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OSTI: Beware the carprehensive policy!

20 May 2011 Ombudsman for Short-term Insurance
Brian Martin

Brian Martin

The Ombudsman for Short-term Insurance would like to caution consumers purchasing insurance cover from insurers to satisfying themselves prior to inception of any contract, that the policy offered by the insurer covers their specific risk needs and not to be fooled into purchasing insurance products because they offer a low premium.

It is well known that traditional comprehensive motor vehicle insurance cover, which has been available to motorists for a very long time, is not cheap and that roughly only 35% of motor vehicles travelling on South African roads are insured. The very high incidence of uninsured vehicles on our roads has created significant problems for society as a whole, especially the victims of negligence on the part of uninsured drivers, who are more often than not, unable to compensate their victims for their actions.

The affordability of motor vehicle insurance is a matter for ongoing concern to both the South African Insurance Industry and consumers. Recently some insurers have introduced forms of insurance cover at what is said to be substantially reduced premiums, in an endeavour to reduce the number of uninsured vehicles on our roads. Such products however, may not offer much protection to consumers and may lead consumers into a false sense of security. Consumers are urged to very carefully analyse the cover provided by such products and to critically assess whether the cover provided is relevant to their circumstances and whether they are able to carry the potential consequences of excluded risks themselves.

A traditional comprehensive motor vehicle insurance policy provides indemnification to the insured for loss or damage:-

1. To their own property.

2. Damage to the property of others (3rd parties) who may suffer damage as a result of the wrongful conduct of the insured.

3. Indemnification against claims for bodily injuries sustained by passengers conveyed in the insured vehicle occasioned by the negligence or other wrongful conduct of the insured and to the extent that this liability is not covered by any other form of insurance or protection, such as that offered by the Road Accident Fund Act.

A traditional insurance policy also provides for indemnification from the moment of inception of the policy and provides indemnification against the consequences of the insured’s own negligence or wrongful conduct. The insured however does not enjoy indemnification against the consequences of recklessness.

The “Carprehensive policy” which is currently extensively marketed on television and in other media and which is underwritten by RMB Structured Products, differs significantly from a traditional comprehensive motor vehicle insurance policy and in reality offers little protection to consumers. This particular product offers consumers a choice of three plans providing for indemnification for a percentage of the vehicle’s trade value, based upon the plan selected. The “trade value” would represent the value that a dealer would offer as a trade-in on a motor vehicle and should be distinguished from either the market value of the vehicle, or the retail value, which would represent the value for which a vehicle would be sold by a motor vehicle dealer to an end purchaser. There can be a significant difference between the “trade value” and the “retail value” of a motor vehicle and this may leave a consumer with a large shortfall in the event of total loss.

The cover provided by the “Carprehensive policy” extends only to the event of a complete loss of the vehicle through write off occasioned by an accident or through theft or hi-jacking. This policy does not offer any cover to a consumer for damage to the vehicle itself where the vehicle is not assessed as a write off. Furthermore, the insurer’s liability is restricted to cases where the repair costs are estimated to be greater than 80% of the vehicle’s current trade value and is also greater than an amount of R40 000. Consequently, before a claim can exist against the insurer, the damage to the vehicle must exceed R40 000 and must be greater than 80% of the trade value.

The policy also only provides indemnification for claims by third parties where the value of the claim, or damage to the third party vehicle, exceeds R50 000 and is subject to a maximum of R250 000. This means that consumers will be personally liable to a third party for any damage less than R50 000 and for any amount exceeding the sum of R250 000. Theft and hi-jacking benefits are also only payable after a period of 30 days has elapsed.

The policy is also subject to the highly restrictive provision that cover only commences after three consecutive payments of premium have been paid when due. This means in effect that consumers will have no cover for the first three months of operation of the policy, despite having an obligation to pay premium over this period of time. This is a very severe limitation. If immediate cover is required then 3 months premiums must be paid upfront.

The Carprehensive policy is also subject to a number of unusual exclusions which are not normally contained in a standard motor vehicle insurance policy, such as driving off-road, exceeding the speed limit (whether or not intentional) and/or violation of any other road traffic laws as well as any action that is in any way unlawful, criminal or negligent in nature. It is also warranted that the tyres of the vehicle will be immediately replaced when the tread is worn below the legal limit of 1.6mm.

The exclusions referred to are of such a nature as to render the cover applicable almost valueless having regard to the fact that motor vehicle collisions are almost invariably caused by negligence on the part of both drivers. Whilst it is possible to be the victim of another’s negligence which was the sole cause of the accident, in the vast majority of cases an apportionment of liability will be applicable and in this instance the Carprehensive policy will not provide any cover.

The insurer’s liability is also excluded where the vehicle is directly or indirectly damaged as a result of mechanical failure, fire, flood or seismic activity, or where the insured vehicle is more than 15 years old. Critically, the insurer also provides no cover “for any bodily injury caused to a third party”. The insurer also has no liability to settle or contribute towards any claim “where there are indications that the cause of the accident was as a result of the negligence on the part of the designated driver”, and “where there are indications of over-indulgence in or abuse of alcohol or non-prescriptive drugs by the designated driver at the time of or prior to a claim arising”.

The insurer is entitled to any scrap of salvage obtained, despite the fact that it has not provided a full indemnification against the value of the vehicle and that in reality the insured remains a co-insurer of the vehicle. However, of particular concern to the Ombudsman is the apparent disregard for the provisions of the Policyholder Protection Rules in relation to the use of polygraph or voice stress analysis methods in the investigation of claims. The policy provides that “the insurer may request you or any witness or passenger associated with the claims event to undergo a polygraph/voice stress analysis or similar test”.

Consumers are encouraged, if they cannot afford traditional comprehensive motor vehicle insurance cover, to consider as an alternative, whether they would not be better served by taking out balance of third party fire and theft cover or third party cover only. The average price for third party fire and theft cover is in the region of R220 per month and third party cover only is available at an average premium of R61. This type of cover has the advantage of being available immediately upon inception and as providing for full indemnification for liabilities to third parties. Fire and theft cover will also provide for indemnification in the event of the vehicle being destroyed by fire or lost through theft or hi-jacking.

In summary, consumers who are not able to afford to act as their own self-insurer for the risk of damage to their vehicle through accidents which do not result in the vehicle being written off, or to carry the cost of paying for the first R50 000 of damage to third parties, or any amount exceeding R250 000, should avoid the Carprehensive policy or any other similar type of product.

It should also be noted that whenever a motor vehicle is purchased on credit through an instalment finance agreement, it is a requirement of that agreement that the motor vehicle be comprehensively insured. The cover provided by the “Carprehensive policy” does not qualify as comprehensive insurance. Ensure that the insurance cover you propose taking out satisfies the requirements of the bank or finance house concerned before taking delivery of a vehicle.

In conclusion, consumers are urged to exercise great caution in the purchase of insurance products and only to do so after they have satisfied themselves that they are fully aware of all the potential pitfalls associated with the proposed purchase. Wherever possible, consumers are urged to seek professional advice prior to the purchase of any insurance policy. Speak to your broker, an attorney, or other suitably qualified professional, before agreeing to purchase any insurance product and remember that you get what you pay for.

Yours sincerely,

BRIAN MARTIN

OMBUDSMAN FOR SHORT-TERM INSURANCE

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