Power Report: Don't fall for cut-rate car insurance

There's only one thing that beats buying your first car - buying your first new car.

But by the time you have the keys in your hand, you have probably jumped through hoops at the bank to secure a loan to finance it and bargained hard with the salesman for metallic paint at no extra charge.

So the last hurdle - obtaining competitive car insurance - probably gets the least attention and time. Big pity.

Many first-time car buyers seeking insurance cover are young and financially inexperienced. They're also more prone to allowing emotion and impatience to cloud their better judgment. Let's face it, insurance is the least exciting part of the experience.

Insurers, however, can wash their hands of the clients' rash choices - as long the company can show it has properly disclosed all contract terms.

story_article_left1

Which is what happened in the case of our reader, a 23-year-old Capetonian who insured her new car in August last year, just three weeks after getting her driver's licence.

The young woman (I'm not naming her for reasons unrelated to this complaint) took out comprehensive cover with King Price Insurance, at a monthly premium of R528.

What she also contracted to, and was told about by the insurer, was a basic excess of R27500, which represents about 23% of the value of her R117000 Suzuki Celerio 1.0 GL.

King Price's basic excess ranges from R1500 to R27500 depending on the value of the car and value of the monthly premium, with a maximum excess of 25% of a car's retail value. Choosing a higher excess with this insurer means paying a lower premium.

But it's a case of penny wise and pound foolish. If your car is damaged in an accident, having to fork out tens of thousands in excess could be disastrous - certainly for those just starting out in life.

The King Price client learnt this only when it was too late. When an accident last month caused damage of R30500, she was saddled with paying the first R27500.

Her boyfriend, Sam de Goede, who had not yet met her when she took out the cover, said: "The excess loaded on her policy seems out of the ordinary, to the extreme."

story_article_right2

The 34-year-old financial planner said he had spoken to King Price since the accident but had been assured that his girlfriend had been adequately informed.

"I struggle to see how this is fair or even reasonable to the consumer. Even the fact that she is a new licence holder and first-time buyer does not account for the fact that her excess is over 23% of the value of her car. She's been grossly taken advantage of," said De Goede.

However, had she done her homework, she would have likely found a better deal. This week, she was offered a R10000 excess by a competitor, for around R700 a month.

De Goede admits his girlfriend may have been too quick to seal her insurance deal.

"I don't think she shopped around - she was just keen to get her car," he said. "I don't think she realised the impact of what she was agreeing to."

So did King Price offer adequate disclosure? The transcripts I have of the sales call shows her high excess was explained. She was even encouraged to reduce her excess by increasing her premium as soon as she could afford to.

"We take our responsibility to inform our clients very seriously," said King Price head of legal Wynand van Vuuren.

"We've put a system in place where a team manager explains the consequences of having a high excess (above R15000) to a client in detail. This is exactly what happened in this case.

story_article_left3

"She indicated that she understood and accepted the excess of R27500. Moreover, her excess is listed on her policy documentation and King Price offered some advice and guidance on how to get her excess lowered over time."

Van Vuuren said many clients chose this type of cover because it was "much cheaper" but still offered more than the traditional limited-cover option of "third party, fire and theft". The average excess amount at King Price is R7500.

He said the client had saved about R9500 in premiums to date by choosing the higher excess option.

Had she added R100 to her premium, her excess would have dropped to R23500; had she doubled her premium to about R1200 a month, her excess would have been R4500.

"Had misfortune not visited her so soon, and had she been incident free for the next two years, then the savings on her monthly premiums would amount to the excess due for this incident," he said.

story_article_right4

But are such high excesses ever in the best interests of consumers?

Definitely not, says senior assistant ombudsman for short-term insurance Peter Nkhuna.

"When one most needs the benefit of the cover provided by the policy, the consumer tends to realise that it was actually not a good idea, as they now have to raise the funds to cover the excess," said Nkhuna.

"The only time when this excess structure would make sense is when one has made provision for the excess amount and it is saved somewhere with easy access. Most people do not, however, make such provision and end up having to apply for a loan or do substandard repairs they can afford."

Although there are no prescribed excess limits, this had not always been the case. Under a former ombudsman some time ago, there had been an informal agreed limit, but after being criticised for being random, it had been abandoned.

"The principle of the sanctity of the contract is our current approach," said Nkhuna. "If it was agreed and it was properly explained or disclosed by the insurer, we would not interfere unless there are very exceptional circumstances."

Zakes Sondiyazi, insurance risks manager for the South African Insurance Association, said excess amounts were a commercial matter in which the association did not get involved.

"However, we expect SAIA members to explain and disclose the excess applicable at sales or underwriting stage ... [and we] advise customers to shop around and compare the features and benefits before they decide on buying a product," he said.

sub_head_start Contact Megan Power sub_head_end

E-mail: consumer@sundaytimes.co.za

Follow Megan on Twitter: @Power_Report

Tune in to PowerFM 98.7's 'Power Breakfast' (DStv audio channel 889) at 8.50am on Monday to hear more from Megan

Please note: Other than in exceptional circumstances, readers sending me complaints must be willing to be identified and photographed.