Car-insurance-premiums-should-sometimes-come-downDoes your car insurer inform you that your premium is adjusted yearly in line with the market value of your vehicle?

We have come across an important article by Neesa Moodley-Isaacs titled “Car premiums rise when they should come down” which provides a rather detailed discussion on the onus to inform car insurance clients that car insurance premiums require adjustment in line with reduced market value. It also emphasizes the need for clear communication between insurer and client!

The following important questions have been addressed:

  • Are you aware that your car insurance premium should sometimes be adjusted downwards as the vehicle loses market value?
  • Does your contract stipulate such a possible reduction or has your broker disclosed this to you?
  • Do you know that if you submit a claim, you will receive compensation based on the market value at the time of the claim?

The Financial Advisory and Intermediary Services (FAIS) Ombud, Charles Pillai, has presented a clear warning to insurers and brokers who have been jacking up car insurance unnecessarily to earn higher premiums and commissions. We would like to discuss a recent decision by the Ombud with reference to the facts of a specific case…

Factual Scenario:

  • Anthony Naidoo took out short-term insurance through Absa Brokers, jointly underwritten by Mutual and Federal and Santam, in 1999. In July 2003, he added a Toyota RunX RSI valued at R200 000 to his policy. In March 2004 and in March 2005, Naidoo received renewal letters from Absa Brokers.
  • Both letters said: “In your own interest it is necessary to update the sums insured at regular intervals to avoid the negative effects of under-insurance.”
  • Neither letter mentioned that failing to revise the value of his insured car could also lead to over-insurance.
  • In February 2006, Naidoo contacted Absa Brokers to add a new car to the policy. He then became aware that he should be adjusting the insured value of his car to match its market value.
  • Naidoo immediately asked for the insured value and premiums on the Toyota RunX to be adjusted. He asked why the adjustment had not been made previously and why the broker had not informed him of the possibility of a reduced premium.
  • Absa Brokers said the onus of ensuring the vehicle was insured for the correct market value was on the client. Naidoo then sent a written inquiry to both Absa Brokers and Mutual and Federal. Mutual and Federal agreed with Absa Brokers that it was the responsibility of the client to adjust the insured amount.
  • When Naidoo asked Mutual and Federal why he was not entitled to a refund for the extra amount he had paid over the period the premiums had increased while the value of his vehicle had depreciated, he did not receive a response.
  • He then lodged a complaint with the office of the FAIS ombud.

Decision / Ruling by the Ombud
The Ombud ruled against Absa Insurance Brokers for failing to inform the client that bringing the insured value of his Toyota RunX into line with its market value would reduce his premiums and save him money.

The Ombud criticised the insurer for not mentioning in Naidoo’s contract renewal letter that a reduction in the value of the vehicle could result in lower premiums. It was also emphasized that the broker should not have merely conveyed letters from the insurer to the client.

“Absa Brokers was engaged by Naidoo to render financial services to him and should have advised him about the depreciation of the market value of the vehicle,” the Ombud said.

In his determination on the matter, FAIS ombud Charles Pillai ordered Absa Brokers to:

  • Find out what values the vehicle should have been insured for annually, on a depreciating scale, each time the policy was renewed after September 30, 2004;
  • Consult with the insurer and establish what the premiums should have been on each renewal date; and
  • Compensate Anthony Naidoo with an amount equal to the extra premiums he paid since September 30, 2004.

Outcome and Conclusion
Peter Todd, the managing director of Absa Insurance Brokers, admitted that in this case the broker had been negligent by failing to advise Anthony Naidoo on over-insurance.

Todd says the ruling is important as it highlights the ambiguity of short-term insurance policy schedules and renewal letters. “It should ideally lead to the industry rewording policy schedules and renewal letters. The ruling also provides clarity on what an annual policy is and the fact that a renewal date constitutes a new contract,” he says.

Todd says claims by other policyholders will be examined on their own merits.

Keith Kennedy, the managing director of Mutual and Federal, says the company will consider the ruling and will certainly review the wording of its insurance policy renewal letters.

Advice on Market Value and Adjustments to Policies
What should we as car insurance policyholders know about the market value of our vehicles?

  • Most insurance policies are based on the retail value of your car. The retail value is the amount you paid the dealer for your car.
  • You should tell your insurer or broker that you want your car insured at its market value. This is the amount a reasonable buyer would pay for it and is based on research published by Mead and McGrouther – this is the mysterious “blue book” dealers often refer to when they are evaluating your car for a trade-in.
  • The onus is on you to contact your insurer each year to request an adjustment. However, some insurers annually adjust the insured value of your car to its market value, provided you have stipulated that the car is insured at its market value.
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