Ever heard of “violation” cover?

A recent press release from the Ombudsman for Short-term Insurance highlighted just how little consumers – and the short-term industry for that matter – know about the covers typically “sold” to consumers when they apply for motor vehicle finance at dealerships.

A while back the Ombudsman for Short-term Insurance, Brian Martin, created a stir with a press release titled Unintentional violation or non compliance should not always leave you empty-handed. It referred to violation cover - one of the covers consumers are “sold” when they apply for motor vehicle finance at dealerships.

The Ombudsman provided a “sketch” to illustrate his concerns relating to this violation cover.

Jane Average purchases a motor vehicle valued at R200 000 and takes out a comprehensive insurance policy and an extended cover policy as part of the financing process. The vehicle is subsequently stolen and the claim is repudiated by the underlying comprehensive insurer due to a change in risk address. The change occurred after the inception of the policy, but Jane had failed to notify her insurer. Had her insurer been notified of the change they would not have continued with the cover as the security requirements at the new risk address were unacceptable.

What Jane doesn’t know is that the extended cover “sold” to her when she financed the vehicle included violation cover. Although the claim under the comprehensive policy had been rejected, either Jane or the finance company could have instituted a claim under the violation benefit clause in the extended cover policy. This claim would have settled the outstanding balance on the finance agreement. Instead – completely unaware of this cover – Jane continues making monthly payments to the finance house on a vehicle no longer in her possession.

There are dozens of cases where the consumer is financially compromised due to lack of awareness of the risks covered in their short-term motor portfolio. The best way to understand the problem is to take a closer look at what happens when a consumer purchases and finances a motor vehicle.

In real life

When Jane Average purchases a new motor vehicle from her local dealer, the finance application would have been handled on the dealer floor by a registered finance and insurance (F&I) representative. The F&I rep may arrange short-term insurance cover for the new vehicle through an insurer or a broker, while an extended cover policy is typically issued by a separate insurer to offer violation, top-up, deposit risk and credit shortfall benefits.

How does Jane know what she’s covered for? Firstly, the F&I rep should inform her of the comprehensive insurance arranged and any additional covers provided to her through an extended policy. Secondly, she has to sign for the cover and provide authorisation for both the comprehensive insurance premium and the premium for any extended cover. And thirdly, she will receive detailed information in the form of a policy wording and a policy schedule when the cover is accepted.

In the fine print... somewhere

It’s important to note the violation cover referred to by the Ombudsman is not part of the comprehensive motor insurance policy. It exists as a benefit in an extension to the policy requested by, or offered to, the insured when purchasing the motor vehicle. Wording from a typical extended cover policy might read like this: Where the vehicle is damaged, written-off or stolen during the term of insurance, and a term or condition of the underlying policy is unintentionally violated or not complied with, resulting in rejection of the liability of the claim in the underlying insurer, we will pay in respect of…

Safety net

“Violation cover was initially developed for Wesbank and was subsequently rolled out to other banks,” notes Michael Blain, chief executive at Centriq Insurance.

Some insurers that offer shortfall benefits as part of their comprehensive car insurance policy, though such policies seldom – if ever – offer violation benefit. The shortfall policies “sold” through vehicle dealerships usually include violation benefits as they are finance house approved. Shortfall cover is therefore a “safety net” for the corporate entity financing the vehicle.

In the event Jane’s vehicle is stolen or written off in an accident her first port of call is the underlying insurer on the comprehensive insurance policy. But things don’t always go smoothly at claims stage. Let’s say Jane had unintentionally violated or not complied with a term or condition of the underlying comprehensive policy. In such cases the comprehensive insurer will reject liability for the claim – leaving the insured no choice but to turn to the extended covers.

Paid up policy, no compensation

The point Martin is making is this rejection shouldn’t be the end of the road. Jane took out an extended cover policy when she financed the vehicle in terms of which she is covered for unintentional violations. As soon as the underlying comprehensive insurer notifies her of the claim rejection, Jane - or the finance company - can submit a violation claim on the extended cover policy. The finance company essentially applies for settlement of the outstanding balance and the benefit typically accrues to the finance house, where the balance outstanding by the customer at the time of claim repudiation is settled. There’s generally no relief for the customer if any shortfall between the debt and the current market value of the vehicle exists.

Often, the finance company would only become aware of a possible violation claim when the client alerts them to it, or when notified by the investigator or by the underlying insurer rejecting the claim. The finance company has to be involved in the violation benefit claim because it provides details of the outstanding balance on the motor vehicle finance agreement. It is, of course, in the interest of both the consumer and the finance company that the claim be submitted. However, what sometimes happens is that clients forget that they enjoy this cover and therefore the finance house is not alerted to a potential claim. The client suffers a loss and fails to receive compensation under a paid up policy.

Back to the broker

The average motor vehicle owner is entirely unaware of what he/she can claim for on extended cover policies. Nine times out of 10, they probably don’t even remember signing for - or paying for - the extra cover when they financed the vehicle.

“It was becoming more and more apparent to me that in many cases where insurers were relying upon violation as a basis for rejecting the claim, they knew the financial institution would be entitled to file a violation claim, but were not communicating this fact,” says Martin. “And often the financial institution doesn’t file a claim even though it has a right to do so…”

Martin issued his press release to get the industry talking about violation cover, which is offered by way of extended cover policies to many short-term motor policyholders. He suggests consumers and their brokers check their policies when they next review their short-term books. Definitely ask a few questions if a claim submitted by one of your clients is rejected –no one else is going to look after your client’s interest!