I had driven along that stretch of road in London hundreds of times before but on that hot, sunny morning last year, the traffic was pretty bad.

As I attempted to filter into a single lane, my car was nudged and there was a loud crunching noise from my front passenger door.

It all happened so quickly and as we parked up ahead to exchange details, I was left shaking uncontrollably with thoughts of relief that I was travelling alone without my young children. More importantly, I was unhurt.

But my head was scrambled and I struggled to remember which car insurance firm I was with.

After scrolling through my emails on my phone, I eventually found my insurer and a claim number, but a recorded message told me to ring back after 9am as the department was closed – what a joke.

After waiting till 9am, I recounted the details and my insurer suggested I wasn’t at fault. However, they would get the details from the other driver’s insurer and collect any evidence to back up the claim.

My car was damaged, but it was more cosmetic and could be driven, so I continued with my journey. Later that day, I received a phone call from a major car hire company explaining the details of my credit hire which I wrongly assumed was my courtesy car that came as part of my insurance cover.

Credit hire or courtesy car?

I presumed my insurer had a partnership with this car hire company to supply my courtesy car – after all, it makes sense seeing as they have a big pool of cars.

But something didn’t feel right. I asked lots of questions: Why was it through them? Why were they dealing with me rather than my insurer? Why did I need to sign an agreement and why was there talk about excess?

Having hired cars in Europe before, I knew the sales tactics to watch out for but this felt so alien to me having never been in a car accident before.

After probing, that’s when I had unwittingly ‘agreed’ to credit hire and was assured that as the non-fault driver, the cost would be recovered by the at-fault driver.

But I told them there was a chance I could be found at fault and if that’s the case, I didn’t want to be hit with the added costs of a credit hire. I was more than happy to stick with the courtesy car I was entitled to as part of my car insurance cover. They insisted I wouldn’t have to cover any costs apart from my insurance claim excess, and after labouring this point very clearly on the phone call which was being recorded, I thought this was all sorted.

Our credit hire lasted two weeks while the car was in the garage being repaired. We rented a family SUV, an ‘upgrade’ from the standard small hatchback that came as part of our cover.

The repairs came to £3,500 but the credit hire added a whopping £1,500 to the cost of the claim.

And, it turned out my insurer did find me at fault. When the car hire firm contacted me to settle the bill, I reminded them of the recorded conversation and that I had checked and double checked that I would not need to pay anything extra (apart from my excess) for the credit hire if I was found to be the at-fault driver.

My insurer begrudgingly swallowed the cost after numerous emails and phone calls were made. But while I had managed to escape the burden, I wondered how many other drivers had been stung in this way, and how much credit hire adds to the total cost of premiums in the car insurance industry as a whole.

According to Luke Mayor, executive director of commercials, sales and claims at Freedom Services Group, “credit hire has always been tarnished with raising the cost of insurance premiums”.

He said: “In fact, during the Government’s recent reforms into the personal injury market they looked at the associated services including credit hire which may be driving up the costs of insurance premiums. It is thought that credit hire increases premiums by £3 to £10 per policy. However, with greater regulation in recent years, this number is likely to be at the lower end.”

With an estimated driving population of c. 35 million in 2021 according to the RAC Foundation, that’s a huge amount being picked up by motorists for a service, which in my opinion, isn’t needed for everyone.

Four-fold increase in credit hire complaints to the ombudsman

Complaint resolution firm the Financial Ombudsman Service (FOS) has seen complaints about credit hire rise from 40 in 2021/22 to 180 this year. This has prompted it to warn motorists who do not understand the risks of credit hire that they could face bills of tens of thousands of pounds.

In one recent case, a £5,000 claim for damage resulted in an insurer paying out almost £20,000 due to the car hire costs.

In another, a driver only realised she was liable for her credit hire when she was asked to help recover the £3,000 cost from the other motorist’s insurer who had refused to pay. She was told she’d have to pay up if it wasn’t covered.

Eventually the other insurer did agree to pay but she complained to FOS as she was unhappy that the risks hadn’t been explained properly, and if they had, she would never have asked for a courtesy car. FOS found in her favour and told the insurer to pay her £350 for the distress and inconvenience caused.

Now, while the sums for the car can be huge, the number of complaints adjudicated by FOS may sound low. But it doesn’t show the full picture as they are very specific complaints relating to a particular aspect of credit hire. In a nutshell, it’s all to do with what’s regulated and what comes under its jurisdiction. Either way, FOS is concerned about the impact credit hire may have on drivers.

Confusing complaints conundrum

Up until 31 March 2019, Claims Management Companies (CMCs) were regulated by the Claims Management Regulator and complaints about CMCs were dealt with by the Legal Ombudsman.

On 1 April 2019, the regulation of CMCs switched to the Financial Conduct Authority (FCA) and complaints moved to the Claims Management Ombudsman (CMO).

However, credit hire counts as a credit agreement which is exempt from the Consumer Credit Act, meaning they are unregulated. So complaints about CMCs providing credit hire fall outside the scope of the FCA’s rules as they are providing ‘accident management services’ which don’t relate to a financial service or financial product claim.

As such, FOS can’t consider complaints on the action of the CMC that was responsible for the credit hire or credit repair, and neither can the CMO and that’s because the agreements aren’t regulated.

However, FOS can look at complaints made against the affected driver’s insurer or broker for referring them to the credit hire in the first place.

FOS explained that when considering complaints about the referral, it will look at whether the insurer or broker met their “regulatory obligations” when making that referral. That includes treating the customer fairly when making the referral and giving them enough clear, fair and not misleading information about their options to pursue their claim.

“In many cases that the Financial Ombudsman sees, the referrals aren’t balanced and don’t give policy holders enough information to make an informed choice on whether to use credit hire and the implications this may have,” it said.

In the 2022/23 financial year, it noted 46 open complaints about the referral to a CMC, and 20 open cases about the ‘after the event policies’ set up by CMCs to cover credit hire costs.

Rachel Lam, ombudsman director at the Financial Ombudsman Service, said: “Consumers and insurers can be subject to huge costs when credit hire is used. People have told us that they would never knowingly have chosen credit hire had they known the risks of having to pay the costs involved themselves.

“Others believed they were still dealing with their own insurer, and it wasn’t made clear to them that they’d been passed to a credit hire provider in the first place.

“We would urge industry to take an approach which is balanced, fair and transparent – putting consumers at the heart of their thinking.”

Credit hire: What you need to know

Credit hire is an alternative to drivers claiming on their own car insurance. Instead, claims or accident management companies (AMCs) can repair the car or help with a replacement vehicle under a credit agreement.

It is offered on both third party and fully comprehensive insurance policies and is typically provided to a non-fault driver. If liability is admitted by the at-fault insurer, they will bear the cost of the hire.

“That being said, the contract is between the hire company and the claimant and could result in the claimant being charged if liability is declined or hire charges are disputed. Credit hire agreements should be read in full prior to signing and also the claimant should be made aware of what they are entering into,” Mayor says.

However, he added: “Credit hire offers an essential service in non-fault accidents. Under Section 145(3)(a) of the Road Traffic Act 1988, following a RTA in Great Britain, the insurer of the driver who is at-fault for the accident is responsible for the costs of reinstating the non-fault driver to the position they were in before the accident. If the accident results in the non-fault driver’s vehicle being temporarily unavailable due to repairs, the at-fault driver is also responsible for compensating the non-fault driver for the temporary loss of use of their vehicle.

“In the majority of cases, people have a need for their vehicle and alternative transport is not an option. Daily rentals paid upfront by a claimant are also not viable in the majority of cases as many people are unable to afford rental charges which may run into the thousands which are then to be recovered at a later date from the third party insurer. Credit hire enables the claimant to receive a like-for-like vehicle paid by the at fault insurer.”

But he warned that as this is a car hire, there will be an excess policy and there will be costs to pay in the event of an accident.

“All rental vehicles have similar pitfalls, each rental is expected to be returned in the same condition as it left and damage from misuse will of course be charged back to the client as will speeding and parking fines.”

In our case, my husband’s credit card was necessary for a £250 excess and we were told to fill up the petrol to the same point marked on collection.

Mayor also explained that many insurers outsource the claims handling process to benefit from third party expertise, and it means they can save “heavily” on staff training, IT costs and payroll.

If you do want to complain about a credit hire, you need to take your complaint to the insurer or broker first. They usually have eight weeks to respond. But if they don’t respond or you are not happy with the response, you can then complain to the ombudsman.