for that insurer would likely pursue the at-fault driver’s insurer;
  • where a not-at-fault driver has options, their reasonable adoption of one option is not to be held against it simply because another may be more effective or economic.

In the end, the question is whether a prudent driver would take up R2D’s replacement car while they await the repair of damage they caused to their own car. At-fault drivers’ insurers will need to prove to the contrary if they wish to avoid paying these costs.

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