An area of challenge that has been observed in the adjustment of motor insurance claims is the inadequate understanding of the difference between the Policy Excess clause and the Contribution conditions in an insurance policy. Even among some insurance marketers, this two concepts are oftentimes misunderstood and therefore misconstrued. And this misunderstanding is further passed on to the insured by means of unintentional misrepresentation.
Many a times in the course of adjusting a Motor Insurance claim, an insured would insist that the excess on his motor insurance policy has been paid for and there is therefore no justification for any form of contribution. This usually results in a tug of war in determining how much should be considered fair and equitable as compensation.
The onus is therefore on insurance professionals to always have an adequate understanding of the clauses in their insurance policies and the motives behind such wordings of those clauses and policy conditions.
What is Policy Excess?
This is a clause or condition deliberately worded into an insurance policy to limit underwriter’s exposures in the event of a claim. Actually, there are other policy conditions or clauses that also limit underwriter’s exposures and they serve different purposes however, the main motive behind this particular clause is to instill in the insured a sense of responsibility and caution to not be either careless (because there is an insurance protection in place) or have a claim-centric attitude. A claim-centric attitude is a situation where an insured uses every available opportunity to lodge a claim especially with respect to seemingly insignificant damages.
Application of Policy Excess in Motor Insurance Policy
Policy Excess applies to indemnity policies only and it is deducted from whatever settlement that is due to the insured in the event of a claim. In a layman’s term, indemnity policies are insurance policies that has to do with properties or physical and tangible items. This Excess usually come in pairs and with conditions. It is usually the higher value between an absolute sum and a specific rate (percentage). And especially in Motor insurance policies, the sum and the rate could graduate subject to the sum insured of the vehicle.
Below is a typical example of policy excess as it relates to Motor Insurance Policies.
Where the amount claimed falls below the policy excess, the insurer would not be liable to pay such a claim. But where the amount claimed is above the Policy Excess, the value of the “excess” is deducted from the amount claimed and the balance paid to the insured.
A motor insurance policy holder (insured) is usually given the option to free themselves of this clause by paying an additional amount for its waiver. Where this waiver is granted, the Policy Excess clause is deleted from the policy as the amount of the “Excess” would be deemed to have been bought back into the motor insurance policy, hence the term Excess Buy Back (EBB). Therefore at the time of a claim, there wouldn’t be such deduction that relates to Policy Excess from the amount the insured is expecting as compensation for a loss.
It is however worth mentioning that the waiver of Policy Excess on a Motor Insurance Policy is subject to the insurer or underwriter’s discretion regardless of the insured’s willingness to pay the required additional premium. Where there is “EBB” on a motor insurance policy, the underwriter can choose to revoke the waiver at a later time (at subsequent renewal of the policy). This is usually done in an attempt to manage a risk where the policy has been considered unprofitable due to incessant claims.
What is Contribution?
Contribution in insurance can be viewed from different angles. For the purpose of this discussion, it would be limited to the sharing of insurance liability between the insurer and the insured (the policy holder).
The concept of contribution is a corollary of indemnity which is one of the fundamental principles of insurance. Contribution therefore applies to indemnity policies only. Benefit policies such as life assurance policies or personal accident policies do not fall under this purview.
The principle of indemnity goes to say that an insured has the right to be compensated by the insurer in the event of a predefined loss having fulfilled the conditions of an insurance contract or agreement. This principle further says that is as much as the insured ought to be returned to the nearest possible financial position they enjoyed before the loss, the insured should not be allowed to benefit from his loss…and therein lies the issue of contribution.
Contribution arises in a situation where it is practically difficult for the insured to be returned to the previous position they were before a loss event without making them better off.
- Painting the entire car due to damage to some areas.
- Replacement of a pair of item (shock absorber, headlight) due to damage to one as a result of accident.
- Replacement of a damaged part with a brand new part especially for vehicles that are old.
- The use of a standard automobile repairer’s garage instead of the insured’s regular garage especially where there is Maintenance Garage Clause in the policy.
Due to the disagreements that surfaces between the insurer and the insured over whether or not contribution ought to apply in respect of a claim and the percentage to apply, underwriters’ have come up with some policy conditions.
- Pair Clause; this clause states that in the event of a loss, the underwriter’s liability would only be limited to the cost of that specific single item and not the whole pair.
- New for old; this clause states that in the event where a damaged item is to be replaced with a brand new one, the insured would be made to bear a certain proportion of the cost by means of contribution.
- Betterment clause. This clause states that in the event where a larger portion of a vehicle is to be painted due to the damage to a small portion, the insured would be required to contribute to the cost of such painting or repairs.
Kindly click on the picture below to read the Part 1 of this discussion.
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