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Claim settlement options – OSTI case study clarifies indemnification criteria

In a case study shared in the recently published OSTI annual report, the issue to be determined was whether the insurer’s offer of settlement amounted to indemnification on the part of the insurer. “Short-term insurance contracts are contracts of indemnity which means that the insurer’s obligation is to place the insured back in the same financial position that he was in immediately prior to the loss or damage. Indemnity also means that the insured should not profit from the insurer’s settlement of the claim,” Darpana Harkison, Senior Assistant Ombudsman explains.

What lead to the insured’s dissatisfaction with the offer of settlement?

The insured submitted a claim for the theft of his cell phone, a Samsung S7 Edge, which took place during a burglary at his risk address on 20 October 2018.

On 5 January 2018, the insured contacted the insurer to amend the policy as he and his wife had separated. When the insured asked the insurer’s sales consultant what he would be paid by the insurer should anything happen to his cell phone, the insured was advised that he would be paid the insured amount, being R15 000.00, minus his excess of R500-00.*

At the time that the insured submitted the claim, the Samsung S7 Edge could not be replaced, and the insurer offered to settle the insured’s claim by replacing the Samsung S7 Edge with a Samsung Galaxy S8. However, based on his conversation with the insurer on 5 January 2018, the insured was adamant that the claim must be settled on a cash-in-lieu basis in the sum of R14 500.00.

Contractual settlement options

The policy wording which the insurer relied on to substantiate its offer of settlement read:

“Need to claim –

We have the choice to settle your claim in any of the following ways:

  • Paying out cash to you.
  • Repairing the damage at a repairer of our choice.
  • Replacing the item at a supplier of our choice.
  • Any combination of the above.

What’s it worth –

The insured value that’s noted on your policy schedule is the maximum amount that we’ll pay for any claim, less the excess amounts payable by you, and less any dual insurance and under-insurance.”

Rationale behind Insurer’s offer

It was pointed out to the insured that, when dealing with contents items, which depreciate in value due to use and rapidly changing technology, it becomes difficult for an insurer to place the insured back in the same financial position. Consequently, an extension of the indemnity principle is that, where the risk item is insured for its replacement value, the insurer is then permitted to replace the lost used item with a new item which is similar to the item which was on cover.

It was not in dispute that the replacement phone, which the insurer sought to provide to the insured, was a newer and more modern phone than the one that was on cover. Therefore, the insured was advised that the insurer’s offer to replace the Samsung S7 Edge with a Samsung S8 Galaxy did amount to indemnification on the part of the insurer.

Outcome of the complaint

OSTI held that the insurer had successfully proven that, on a balance of probabilities, its offer of settlement was fair and reasonable and in accordance with its obligations to indemnify the insured as set out in the policy wording. A recommendation was accordingly made to the insured to accept the insurer’s offer.

Click here to read more on this and other case studies shared by OSTI.

*It would be interesting to know whether, during the sales call, the other claims options were also mentioned, and this was yet another case of selective memory loss by the client.

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