Third Party Motor Recoveries – they matter

What is a “recovery”?

Ms Bredenkamp gets rear ended on the way to church by young Mitchell, the bane of the sleepy backwater of Butterworth in his modified Corolla. Ms Bredenkamp has insurance and so lodges a claim, whereupon Ms Bredenkamp’s insurer, Never Pay Ltd, actually does and her car is repaired. Because the collision was Mitchell’s fault he is liable for her damage. Ms Bredenkamp isn’t too worried at the outset, she only had to pay the R500 excess portion of the repairs with Never Pay
standing in for the balance of R30000.

But R500 is a lot of tea money so Ms Bredenkamp starts making polite but progressively persistent enquiries as to when she’s getting her excess back, something she’s surely entitled to because she clearly was not at fault. Ms Bredenkamp’s claim against Mitchell is referred to in the Short Term Insurance Industry as a “Third Party Recovery”, or mostly just a “Recovery”, with Mitchell being the “Third Party” and Ms Bredenkamp the “Insured”.

Who pursues the recovery?

In terms of Never Pay’s policy wording all Ms Bredenkamp’s rights to claim from Mitchell for damage flowing from the collision have been subrogated to Never Pay, i.e only Never Pay can claim these damages on her behalf.

Ms Bredenkamp cannot therefore approach Mitchell for payment in any sum without Never Pay’s consent. If she does and compromises the overall claim against Mitchell she will be liable to Never Pay for the R30000 indemnity they paid. That said, Never Pay has no obligation to even attempt a recovery against Mitchell (though if they don’t they should not object to Ms Bredenkamp doing so on her own initiative). Recoveries are pursued primarily to mitigate the insurer’s expense on a claim, recovering the excess is only incidental to this process.

The process

Never Pay now makes contact with Mitchell and demands payment of the R30500 repair costs (their R30000 and Ms Bredenkamp’s R500 excess). If Mitchell is more responsible than perceived and also has insurance he gives Never Pay the details and his insurer settles the claim. Ms Bredenkamp is happy as she gets her excess back and Never Pay has more money for their expansion into the global insurance market.

Unfortunately this fairy tale ending transpires in less than one in every five recovery matters: 70% of drivers in South Africa have no insurance and many insurers, either by design (for reasons of self interest) or through simple neglect, don’t pay approaches like that of Ms Bredenkamp (“Third Party Approaches” in industry jargon)

They don’t want to pay! Now what?

The only way to force Mitchell (or his insurer) to pay is to take legal action by proceeding with a summons out of Civil Court.

Fine! Sue the rascal, make him pay!!

Not that simple, the decision whether or not to sue is far more complex than a consideration of the merits.

While Never Pay’s costs in pursuing the initial approach were minimal, issuing summons will be MUCH more expensive. The recovery goes from the hands of Never Pay’s claims staff, making a few phone calls and sending some letters of demand, to a firm of attorneys, charging rates similar to those that bankrupted Oscar Pistorius.

By serving summons Never Pay also engages the third party in a process from which they cannot withdraw without either getting his consent or tendering his costs.

So Never Pay should not issue summons unless there is at least a reasonable prospect of getting money.

But it was a rear ender …. ?

The variables affecting the outcome of litigation are infinite, so only the insane would dare predict the outcome with any degree of certainty.

Aside from the merits, some of the relevant considerations are:

  • whether the third party is insured or not. The bulk (over 70%) of all recoveries actually made are against insured third parties. Uninsured third parties are hardly ever worth suing
  • Those uninsured third parties worth suing are normally in formal employment (not selling Niknaks on the pavement..) or very rich (“self insured” in industry jargon, like Harry Oppenheimer)
  • Many minibus taxi owners are “very rich”, but they are hardly ever worth suing because:
    • for many of them the law is something they only hear about on the radio and
    • no Sheriff will attempt to serve a warrant at a taxi rank without the help of Seal Team 6
  • The availability of witnesses and their willingness to testify. If Mitchell is sued and insists on going to trial (which he has the constitutional right to do, even though it is a rear-ender) Ms Bredenkamp will have to testify in person (no, an affidavit won’t do .. ). Never Pay’s policy obligates Ms Bredenkamp to do this (if she refuses she has to refund the indemnity) but it’s better if she actually wants to help.
  • The efficiency of the court (and Sheriff) having jurisdiction: South African Courts generally give good service and if you are persistent you will have your matter heard. Some courts however are disfunctional to varying degrees, to the extent that finalizing a matter is sometimes either too expensive or takes too long to make it worth while. Also (in some areas) the Sheriffs are partially or entirely ineffective, so even if you have a judgement, enforcing it is simply either not possible or too much effort

Successfully running a civil trial requires the insurer’s attorney, insured and her witnesses, the third party’s attorney and witnesses, the Magistrate (or Judge), interpreter, and court orderly all to be in the same place at the same time and ready to proceed. There must also be a functioning court available (with electricity .. ), so even if everything about a recovery seems right it may still be derailed by anyone of these cogs not turning on the day.

Wow, we should NEVER sue.

Not so, recovery ratios range from 12% (very bad and very common) to over 30% (stellar and very rare) among South African insurers. Most insurers are able make the “easy” recoveries, it’s correctly deciding on which recoveries to sue that mostly determines whether the ratio is good or bad. This is a bold statement, but backed by the writer’s personal experience – another important factor being the insurer’s ability, or rather lack thereof, in actually identifying all potential recoveries as such. If an insurer does not have a substantial litigious recovery portfolio it is certainly leaving money on the table and, because most successful litigious recoveries are also made against insured third parties, most of this money is going straight to the competition.