Excuse my ignorance, but what is “violation” cover?
We borrowed today’s headline from a reader who responded to our recent article on violation cover. Within minutes of hitting “send” our phones were ringing off the hook as short-term insurance brokers telephoned us to say they had no idea what we were talking about. One of our online respondents (one of the few who’d heard of the cover) went so far as to chastise us for getting things so mixed up. “The customer cannot directly benefit from a breach of policy conditions,” he said. “That’s why Absconsion and Violation Cover are implemented for the benefit of the finance company only. These covers should never be interwoven with the underlying policy as appears to have been done by both the Ombudsman and yourselves!”
We accept blame for the confusion because our first stab at the violation cover concept left more questions than answers. Hopefully the following will clear things up. The first step in our voyage of discovery is to clear up some misconceptions. Violation cover is not part of the insurance policy, but rather an extension to the policy requested by (or offered to) the insured when purchasing a motor vehicle. “This additional cover is provided by the likes of Hollard Insurance,” says Michael Blain, chief executive at Centriq Insurance. “It was initially developed for Wesbank and was subsequently rolled out to other banks.” He said to the best of his knowledge this product isn’t offered to the general broker market.
Brian Martin, the Ombudsman for Short-term Insurance cleared things up further during our follow-up discussion. “Violation cover can be an extension to the initial policy, but frequently you find it lumped together with so-called credit shortfall cover or deposit protection insurance,” he said. Violation cover isn’t a standalone cover, but one of the defined events recorded in a policy extension typically issued by a separate insurer. The extension typically includes top-up, credit shortfall and deposit risk. In the common parlance, suggests Martin, the cover is probably referred to as top-up cover or shortfall insurance. He read from a policy document to illustrate: 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…
The “wheels bank” calls it Coverplus
After a couple of minutes spent “surfing” Wesbank’s website we came across a more detailed explanation of this type of cover. They market it under the Coverplus brand and describe it as follows: “Coverplus is specially designed as an extension to your motor comprehensive policy to provide an additional cover in the event of unintentional violation of the underlying policy, and a shortfall benefit.” It also provides a cover called bodyline maintenance which covers minor accidental damage falling within the underlying policy’s excess.
If you purchase a vehicle through a dealer and finance it through Wesbank then chances are you’ll be offered comprehensive motor insurance (a motor policy) and given the option to purchase additional cover (an extension to the motor policy which includes violation cover). It’s this extension Martin was referring to when he issued the violation cover scenario featured in our first newsletter.
The benefits on the Coverplus extension include unintentional violation cover (should the comprehensive insurer reject the claim due to an unintentional violation of certain policy conditions by the insured), shortfall cover (protection against possible shortfalls arising between your comprehensive insurance settlement and the balance owing to the credit provider) and bodyline maintenance cover (to cover minor repairs where the cost of repairs are less than the excess on the comprehensive policy).
Our reader: “The benefit accrues only to the finance house where the balance outstanding by the customer at the time of claim repudiation is settled. There is no relief for the customer if any shortfall between the debt and the current market value of the vehicle exists.” What would trigger the violation benefit? It could be drunken driving or allowing an unlicensed driver to use the vehicle – or any of a number of exclusions under the initial motor insurance policy. In the event a claim is refuted for such violation – and the extension to the policy exists – the finance company applies for settlement of their outstanding balance.
You only miss it if you don’t have it
The problem creeps in where the bank arranges for violation cover and the insured is not aware of it! “It was becoming more an more apparent to me that in a lot of 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…” He continues: “What’s significant about violation cover, which is not always appreciated, is it will also respond in some instances where premium is not paid. There will usually only be one violation claim paid where there was an inadvertent failure to pay one month’s premium…”
Martin issued his press release to get the industry talking about violation cover, which is quite possibly included by way of extensions to many short-term motor policy documents – especially if vehicle was purchased and financed through a dealer. Check it out when you next review your client’s cover – and definitely ask a few questions in the event one of your client’s claims is rejected... We’ve heard from at least one reader who saved his client money by “knowing” this clause in his client’s “top up” cover.
Editor’s thoughts: Hopefully we’ve covered this topic in enough detail for you to do some further investigation. It might be worth your while to make some enquiries about the motor policies your clients currently hold – to find out whether any extensions were “sold” when the vehicle was purchased. At the very least make a couple of calls should your client’s claim be rejected on grounds of policy violation! Does the violation cover concept make more sense to you now? Add your comment below, or send it to [email protected]
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