You might assume that buying a comprehensive insurance policy for your car means there will be no out-of-pocket expenses. Sadly, you are mistaken. There are rules, limitations and conditions within the policy that will decide your final claim amount.
The first motor car to appear on a British road was a Benz in 1894. According to law, the vehicle was not to operate on a public road with a speed exceeding 5km per hour. A man had to carry a red flag and walk in front of the car. In 1896 the law was changed. They could now travel at 20km per hour. There were many accidents involving damage to property and injury to people. Often, the person responsible for the accident had no insurance. They also did not have enough money to settle the claim.
Motor insurance was available from around 1898 and from 1903. Motor vehicles appeared in larger numbers on the road after the First World War. In 1909 there were less than 100,000 vehicles in Britain. In 1919 there were 330,000 vehicles. In 1929 there were 2,130,000. By 1929, over 6,000 people were killed annually in road accidents.
Many accident victims and their dependents were unable to recover damages because the motorist concerned in the accident was uninsured. To protect accident victims, many countries acted by making third-party liability insurance compulsory. Norway was the first country in 1912, followed by Switzerland in 1914, Denmark in 1917, Massachusetts in 1927, New Zealand and Sweden in 1929. In the UK, the road traffic act 1930 made it compulsory to have insurance to cover personal injury to third-parties other than passengers carried free of charge. There was an amendment in 1972 that included this exemption.
In Ghana, the Act that makes motor insurance compulsory is the Motor Third Party risk Act, Act 1958. This made it compulsory for vehicle owners to have the Act cover in place to protect injury and death, and property damage to third-party victims before they put their vehicles on the road. The following are a few of the things you need to know about your motor insurance. The third-party motor insurance cover that is compulsory does not cover damage to your vehicle itself. The third-party motor insurance covers the following:
- death of or bodily injury to any person, and/or
- damage to property belonging to someone other than you or a member of your household
- All legal costs and expenses incurred with written consent of the insurer in defending any court proceedings arising from an event for which cover is provided are recoverable under this policy
- Emergency Medical Expenses/Treatment
- Personal Accident Benefit to Policyholder/Driver
Most people were interested in extending the scope of cover to include their vehicles. This brought development of the comprehensive policy. I have met several people who want to do comprehensive motor insurance because they do not want to incur any cost at the time of claim. This should actually be the peace of mind and security insurance seeks to provide. Is this assertion true? Does motor comprehensive insurance mean everything is covered? But if everything is not covered, can insurers design something to actually cover everything? What are some of the things that are not covered so clients can make other provisions in case of a loss?
From the Oxford dictionary, the word comprehensive means including or dealing with all or nearly all elements or aspects of something. The motor comprehensive policy is a named peril policy. This means that the elements the policy covers have been listed in the policy. Below are the elements or perils the motor comprehensive policy covers in addition to the third-party and personal accident components. The motor comprehensive policy will pay:
- For loss of or damage to your vehicle and/or accessories caused by or arising out of: Accidental Collision or Overturning, or Collision or Overturning due to mechanical breakdown or wear and tear.
- Fire external explosion self-ignition or lightning
- Theft, Burglary, Housebreaking
- Malicious Act
- Flood, Typhoon, Hurricane, Volcanic Eruption, Earthquake or other Convulsions of Nature, strike, Riot, Civil Commotion.
- Or while in transit (including the process of loading and unloading incidental to such transit) by road, rail inland waterway, lift or elevator
- For the loss of or damage to permanently-fitted car radio/cassette, compact disk, audio speakers up to the amount specified in the schedule.
The big question is: can we think of other perils (anything that can give rise to a loss) that are not covered in the comprehensive motor policy? Below are a few instances when an insurance company might repudiate or not pay for your loss:
- If the insured or any other person – with the knowledge and consent of the insured – is driving the car under the influence of alcohol or drugs or any other intoxicating substance
- If the vehicle was being driven by a person without a valid driving licence.
- Damage to engine as a result of oil leakage
- In case of violation of car manufacturer’s guidelines for use of car and related failures or breakages
- Gradual wear and tear
- Any damage to the car due to war, terror attacks, invasion foreign enemy action, civil war, mutiny, rebellion, hostilities, radiation or nuclear material/weapons are not covered under a standard motor policy
- Deliberate accidental loss – that is, a loss arising out of an accident or event that was deliberate is also not covered.
Kindly let us consider some of the following situations. People normally think insurance is fraud: because most claimants have to pay some money after a loss, even though they took a comprehensive policy to cover their vehicle. The amount one must pay at the time of loss to have your vehicle back can be very huge at times. The following situations could make you incur more cost even though you have a comprehensive policy.
When your vehicle is involved in an accident, sometimes it might require towing to a garage where it will be repaired. Insurers only pay a reasonable amount for it to be towed to the nearest safe place. Their reasonability means the cost of towing does not normally exceed 20% of the agreed repair bill. This means it is possible for you to bear some cost, even though you have comprehensive insurance in terms of towing – especially if the accident or crash happened on a highway and you have to tow to the nearest city, or your city, for a garage to look at it and make repairs.
Indemnity literally means to save from loss or harm. This is one of the basic principles of insurance. Insurance is a contract of indemnity because it is intended to provide financial compensation for a loss the insured has suffered and place you back on the same or similar position after the loss as you enjoyed immediately before. This indemnity is an underlying principle for contribution in motor insurance.
Insurance companies always pay for the cost of repairing or replacing the affected portion through insured peril. For instance, if an insured loses their driving mirror through a crash, the insurer will pay for the cost of that. It is possible the insured cannot get a single mirror but has to pay for the cost of a pair. Some parts in the vehicle are paired and they are purchases always as a pair, but insurers always pay for just the affected part.
When there is damage to part of a vehicle’s body that may require full spraying, insurers will only pay for the cost of affected parts. The insured has to contribute if they want they want to spray the whole vehicle.
Third-Party Property Damage
One component covered under motor insurance is the damage the insured or driver permitted by the insured to drive could cause to properties belonging to other people who are not part of the contract. In simple terms, a driver could run into someone’s building, kiosk, shop, vehicle, building wall, traffic-light or any other property belonging to someone other than the insured. The motor insurance covers the cost of replacing or reinstating the property, but there is a limit which is normally around GH¢2,000 or GH¢5,000.
Any amount that exceeds this will be paid by the insured himself. There was an instance when someone ran into another person’s vehicle and caused extensive damage. The vehicle was damaged beyond repair and the cost of that vehicle was around GH¢90,000. The third-party limit was just GH¢2,000. This means the one who caused the damage – whether or not he has comprehensive insurance in place – has to cough up GH¢88,000. This is even higher than the cost of his vehicle.
When the insured thinks the amount for covering damage to third-party property is insufficient, he has an option of increasing the limit by paying additional premium. The rate for additional premium ranges between 1% – 2.5% on the additional amount or benefit one would like to add; and this is based on the risk category or use of the vehicle. Most people just buy the standard because they are not aware of these other benefits. Others who know about this normally take the easy way out by not increasing it, because they have the option and also think the loss might actually not happen.
This is the first portion that will be borne by the insured when there is a claim. For private vehicles, the driver bears 10% of each and every loss. It is 15% for commercial and other vehicle types. This means that if you are making a claim of GH¢100,000 on private vehicle, you stand to pay GH¢10,000 as the insurance company will pay 90% of the loss. This excess can be bought back, but most people are not aware and some insurers are also not willing to sell it.
Most policyholders or drivers are at risk. When there is an accident, the driver or the insured (who’s in charge of the vehicle) is not considered a third-party and as such is not entitled to third-party benefit. The driver then benefits from the Personal Accident cover, which is capped at GH¢2,000. There is no way this amount will ever be sufficient. The driver only becomes third-party when the accident was caused by another vehicle. The vehicle-driver who caused the accident will also not benefit as a third-party. The insured or the driver is exposed!
The insurers will pay reasonable medical expenses incurred in connection with any bodily injury by violent accidental and external means sustained by you, the driver, or the insured and/or any occupants of your vehicle as the direct result of an accident to your vehicle; but such amount shall not exceed the authorised medical expenses limit shown in the schedule. The amount normally ranges from GH¢40 – GH¢60 per person. The period within which liability is admissible shall be 48 hours after an accident.
The policy will also not cover any contractual liability that a policyholder may have toward the insured asset – that is, the car. Contractual liability refers to any claim that may arise because of the policyholder entering into a contract with the same insured risk. For instance, the policyholder has pledged his car to someone (say against a loan) for a certain period of time, and the car is damaged while being driven by the person to whom it has been pledged. Then, any losses due to this damage won’t be covered.
Loss of use
This simply means that you will not be provided with a replacement vehicle or reimbursement for your transportation costs while your vehicle is being repaired or replaced after being damaged by an insured peril. The policy will not pay for any cost you incur because your vehicle is going through repairs. Some companies have introduced hiring as an optional benefit, whereby insureds can hire a similar vehicle when theirs are going through repairs.
Market Value and Depreciation
Whenever there is a total loss, insurers pay the market value of your vehicle or the sum insured whichever is less. This means if you mistakenly insured the value of the vehicle below the actual value, you will end up not getting the actual money to replace your vehicle. When you insure the vehicle above the actual market value, insurers will pay for the actual market value. Insurers also depreciate the value of the vehicle when there is a total loss before they pay. There a lot of different methods of depreciating to determine the actual value of the vehicle at the time of loss. Most insurers work with vehicle manufacturers chart like below:
Others also use the STC valuation data to determine the market value of vehicles at the time of accident. Below is one:
But it’s funny how in Ghana now, the value of vehicles tends to appreciate. This means that given the value of a vehicle you buy this year, when there is a total loss next year the amount you will be paid cannot get you the same vehicle.
Is there any way insurers can deal with contributions by insureds at the time of their claim? Is it possible for actuaries to come out with a rate to charge at inception of the policy so policyholders do not contribute in any form at the time of a loss? I know most policyholders would welcome this idea.
Insureds incur other expenses when they have a claim. Is it possible for insurers to give an option for the insured to select a limit for out-of-pocket expenses? The limit could be GH¢1,000 which the insured can claim with proof through receipts of incurred cost. This could cater for other expenses from towing, contribution, loss of use and other consequential losses.
The personal accident cover for drivers or insureds under the motor policy is limited and not enough. This is why it is so important that drivers need to have a standalone Personal Accident policy which can give them a bigger limit. With the standalone Personal Accident policy, the driver can take a bigger limit by paying additional premium. But how many drivers know about this? and most are also not comfortable with having separate premiums. Insurers can give the option to insureds to increase their personal accident cover under the motor policy.
Policyholders should be made more aware of their right to buy back the excess in the motor policy. Claims under the own damages section of policies, covering all classes of vehicles, are subject to a compulsory excess.
The third-party property damage limit in the motor policy is very small. The cost of claims is very high and it is necessary insureds be made aware to increase their third-party property damage. Most people think because their sum insured is huge, the same applies to their third-party property damage.
There is another school of thought which believes when insurers cover everything, insureds will not show reasonability when there is a loss. Again, insureds can stage, claim or deliberately cause damage. But we still believe that the importance of insurance is to provide peace of mind; and when this is not met, it has defeated its main purpose and failed in everything else!
The writer is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana, and holds MPhil in Enterprise Risk Management and Business Consulting from KNUST. He attained a Bachelor’s degree from University of Ghana, Legon, and has Advanced Diploma and Diploma in Applied Insurance from Ghana Insurance College / Malta Insurance Training Institute.