This is part four of our series in association with Santam on how to get the most out of your short-term insurance policy.
Every year, your contract with your short-term insurer is automatically renewed, unless you’ve become such a bad risk that your insurer decides to terminate the contract, or you decide to take your business elsewhere. Although these things do happen, more often than not the contract simply “ticks over”, with you paying little or no attention to the renewal notice you get once a year.
If this is what you do, the chances are good that you’re either over-insured or under-insured. If you’re over-insured, you’re wasting money. If you’re under-insured, it’s going to cost you when you have a claim, because your insurer will apply the “average” clause (see, “‘A’ is for average”, below).
“You need to review your insurance policy every year, not merely renew it,” Dennis Jooste, the Ombudsman for Short-term Insurance, says.
Marius Neethling, Santam’s personal lines underwriting manager, says the main reason for reviewing your policy is to make sure that you are insured for the right amount – what your insurer calls the sum insured. And it need not be done annually; you can review your policy at any time.
“But a lot can happen in a year,” Neethling says. You might have bought an expensive new TV or done renovations to your house. If you have bought a big-ticket item, such as a new TV, you will want to adjust the sum insured on your contents cover. And if you’ve enhanced the value of your home, you need to increase the sum insured on your homeowner’s policy.
Your home (the structure) and your belongings (the contents of your home) must be insured at their replacement value – that is, what it will cost you, at the time of a claim, to replace your buildings or belongings with similar, new structures or items. Your car should be insured at a “reasonable market value”, Neethling says. Reasonable market value is the retail value, which is what a dealer would sell it for, considering its age, the mileage, the condition of the car and any extras.
Your insurer might automatically increase your sum insured to provide for inflation (which is 4.6 percent, according to the Reserve Bank’s figure for May). Neethling says Santam applies an eight percent escalation to homeowner’s’ policies and a seven percent escalation to home contents policies on the anniversary date of the policy.
But on your vehicle policy, you should see your sum insured coming down automatically every year. “Every year, your car depreciates, so we adjust the value downwards, in line with the retail value in the Auto Dealers’ Guide,” he says.
All insurers that are members of the South African Insurance Association (SAIA) must adjust car values at least once a year, without any prompting from the policyholder.
This is in terms of the SAIA code of conduct for 2014, which became effective from January last year and is for your protection.
“It shouldn’t happen that you buy a car for R400 000, and two years later, when it’s worth R280 000, you are still paying insurance on a car valued at R400 000,” he says.
Irrespective of the type of personal lines (homeowner’s, contents or car) policy you have with Santam, you will receive a letter more than 30 days before the anniversary or renewal date of the policy, notifying you of the revised sum insured. “But this [the sum insured] is a guideline only. It’s up to you, the insured, to make sure that the sum insured is accurate,” he says.
Jooste reiterates this. “Ultimately, the obligation [to insure at the right value] is yours.”
It’s also up to you to know your policy, so make sure you read it again on renewal. Jooste says you should not find that it has changed significantly, because that would be contrary to the Policyholder Protection Rules. But if don’t read your policy, you won’t be any the wiser.
Just because your insurer escalates your contents and homeowner’s cover doesn’t necessarily mean that you need to be insured for more. It depends on your circumstances. For example, you might have bought a plasma-screen TV years ago costing R19 000, but the same one might be available now for R6 000. Also, be mindful of things that you have sold, but are still insuring. If you make that mistake, you cannot recover the money.
Another reason to review your policy is changed circumstances, Neethling says. If you have got married, you may need to make provision for your partner’s possessions. Or your children might have left home, in which case you would no longer need cover for their belongings.
Reviewing your policy is a good time to check that you have complied fully with the conditions of the policy, Neethling says. “Let’s say you have added a braai room to your home. You may have increased the sum insured to cover the extension, but overlooked the need to fit burglar bars, an alarm and safety gates.”
Jooste says this applies to car insurance, too. “Read the whole policy document again to familiarise yourself with all the terms and conditions. Consumers assume that because they have comprehensive cover, it means they’re covered for everything – including another licensed driver driving their car. That is not necessarily the case. You need to check not only what your policy covers, but who it covers. If cover is limited to the regular or named driver, no one else but you should be driving your car.”
Neethling concedes that consumers are hard-pressed, so when insurance policies come up for renewal, they take the opportunity to try to lower their premiums. “That’s where you can play with your excess,” he says. “To make your premium more affordable, you can opt to pay a bigger excess, instead of no excess at all.”
Some policyholders opt to pay a “loaded” premium and no excess in the event of a claim.
Most people pay a basic premium and a standard excess. But if you are struggling financially, rather than cancel your insurance, ask your insurer to give you a pared-down premium and a bigger excess. If you do that, make sure you have access to a lump sum equal to your large excess, so that you won’t be financially ruined by a claim.
‘A’ IS FOR AVERAGE
In terms of the “average” clause in your policy, you are required to insure your assets at their full value. If the sum insured at the time of the loss is less than the insurable value of the property, the amount claimed will be reduced in proportion to how much you are under-insured. Put differently, the insurer compensates you for lost or damaged property according to the percentage of its responsibility if the property is insured for less than its value. This is applied by the insurer to each claim you make. For example, if your house is insured for R200 000 but valued at R400 000, it is insured for half its value. Therefore, each time you claim for loss or damage to the property, the insurer will compensate you for only half of the claim, and you will have to meet the costs of the other half.
UNDER-INSURANCE AND THE APPLICATION OF AVERAGE
The objective of indemnification is to put you, the insured, in the same financial position you were in immediately before the loss or damage occurred. This objective is subject to the sum insured being adequate to cover the full extent of the insured loss. This principle is in line with the common law.
Unless the contract between you and your insurer stipulates otherwise, the common law position as stated above will apply. “Although our clients are aware of the consequences of under-insurance (as we advise them when they take out insurance), they normally find the application of the ‘average’ clause difficult to comprehend, particularly when the loss or damage falls well within the insured amount,” Marius Neethling, Santam’s personal lines underwriting manager, says.
The following examples illustrate what happens when you are under-insured in the event of a total loss and in the event of a partial loss.
Mr X (the insured) has insured his house contents for R100 000. His house is burgled and everything inside the house is stolen. Santam conducts an investigation and finds that Mr X was under-insured and that his contents should have been insured for R150 000.
Santam settles the claim by means of cash in lieu (as agreed with Mr X), paying R100 000, and Mr X bears the loss of the remaining R50 000.
Mr X has insured his house contents for R100 000. His house is burgled and an iPad, clothing, a DVD player and a travel bag are stolen. Santam investigates and finds that Mr X was under-insured; his contents should have been insured for R200 000. The value of the stolen items was R50 000.
The settlement will be calculated using the following formula: sum insured divided by the value for which the contents should have been insured multiplied by the loss: (R100 000 ÷ R200 000) x R50 000 = R25 000. Meaning, Santam will pay Mr X R25 000.
Article credit: http://www.iol.co.za/business/personal-finance/review-when-you-renew-and-save-money-1.1887131#.VazZYtDFxIU