Ombud has a say
South Africa’s regulatory watchdogs have gone rather quiet of late. We remember a time when FAIS Ombud determinations settled on our desk almost on a daily basis. Nowadays we have to go on a “determination hunt” if we hope to find fodder for our readers. Perhaps this will change when the hundreds of inevitable Sharemax complaints find their way to the FSB headquarters... In the meantime we’ll have to satisfy ourselves with the latest comment from the Ombudsman for Short-term Insurance (OSTI), Mr Brian Martin. His outfit issued a tersely worded statement earlier this week.
The headline: Unintentional violation or non compliance should not always leave you empty-handed. There’s one word in this headline that makes us a little uncomfortable – “unintentional”. Because when it comes to claiming on a short-term insurance policy for accidental damage – whether by the policyholder or a financing institution – the consequences of said actions are always unintentional… But we’re running a bit ahead of the matter...
Getting to grips with “violation” cover
One of the conditions of new vehicle finance is that the purchaser provides proof of comprehensive insurance to cover the asset. The finance company has certain rights if the policy includes violation cover. According to the OSTI: “Violation cover, in general, permits the finance institution whose interests in the vehicle have been noted on the policy, to file a claim in terms of the policy where the financed motor vehicle is damaged, written-off or stolen during the period of insurance and where a term or condition of the policy, has been unintentionally violated or not complied with, resulting in the claim being rejected by the insurer.” In other words – the financing institution has a second chance to get the insurer to pay out.
The problem is very few policyholders know about the violation clause – which could make a massive difference to their financial wellbeing. Brian Martin provides the following mock “scenario” to illustrate the concept:
“Ms Smith purchased a motor vehicle valued at R200 000 and took out violation cover as part of the insurance cover for the vehicle. The vehicle was stolen and the claim was repudiated due to a change in the risk address, which occurred after the inception of the policy, and of which Ms Smith had failed to notify her insurer. Had her insurer been notified of the change in the risk address they would not have continued with the cover as the security requirements at the new risk address were unacceptable to the insurer. Ms Smith did not check with her financial institution if a violation claim was lodged and continued making her monthly payments to the finance house on a vehicle she no longer had. She had unintentionally violated the terms of her policy, but had a violation claim been submitted the outstanding balance in terms of the agreement would have been settled.”
A shocking failure by insurer and bank
How many people know about violation cover? We certainly hadn’t heard about it until the OSTI informed us – and we’ve been writing on short-term insurance issues for almost four years. The Smith case mentioned above is typical of the heavy handed approach taken by both insurer and finance institution to their clients. You can be sure when the claim was lodged – and subsequently refuted – that the insurer said nothing about violation to the insured. And provided Ms Smith kept making her monthly vehicle instalments we’re sure the finance house wouldn’t have volunteered assistance either. In the above scenario Ms Smith will probably end up making monthly instalments on a motor vehicle she doesn’t own until the lease agreement is settled in full.
Had the violation option been followed the situation would have been totally different. Notes Martin: “The violation policy usually pays for the cost of repair to the vehicle less the applicable excess (if the vehicle is repairable) or in the case of a total loss, the maximum indemnity less the applicable excess.”
Knowledge is power is money
“What may happen is that the financial institution does not lodge a claim in respect of the violation cover provision, or that if a claim has been lodged, they may fail to advise the consumer of this fact. This leaving the policyholder to believe that they have to carry the full burden of making good the outstanding amount on the finance agreement or repairs to the vehicle”, said Martin “We cannot stress how important it is for consumers to read the specific terms and conditions applicable to the type of insurance cover that they wish to purchase and in the case of violation cover, to make the necessary enquiries with both the insurer and financial institution to avoid unnecessary financial burden.”
Editor’s thoughts: Finance institutions and banks conspiring to cause financial hardship for a client. The scenario painted by Martin demonstrates just how poor South Africa’s business ethics are. In the perfect world the insurer would advise its policyholder of the violation clause on date of repudiation. In the perfect world a finance institution benefiting from violation cover would advise its client of the recovery… But it’s not to be. Have you had any experiences with violation cover? I’d love to hear your thoughts on the topic. Add your comment below, or send it to [email protected]
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