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Ombud has a say

21 October 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

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 gareth@fanews.co.za

Comments

Added by Jay, 13 Oct 2011
I am in agreement with Matthew. However, my question is, who pays the premium for the violation and absconsion cover? From what I read it seems the client/individual bears the cost of this cover and yet at the end of the day it stands to benefit the Finance House. Which is which?
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Added by Mark, 22 Oct 2010
M.Gallacher's comments noted, however the net effect is, that if the Finance Company does not get paid, the customer will in one way or another carry the can. Valueable cover to have then, make no mistake every policy holder of a financed vehicle should make sure that they have this cover
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Added by STEVEN BURGER, 21 Oct 2010
This is a bit of a knock on the head of Brokers who do not support more than one Insurer or service provider and/or does not make enquiries on products available in the market. The well known 'TOP UP COVER " offered by most Finance Houses are being ignored or just not suppoted by some Brokers and one very important "ingredient" on offer in this policy is "violation of policy conditions " I have made use of this facility on a claim with success and to the relief of my client. I must also add that the assistance of the Finance House was a great help. STEVEN BURGER
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Added by Shane, 21 Oct 2010
Steven makes a good point. But is that type of cover available anywhere else, besides from the finance houses' Top Up policy?
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Added by McT, 21 Oct 2010
Excuse my ignorance, but what is "violation cover"?
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Added by Mathew Gallacher, 21 Oct 2010
Hi Gareth, This article both amused and astounded me. For my sins, during the Seventies, I worked for I.G.I. Ltd (Incorporated General Insurances) and dealt with Violation and Absconsion Cover as part of the Company's dealings with various Finance Companies. During that period, certain Insurers focussed on Finance Company business, more to build up cash flow than to create a sound insurance base. I can recall, prior to the advent of computer spreadsheets, producing statistics with the help of Trust Bank and Bank of OFS, to mention only two, whereby we could assess the direct financial loss to those Companies as a result of the rejection of claims against the underlying comprehensive insurance policies taken out by customer. In essence, Violation and Absconsion Cover were created, not to protect the customer but the Finance House. Although the cover went in tandem with the comprehensive insurance on the vehicle, there was never any indemnity for the customer. The benefit accrued only to the Finance House where the balance outstanding by the customer at the time of claim repudiation was settled. There was no relief for the customer if there was any shortfall between the debt and the Current Market Value of the vehicle. Violation was understood to apply to a breach of any policy condition. It could be drunken driving or allowing an unlicensed driver to use the vehicle - which then resulted in a claim against the underlying policy. Once the claim was officialy rejected, the Finance Company would apply for settlement of their outstanding balance. I can recall processing bordereaux from these Companies and raising bulk premiums for payment. When the underlying policies were issued the one-off premiums for Violation and Absconsion were clearly reflected in the Clients policy, yet rarely did we explain to a customer the reason for these charges. As we had little or no upfront contact with any Floorsales Motor Client, they were generally uninformed. Absconsion cover operated similarly, except a claim was only lodged by the Finance Company when the customer had been proven to have absconded with the vehicle and there was no prospect of recovery from elsewhere. As the Finance Company relied heavily on the financial relief these products provided, there was a constant stream of bordereaux and this was seen as a lucrative source of business to IGI in those times. A similar product existed to address Household Appliances and Furniture, where McNamees and certain other major retailers charged their customers a premium for automatic insurance of the goods that were financed. Again, there was little relief for the customer, as the Retailer received payment of the balance outstanding when the goods were damaged or destroyed. Violation and Absconsion Cover must be read totally separate to any underlying cover. You cannot have a situation where a customer can effectively be provided with a condition free insurance policy. The customer cannot directly benefit from the breach of policy conditions, hence Absconsion and Violation Cover were effected for the Benefit of the Finance Company and should not be interwoven as appears to have been done by both the Ombudsman and yourselves. I hope this helps to explain the situation as it was. What I see now is a total confusion and lack of comprehension. Kind regards, Mat. Gallacher Director, Cooke Fuller Insurance Brokers (Pty) Ltd. FSP Licence No 5672.
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