Ombud raps broker for not advising client of vehicle depreciation and the resultant lower premium
Motorists who heed the latest determination by the FAIS Ombud can collectively save themselves millions of rands by adjusting insurance premiums according to the depreciated value of their vehicles.
Thousands of motorists pay higher premiums based on the original value of the vehicle without realising that in the event of a claim, compensation for loss or damage will be based on the current value of the vehicle.
Vehicle owners are not advised to adjust the value of their vehicles downwards in keeping with depreciation, thereby reducing the premiums payable.
Charles Pillai, the Ombud for Financial Services Providers, has ruled against
ABSA Brokers (Pty) Limited for failing to advise its client about the depreciation of the market value of the vehicle which would have resulted in lower premiums.
Pillai’s determination followed a complaint by Anthony Naidoo of Bluff, Durban, who claimed he was entitled to a refund for the higher premiums that he had paid whilst the value of his vehicle depreciated.
Naidoo took out short-term insurance jointly underwritten by Mutual and Federal Insurance Company Limited (M & F) and Santam Insurance through Absa Brokers, the Respondent, in 1999. In July 2003, he added to this policy a Toyota RunX RSI valued at R200 000.
In March 2004, Naidoo received a renewal letter from the Respondent advising him the policy fell due for renewal and would automatically be renewed on his behalf. In March 2005, he received another renewal letter from the respondent \which was couched in similar terms.
The renewal letters received by the Complainant further contained a paragraph which read as follows: “In your own interest it is necessary to update the sums insured at regular intervals to avoid the negative effects of underinsurance. The omission of regularly revising the value of insured property to take account of the increasing rate of inflation, VAT and the diminishing value of the Rand, is having an adverse effect on the adequacy of sums insured.”
During or about February 2006, the Complainant contacted the Respondent to enquire about the premiums that he would be charged on a new vehicle that he intended to add on to the policy.
During the course of making the enquiry, the Complainant became aware that as motor vehicles usually depreciate in value annually, the value for insurance purposes could be adjusted accordingly, with a consequential reduction in premium payable. He realised that until then, he had been paying more on his premiums for the Toyota Run X than he would have had its value been adjusted annually.
The Complainant immediately negotiated with the Respondent for the reduction in the value of the vehicle and the appropriate downward adjustment of the premiums. The monthly premiums together with the sum assured were adjusted accordingly.
Immediately after the premiums were adjusted, the Complainant enquired further from the Respondent about the following:
· the reasons for the vehicle remaining insured for the original purchase price from the date of its purchase to the date of the inquiry;
· whether he previously qualified for any discount or reduction in the premiums payable for insuring the vehicle; and if so
· why the respondent did not offer him such discount or reduction in the premiums payable.
Naidoo told the Ombud that in its response to him, the Respondent had informed him that the onus of ensuring that the vehicle was insured for the correct yearly market value rested upon the Complainant and not the Respondent.
The complainant was not pleased with respondent’s answer to his enquiry and forwarded a formal enquiry in writing to the Respondent and M & F.
In response M & F stated that a renewal letter had been sent to the Complainant through the Respondent requesting him to adjust the insured values annually lest he would be under insured. Nothing was said about possible over-insurance.
According to M & F it was and remained the responsibility of the Complainant to adjust the insured amounts due to the fact that he was the only person privy to any changes in the value of his vehicle.
In reply to the response offered by M & F, the Complainant asked why he was not entitled to a refund for the extra premiums that he had paid in the past months when the premiums had increased whilst the value of his vehicle depreciated. The Complainant did not receive any response from M & F.
Naidoo then complained to the Office of the FAIS Ombud.
When asked by the FAIS Ombud to comment, the Respondent objected to the jurisdiction of the Office of the FAIS Ombud to adjudicate upon the matter.
The Respondent argued that as the policy in question had been in force since May 1999 and the particular vehicle that was the subject of the complainant’s dissatisfaction was added to the policy in July 2003, the Office of the FAIS Ombud had no jurisdiction. In other words, the Respondent was of the view that the financial service that was rendered to the Complainant occurred prior to the coming into operation of the FAIS Act in 2004.
The Respondent further submitted that in any event the Complainant would have been duly informed of his obligations in terms of his policy, specifically with regard to ensuring that items insured under the policy were insured for the correct value.
The FAIS Ombud informed the Respondent that it had confused the concept of “new
business” with “new contract”.
“In this case, the business was initiated in 1999 but the contract was for a term, that is, it was a so-called month-to-month contract renewable annually.
“When a contract is renewed, a new contract is created and the duty to disclose arises just as it did when the old contract was originally concluded. The new contract replaces the old contract when the term of the old contract comes to an end.
“Therefore, when the old contract was renewed after this Office was vested with jurisdiction on 30 September 2004, the respondent had to comply with the FAIS Act.”
The Ombud found that upon receipt of the renewal letter from M & F, the Respondent had failed to advise its client on an important matter relating to the re-evaluation of the Complainant’s vehicle to ensure that the insurance premiums payable were in line with the value of the vehicle.
Consequently, the Respondent had failed to render the financial service with due skill, care and diligence and in the interests of the client.
“The respondent has the necessary skill or should possess the necessary skill, and is vested with the necessary knowledge or should possess the necessary knowledge, to enable it to know that the market value of the vehicle will depreciate with each passing year.
“The Respondent, therefore, ought to have advised its client about this aspect and not merely acted as a conduit by conveying letters from the insurer (M & F) to the Complainant.
“The Respondent was engaged by the Complainant to render financial services to him and should, therefore, have ensured that it fulfilled its side of the bargain by advising its client regarding the depreciation of the market value of the vehicle.”
The Ombud said that as a direct consequence of this non-compliance, the complainant suffered financial loss.
In order to settle the matter, The Ombud recommended that the Respondent should:
· ascertain the values that the vehicle would have been insured for annually on a depreciating scale at renewal of the policy after 30th September 2004;
· consult with the product provider and establish what the premiums would have been at the time; and
· compensate the Complainant with an amount equal to the extra premiums he paid since 30 September 2004.
However, the Respondent informed the FAIS Ombud it did not accept the recommendation.
The Respondent disagreed that a whole new round of disclosures had to be made according to the FAIS Act if there was indeed a renewal of the policy on an annual basis.
The Respondent also disagreed that there was a duty on it to advise its client regarding the depreciation of the vehicle and to ensure that the vehicle was insured for the correct value.
It was also of the view that the policy was a month-to-month policy and did not agree that a new contract came into force each year upon renewal of the policy.
The Respondent, however, offered to compensate the complainant for the difference in premiums that he would have paid had the value of his vehicle been adjusted on a regular basis and the amount he had actually paid.
The Ombud ruled that the fact that renewal letters were sent annually on the anniversary date of the policy pointed to the policy being an annual one, even though it may have been styled a “month to month” policy.
The Ombud said it was clear a new contract arose after the FAIS Act came into operation and the Respondent had to comply with its provisions including the provision that he must at all times act in the interests of the client.
“A reduction in premium due to depreciation of the insured article can only be in the interest of the client whereas a higher premium swells the coffers of the insurer and also invariably results in a higher commission for the broker,” the Ombud said.
The Ombud also criticised the conduct of the insurer in not pertinently mentioning that the downward movement in the value of the vehicle could result in lower premiums.
In this respect, the Ombud said: “I am confident that the regulator will take appropriate steps to prevent this type of conduct in the future.”
At the time that complainant added his vehicle in 2003, the sum assured for the vehicle was R200 000. This value would not have remained constant for the ensuing years. The sum assured and premiums payable had to be re-evaluated in line with the depreciating value thereof. Should a total loss of the vehicle have occurred, M & F would not have compensated complainant R200 000 but his loss. This would have been the prevailing market or replacement value.
“Consequently, the Respondent failed to render the financial service with due skill, care and diligence and in the interests of the client.
“The Respondent has or should have the necessary skill and knowledge to know that the market value of the vehicle will depreciate with each passing year,” the Ombud ruled.
He said when the Complainant made the inquiry about the adjustment of the premiums in line with its depreciating value, the Respondent immediately attended to it and the result was a reduction of the monthly premium. It was clear, therefore, that the Complainant had suffered financial loss.
The Respondent was ordered to pay the Complainant R2102, 30 plus interest.
Click here to read the determination (PDF file 77kb)
