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TCF in Practice

Treating customers fairly may be the new buzzword, but it has been applied in the industry for quite some time now.

A perfect example of this comes from a formal ruling made by the Short-term Ombudsman four years ago when it found against an insurer for adopting a practice which the Ombudsman felt “…was out of keeping with the industry norms and standards, was potentially highly prejudicial to insured persons and would…result in uncertainty, confusion and unnecessary disputes…”

The insured purchased a BMW for R950 000 which was comprehensively insured. In April 2008 the insured vehicle was involved in a collision and later declared a write off. A claim was submitted to the comprehensive insurer as well as the credit shortfall insurer.

The comprehensive insurer assessed the market value of the insured vehicle to be R620 000 and the insured was made an offer on this figure less the applicable excesses. The insured’s credit shortfall insurer rejected the value placed on the vehicle by the comprehensive insurer for the purposes of assessing the insured’s shortfall claim.

The insured approached the Office of the Ombudsman for Short Term Insurance who then took up the matter with the comprehensive insurer. It appeared that the method of indemnification provided by this insurer was the market value on the date of loss.

The insured vehicle, a 2006 model, had a retail value of R792 200 at the date of loss which was consistent with the new list price in 2008 of R864 000 according to the Auto Dealer’s guide, being the industry standard for determining the value of vehicles.

The comprehensive insurer however did not follow the Auto Dealer’s guide and instead considered similar vehicles being offered on the market and determined that the insured vehicle could be replaced at a cost of R620 000. The comprehensive insurer submitted to the Ombudsman a circular dated the 10th of June 2010 which was sent to all their brokers advising them of the proposed new method of determining the market value of vehicles at date of loss with the intention of reducing reliance on the Auto Dealer’s guide. This happened two years after the claim.

The Ombudsman for Short Term Insurance advised the comprehensive insurer that their method of determination of the market value was out of keeping with the industry norms and standards, was potentially highly prejudicial to insured persons and would only lead to differing practices being followed in the industry which would result in uncertainty, confusion and unnecessary disputes being created.

The Ombudsman advised further that it was imperative that there be uniformity in approach within the industry to the methodology to be employed in determining the indemnification to be provided to the insured in the event of a loss. He advised that the methodology was especially important as it would affect the calculation of the credit shortfall.

The Ombudsman for Short term Insurance conceded that an insurer was, as a general rule, entitled to elect whether to repair, replace or settle on a cash-in-lieu basis. However, once an insurer had elected to indemnify through a particular method, they were stuck with that method and may not later change that election to the detriment of the insured.

The Ombudsman advised that, once an insurer had elected to indemnify on a cash-in-lieu basis, it could not rely upon the cost of replacement as representing the measure of indemnification. The comprehensive insurer disagreed with the Ombudsman and advised that they would not change their view. This necessitated the Ombudsman to issue a formal ruling against them.

The insurer was ordered to recalculate the settlement to the insured following the industry standard, which was the Auto Dealer’s guide, and, further, that interest was to be paid to the insured at the rate of 15.5% per annum as from the 09th of April 2009.

After further deliberation the insurer agreed to abide by the findings of the Ombudsman.

In our view, this proves that TCF is not new, nor rocket science. It is merely a set of guidelines to ensure fair treatment of clients. The onus is currently on the industry to examine its policies and procedures to ensure that it is line with the six outcomes of TCF.

In this instance, the insurer was penalised for one claim which resulted in a complaint to the Ombudsman. In future, penalties for unfair practices will be substantially higher than the cost of a single transgression.

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