The importance of conveying material terms to a client was stressed in numerous previous articles. Without the help of a reliable crystal ball it is often a challenge for an adviser to determine exactly which ones should be specifically pointed out to a client.
Very often, we tend to place less emphasis on those aspects which may lose us the sale. Who wants to discuss an issue like excesses when the client is not even covered yet?
Unfortunately, it is a matter for discussion at the point of sale, as is borne out in a recent case study published by the Office of the Short-term Ombud (OSTI).
The Short-term Insurance Act places an obligation on insurers to explain the basic excess and additional excesses to an insured during the underwriting of the risk, or at least clearly set out the excess structure in the proposal and policy form.
Under FAIS, it is inevitably the adviser who pays the price if a complaint lands on the Ombud’s desk, usually as a result of being unable to provide sufficient proof that all material terms were properly explained to the client.
The insurer will take into consideration whether or not it is economical to pursue the recovery of the excess, especially where the legal costs may not justify the amount to be recovered. Even if the insurer is successful with a recovery of the costs from the third party, there may be policy conditions which apply to the amount that will eventually be refunded to the insured.
Mrs. M. was involved in a motor vehicle accident which was caused by a third party. The insurer declared her motor vehicle to be a write-off as it was uneconomical to repair and calculated its liability based on the market value of the vehicle at the date of loss, as per the policy wording. However, approximately R45 000 (40% of the claim) in respect of the basic and additional excesses were deducted from the settlement offer.
Mrs. M. then approached the Ombudsman to investigate whether or not the insurer was entitled to charge such a high excess as well as how much of this should be refunded to her once the insurer had recovered it.
The insurer provided the Ombudsman with a recorded sales conversation where Mrs. M. was advised of the basic excess as well as the additional excesses that may apply. The insurer confirmed that a recovery had been initiated against the third party’s insurer who had accepted liability for the accident and had paid for the damage incurred to Mrs. M’s vehicle. The insurer also referred to the policy wording regarding the refund of the excess which states: “On the successful recovery of any amount recovered from a third party, the insured shall be refunded the first amount paid (excess) on condition that the insurer has recovered all of the costs pertaining to the claim, which includes but is not limited to all own damages, towing and storage fees, assessor’s fees, legal fees, tracing fees, admin fees and/or the like.”
The insurer recovered an amount of R71 000 from the third party’s insurer plus an amount of R22 000 from the proceeds of the salvage, a total of R93 000. After deducting all the costs incurred by the insurer, as stated in the policy wording, Mrs. M. was offered an amount of R8 000 in respect of the excess.
OSTI’s views and findings
The Ombudsman was satisfied that Mrs. M. had been provided with an explanation of the structure of the basic and additional excesses applicable to a claim and that this was done prior to the commencement of the policy. After listening to the recorded sales conversation the Ombudsman was of the view that the sales consultant was fast paced when explaining the structure of the excesses to Mrs. M. However, she did not request him to slow down when he provided the information.
A recommendation was made to the insurer to consider calculating the excess refund based on the percentage paid by each party in relation to the total amount recovered by the insurer.
The insurer’s administration and settlement costs amounted to 65% of the claim and Mrs. M’s total excess contribution amounted to 35%. The insurer was requested to refund an amount of R33 000 (35%) of the total amount recovered. The insurer offered to refund R21 000 (28%) of the recovered amount, which Mrs. M. accepted.