Vehicle insurance excesses

PFM

Photograph: Istockphoto

Your chances of being involved in a vehicle accident are about one in 10 every year, and insured drivers virtually always have to pay an amount upfront via the excess on their policy.

Last year, the South African police recorded about a million vehicle accidents, which are estimated to have involved as many as 1.8 million cars.

“If you take into account that there are 9.5 million licensed cars and even more unlicensed cars on South African roads, your chances of being involved in an accident are at least one in 10 each year,” Gary Ronald, a spokesman for Arrive Alive, says.

If you are in an accident or your car is stolen and you need to claim on your car insurance, you need to be aware of the terms and conditions around the excess amount you are liable for.

Sometimes it is only when they come to claim that first-time policyholders realise they have to pay an excess, Gari Dombo, the managing director of Alexander Forbes Insurance, says.

“Although most consumers have excesses on their car policies, few of them understand how an excess works,” Dombo says.

The excess is the amount payable by you in the event of a claim and is known as the uninsured portion of your claim. The excess is agreed upfront when you take out your policy and can be either a flat or fixed amount, such as R3 000, or a percentage-based amount, such as five percent of the claim.

For example, if the excess amount stipulated in your insurance policy is a fixed R3 000 and you are in an accident and the damages to your car are R50 000, you would have to pay R3 000 and your insurer would pay the remaining R47 000. If your excess is five percent, you would have to pay R2 500 and the insurer would pay R47 500.

Shehnaz Somers, the head of personal underwriting at Santam, says excesses can be applied at policy level for the entire amount of a claim or at section level. For example, you may have different excesses for different risk levels such as theft, hijacking or windscreen replacement.

Delouise Marais, the Gauteng regional manager of specialist underwriter MUA Insurance Acceptances, says most insurance companies charge a higher or additional excess if the insured has a bad claims history. Higher or additional excesses are also likely if the driver is younger than a certain age, because more accidents involve drivers in the younger age bracket.

“There are a number of different excesses that can be levied, and it is very important that you read your policy carefully and take the time to speak to your broker or insurer to establish exactly which excesses you may be liable for,” she says.

Conditions under which you may be required to pay an excess on top of your basic excess include the following:

* The driver is under the age of 25;

* You claim in the first six months of taking out the policy;

* The car is stolen or hijacked;

* The accident is between midnight and 5am;

* Your car is not fitted with the minimum security required, such as a tracking device; and

* It is a one-party accident – for example, you swerved to avoid a dog.

You need to read your policy carefully and be clear of the wording and the implications for you. For example, if your car is being driven by someone under the age of 25 and the car is involved in an accident between midnight and 5am, you could be faced with the following costs:

Basic excess: R2 500

Driver under the age of 25: R2 000

Time-of-accident excess: R2 000

Total excess amount due by you: R6 500

Bradley du Chenne, a senior executive at Dial Direct Insurance, says additional excesses may depend on the circumstances of the accident.

“For example, if you are middle aged and have been driving for years but lend your car to your 18-year-old son, who crashes it, then an additional excess is likely to be payable,” he says.

Du Chenne says this is because the premium you pay on your insurance policy is based on your individual risk profile and not your son’s risk profile.

“Also, the excess is typically higher for a stolen vehicle claim than an accident claim because, on average, the loss to the insurer is greater on a stolen vehicle. However, most insurers will waive the theft excess if your car is recovered before the claim is paid and if the vehicle can be repaired,” he says.

Somers says additional excesses for certain events are based on historical data. For example, the time-of-accident excess was introduced because data reflected higher accident rates of young drivers in the early hours of the morning.

Marais says you can elect to have a waiver on your policy whereby the basic excess is deleted in exchange for an increase in the premium you pay.

“This waiver is often applicable only to the basic excess, and you might still find yourself responsible for any additional excess noted on the policy, such as one for a driver under the age of 25,” she says.

If you are confident you will be able to settle a high excess in the event of a claim, you can choose to pay an additional voluntary excess to reduce your premium.

A voluntary excess is the amount you have contracted to pay towards a claim in addition to your compulsory basic excess. You can choose the amount of a voluntary excess when you take out your policy. For example, you could raise your excess payable from R3 000 to R6 000 in order to reduce your monthly premium.

Dombo says, for example, that if you are insuring a 1985 Porsche that you drive twice a year, it makes sense to pay a lower premium and take on a higher excess.

“You can afford to take on a higher risk because the chances of your car being involved in an accident are much lower. That said, in the event of an accident, you need to be confident that you can cover the higher excess,” he says.

Somers says that voluntary excesses are much more than a claims control mechanism. If used properly, a voluntary excess allows you choice and control over how much of the risk you are willing to take on yourself.

To determine the level of voluntary excess that is right for you, you should consider the following:

* Are you looking to save money on car insurance premiums by carrying more of the risk yourself?

* Do you have the money to cover the larger excess should you need to make a claim?

* Examine your insurance profile: your driving history, your driving style, the neighbourhood you live in and the type of car you drive. Do these factors make it more or less likely that you will have an accident or claim in the future?

* Are you a risk taker or are you averse to risk?

“The important thing to remember is that you are taking a gamble, because you can never accurately predict if and when you will have a claim,” Somers says.

“So it is always useful to do a proper risk assessment before you decide on your insurance needs. Or you could speak to a broker who can help you determine your level of risk, as well as the appropriate voluntary excess for you,” she says.

IF IT’S NOT YOUR FAULT

You may believe that if you are involved in an accident that is not your fault, you will not have to pay the excess on your insurance claim.

“This is not the case,” says Delouise Marais, the Gauteng regional manager of MUA Insurance Acceptances.

She says many consumers mistakenly think that if they are in an accident, the guilty party will be required to pay the excess on both vehicles.

“Policyholders are always, first and foremost, responsible for the excess payable in terms of their own policies,” Marais explains.

However, if your insurer recovers the money from the person responsible for the accident, you should be repaid your excess. “It is important for anyone who is involved in a no-fault accident to track the status of the claim and make sure that their insurer refunds their excess.”

Danny Joffe, the legal director at Hollard Insurance, says that once an insurer has paid out your claim, the debt owed by the negligent or guilty driver becomes the insurer’s debt and the insurer takes over the recovery in your name, even for the excess.

However, Joffe warns that if you try to interfere with the process while the insurer is trying to recover your excess from the negligent driver, the insurer can reject your claim entirely.

This means it is advisable not to contact the other driver before the matter is settled and to deal only with your insurer.

“South African law is not clear in the scenario where a partial recovery is made from the negligent driver. Some insurers pay you back a pro rata excess and some refund you the full excess – this will depend on the wording of your policy,” he says.

Shehnaz Somers from Santam says there are instances when an excess cannot be recovered. These include:

* You are not able to get the guilty party’s details – for instance, you return to your car in a shopping mall parkade to find that someone has smashed your bumper and driven away;

* The guilty party does not have any income or assets to attach;

* The legal costs to take the guilty party to court outweigh the recovery costs of the excess amount;

* The guilty party cannot be traced through the contact details that are available; and

* The merits of the claim do not justify the recovery of the excess.

As to the fate of your no-claim bonus if the money is successfully recovered, practices vary from insurer to insurer.

Marais says that while MUA will reinstate your no-claim bonus and no-claim discount (the lower premium based on the fact that you have not had a claim for a number of years), other insurers may not do so.

Somers says companies that pay no-claim bonuses will, in the main, not pay the bonus if you claim, regardless of whether you are at fault or not. “The defence by insurers is that it is a no-claim bonus, not a ‘no-blame’ bonus,” she says.

There are significant financial implications for the change in your status. The loss of the annual no-claims bonus is obvious, but another – perhaps more important – consideration is that your monthly premium is bound to increase once you have made a claim and lost your no-claims discount.

When assessing a vehicle insurer, whether you plan to take out insurance for the first time or to swap from your existing insurer, it is worth looking at how it will treat your no-claims status if the money is successfully recovered and you are not at fault.

* This article was first published in the fourth-quarter 2011 edition of Personal Finance magazine.