But that’s not what I paid for it?
Mitesh Lakha, Portfolio Consultant – Specialist Classes
Renasa Inurance Company Limited
The fear of suffering a large financial loss often prompts a vehicle owner to buy some form of vehicle insurance in order to mitigate their risk, but do these policyholders know the actual monetary value of this risk that they are transferring from themselves?
Policyholders are often unaware of the exact benefit they may recover from their insurance policy in the event that their vehicle is declared a total loss. A fundamental principle governing the quantum of a loss is indemnification - an insurance policy sets out to indemnify the insured in the event of a loss, and the insurance is intended to restore the policyholder to the position that he/she was in immediately before suffering the loss. The emphasis here is on “immediately before suffering the loss”. By this logic, if a vehicle is declared a total loss and the policy terms and conditions are met, the policyholder will receive compensation equivalent to the vehicle value immediately before occurrence of the loss.
In motor insurance, this would generally be the depreciated value of the vehicle at the time of the loss. Motor insurance is normally based on retail, trade or market values, and the settlement provided by the insurance company will often be less than the initial purchase (with the exception of agreed value policies).
Brokers, as professional financial services providers, must comply with the FAIS Act, and their inherent duty of due care to the client when advice is being provided.
With regards to the choice of a product, a broker must exercise judgement objectively in the interest of the client and ensure that the client fully understands the “T’s & C’s”. Consequently, a broker needs to appreciate the importance of the client understanding the indemnification process, and inform the client of the various covers which are available to combat the issue of depreciation.
Certain add-on products, such as inception value and return-to-invoice policies, are designed to preserve the insured value of a vehicle and cover the shortfall between the value of the vehicle at the inception of the policy and the depreciated value of the vehicle at the time of the loss. To illustrate this benefit, assume a client purchases an inception value add-on in addition to their traditional comprehensive motor policy:
Retail value at inception of the policy: R200 000;
Retail value at time of total loss: R150 000; (this is the amount that the comprehensive motor insurer will pay);
The Inception value policy will cover the depreciation value of R50 000;
The insured will receive R150 000 from their motor insurance policy and R50 000 from the inception value policy = R200 000 in total;
always assuming all of the other terms and conditions of both the comprehensive motor insurance and the inception value policy have been met.
Evidently, these insurances provide a material benefit to policyholders, and often also include other benefits such as cover for debt-protection/credit-shortfall. As a result, the policyholder is provided with the best possible opportunity to replace the vehicle with one that is deemed to be similar. A combination of these policies and proper advice should, therefore, provide policyholders with peace of mind and prevent any unpleasant surprises at claim stage.
Renasa Insurance Company Limited
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