Low insurance premiums not always best

The Ombudsman for Short-Term Insurance (OSTI) has warned consumers to exercise caution when they choose the low-premium option for their vehicles or their properties.

Ombud Deanne Wood said the reality is that the insurers will increase the excess as the premium comes down.

“Some insurers charge low premiums for comprehensive insurance cover and have low basic excesses. This seems like a win-win until you realise that the insurer charges more than one excess for a single loss, which is applied cumulatively and in addition to the basic excess. They are added together one-by-one and are charged over and above basic excess,” she said.

“When insuring valuable property, the duty is on you, as the owner, to make sure that sufficient cover is provided by the policy before purchasing the product. An insurance policy is a binding contract, which, like any other type of contract, is subject to specific terms and conditions and the failure to comply with them may lead to devastating results including the rejection of your claim,” Ms Wood said.

Not taking careful note of limiting clauses or restrictive terms in the policy wording may be as devastating at claim stage as being in breach of the policy conditions.

“Even though advertisements say how easy it is to take out an insurance contract, it is a serious business. It also remains a grudge purchase for many who are already cash-strapped in today’s tough economy. For most, the premium adds to the already high monthly instalments that we are paying to enjoy the property, car or the television set. It is only natural to want to keep the insurance payment as low as possible. But nothing, or very little, is free in life and this applies to insurance as well.

“Although shopping around for better premiums may land you a very competitive ‘price’, if it looks too good to be true, it often is. Alarm bells should be going off when a quote for insurance cover appears to be much lower than you are used to paying. Very low premiums often mean very high excesses or limited cover,” Ms Wood said.

“Examples of the excesses that are added to these policies include first time insurance policyholder excess, licensed driver for less than two years excess, single vehicle accident excess, accident between the hours of 10pm and 4am, among them.

“Imagine that a policy has a basic excess of R10 000 and an additional R10 000 cumulative excess for each of these examples. If you are a first time insured who is a newly licensed driver and you hit a pothole late at night which results in an accident, your insurer will be entitled to deduct R50 000 from the amount that it pays to you,” Ms Wood said.

Excess clauses are specifically named as limiting clauses in the Policyholder Protection Rules (PPR) and must be disclosed by direct marketers at sales stage before the inception of the policy.

Therefore, the cost of the policy should not just be a consideration of how much the premium will leave you out of pocket, but also what excess or excesses will be payable when claiming.

While you may be tempted to say yes to lower premiums, because a claim “will never happen to you”, beware the consequences of the choice at claims stage.

“Very low premiums or guarantees of a fixed premium may also be an indication of limited cover. Not all insurance policies provide comprehensive cover. This is very important when considering motor insurance. As soon as the consultant uses the words ‘limited cover’, ‘not comprehensive’ or ‘build your own cover’, beware. It is not a comprehensive policy that the insurer is selling to you. When considering limited cover insurance, always ask the marketer or insurance representative, ‘What does the policy not pay for?’ When considering the premium paid for limited cover, you may actually find that it is expensive for the cover you receive in return. Again, think of the consequences at claim stage,” said Ms Wood.

Other points to remember: If you agreed to more than one excess or the basic excess is high, you may, for example, end up paying as much as R70 000 excess on a R100 000 claim and the insurer will only pay R30 000; where you take out limited cover insurance, you may not even have cover for repairs to your own vehicle, towing of your vehicle from the accident scene or any cover at all until a number of consecutive premiums are paid; always know what you are paying for and this is especially true with insurance policies.

“Know your premium. Know the limits to your cover. Know your excesses,” Ms Wood advised.

To contact the Ombudsman for Short-Term Insurance, email: info@osti.co.za or www.osti.co.za or call 011 726 8900 or Share Call: 0860 726 890 or fax: 011 726 5501.