Car crash insurance consequences – loss mitigation costs mount for motor vehicle insurers


Sometimes in insurance law, as in life, a whole lot of modest claims or incidents mount up, creating a significant headache. So it was, when the NZ High Court recently came to examine the unpaid costs of drivers whose vehicles were in at workshops for collision repairs after a road accident. In these representative cases, the drivers had hired a rental or courtesy car as a way to mitigate the loss or inconvenience caused by unavailability of their regular car.

The plaintiffs in this case were three not at-fault drivers who had to get their vehicles repaired due to damage caused by somebody else’s negligence (the “at-fault” drivers).  Evidence suggested insurance companies had often refused to pay these hire costs in a great many more cases, amounting to some NZ$4.22m since 2016.

Not at fault and needing a ride

In Blumberg v Frucor Beverages Ltd [2018] NZHC 1876, it was decided that at-fault drivers were liable to not at-fault drivers for the reasonably incurred expense of a replacement vehicle.  What that meant, in reality, was the insurers of those at-fault drivers should foot the bills.

During the time their cars were off the road, these test case plaintiffs rented replacement vehicles from a relatively new entrant trans-Tasman company named Right2Drive Ltd (“R2D”).

R2D, unlike typical rental vehicle companies, does not require any pre-payment from the not at-fault drivers. Instead, R2D provides a car delivered to where you need it, strives for a similar quality like-for-like replacement (so you are not left battling with the panel-beaters’ creaking 1995 Nissan for 2 weeks), and then seeks to recover its costs from the at-fault drivers’ insurers.

It might be thought of as a traditional market disruptor, existing simply to arrange, finance and fleet-lease vehicles for such purposes. But incumbents may not like it much, and the insurers do not always pay up. In this court action, insurers argued that R2D was not entitled to bring subrogated claims, was breaking into forbidden territory of maintenance and champerty, and ensured the not at-fault drivers have not actually suffered any loss.

How does the law treat hire car costs?

The High Court moved past those initial objections to get to the core issue: have the drivers suffered a loss or had to (reasonably) incur expense to mitigate their loss.  The Court classified the cost of a replacement vehicle as a mitigation expense. In considering a right to legal damages, the principle of mitigation qualifies the principle of compensation flowing to the victim.  Here, the loss of the use of the undamaged car was a reasonably foreseeable loss. But it had been completely mitigated by the hiring of a replacement car from R2D. Meaning, in outcome, that their loss was reduced to nothing because hiring the replacement car plugged that gap, but the reasonably incurred expense of doing so should be recoverable from the at-fault drivers.

The Court was critical of the R2D convoluted contractual structure and marketing, using a time-honoured legalism criticism of «infelicitous drafting».  But the Court overcame those criticisms, and also said it is important to note the distinction between a reasonable expense, and an expense reasonably incurred. In general compensatory damages, the enquiry is usually as to a notional value of what was reasonably lost in value of the damaged vehicle, or in the loss of use of it for a period. But hiring a car to mitigate is an actual crystallised cost. The reasonable expense of a replacement car may not be the same as the expense of your chosen replacement car, to the extent it was reasonably incurred.

Once liable to pay compensatory damages, it is for at-fault drivers to prove that the plaintiffs failed to take reasonable mitigatory steps in response to their wrong, or that the plaintiffs’ reasonable steps were unreasonably gold-plated and costly. The onus of proof therefore fell to insurance companies representing at-fault insured parties to prove that the R2D costs were unreasonably incurred.  They were unable to sway the Court.

R2D’s charges were usually between NZ$100 – $150 per day, depending on the type of vehicle, plus a flat $50 delivery/pick-up fee. The Court said the prices were in the vicinity of usual market daily rates, but R2D provided flexibility where the rental period was unknown – something that was not as easily available from other suppliers who required predetermined rental periods – and a seamless delivery service. R2D’s different business model meant it had to factor in and price for unpredictability, and consumers preference for a modern fleet of cars.

The Court was offered a range of other options that the not at-fault drivers could have looked at, but said what was reasonably incurred should be assessed in light of all the circumstances at the time in which the incidents occurred, not applying too critical an eye of hindsight. The most helpful test of reasonableness is whether such a prudent driver would take up R2D’s replacement car for a period to repair damage they caused to their own car.

Outcomes and incentives

The Judge concluded that the R2D hire charges were reasonably incurred by the plaintiffs. These were steps to mitigate the loss of the use of their cars for the periods of their repair, from damage negligently caused by the at-fault drivers. Those expenses were reasonably incurred. It was in the plaintiff’s interests, and not with disregard to the extent of the at-fault drivers’ liability.

Each at-fault driver was liable to pay the R2D invoices to the respective plaintiff.  Insurers dealing with R2D across the country are presumably now doing some further accounting and reserving.

Defendants, whether negligent parties or insurers or others, may often attack a victim of misfortune for not taking obvious steps available to them to mitigate the problem.  Sometimes, as here, if steps are taken to plug a loss, or remove it completely, the at-fault parties may say the mitigating steps were too costly and unreasonable.  The Court appears to be suggesting, implicitly at least, that you cannot have it both ways, and that it will not scrutinise too harshly the reasonable and proper expenses incurred by blameless motorists.

Given the large amount spread across many insurance claims and several insurers, there must be a chance this case is driven further into the appeal courts.   Time will tell.  For now, new insurance market disrupters and drivers of late model European cars can breathe easier.

Gary Hughes, Barrister                                                                                                                                           

This note is only a summary of legal issues, not legal advice.  Always seek specific advice in any given situation.

Car crash insurance consequences – loss mitigation costs mount for motor vehicle insurers
Tagged on: