Mind the gap when switching insurers

The recession of the past two years has taken a toll on consumers, who are battling to keep up with their insurance premiums and are cutting corners to save money – without realising the consequences of their decisions, the short-term insurance ombudsman, Brian Martin, says.

In his annual report for 2010, Martin says a high number of consumers last year found themselves either unable to maintain their insurance premium obligations or have fallen victim to the dangers associated with the “churning” of cover – when they go from from one insurer to another to try to save on their premiums.

He says that, compared with previous years, a high number of complaints to his office during 2010 involved consumers who switched insurers in an attempt to save money and then tried to claim, only to find that they were not covered for a brief period in-between different insurers.

Martin says consumers often shop around for insurance annually in an effort to reduce their premiums and save money but then fall in holes where they are not covered.

“You need to make sure that your insurance cover is uninterrupted and that there is no period during which you are without cover while moving from one insurer to another,” he says.

For example, if you phone an insurer today for a quote, you will be asked when you would like cover to commence.

“Most people ask for their cover to start from the beginning of the following month, but then find that their current insurer cancels their cover immediately. This leaves a period of days in between when consumers find they have no insurance cover at all,” Martin says.

He says it is far better to ask for immediate cover from your new insurer – there may then be a brief period where you are insured by two companies for the same thing.

“In this scenario, you pay a little extra for a limited time but if you have a claim in that period, the two insurers are obliged to pay your claim on a 50-50 basis. So, for example, if your claim is for R50 000, each insurer will pay R25 000,” he says.

“It is safer to have double insurance for a short period than to take a chance on being uninsured and then being unable to claim from either insurer,” Martin says.

He points out that since 2009 there has been a significant loss of jobs in the formal economy and the inevitable knock on disposable income will have an impact on the short-term insurance market.

“The total number of jobs lost during the first three quarters of 2010 has been estimated at 275 000. The unemployment rate, including discouraged job seekers, housewives and students who would like to work, currently stands at 36.6 percent, indicating that more than a third of South Africans who want to work are unable to find employment,” he says.

Martin says he believes that in the foreseeable future, a significant number of South African households will find themselves in a position where they will not be able to afford any type of short-term cover or will be forced to reduce their insurance expenditure to the bare minimum.

He anticipates competition in the short-term insurance industry will intensify as consumers “seek out cost savings and, through necessity, are obliged to budget only for essential expenditure”.

“As household income comes under increasing pressure, there may also be an increase in the frequency of fraudulent claims, or the temptation on the part of policyholders to inflate otherwise genuine claims,” he says – something he warns against.

Other complaints last year included:

* Insufficient funds: Consumers have complained that their claims were declined because the insurance debit order had not gone off their bank account due to insufficient funds in the account, and they had been unaware of this. Martin says the onus is on you, the consumer, to read your bank statements regularly and to contact your insurer immediately if a debit order is returned, so that you can make arrangements to ensure your insurance cover is uninterrupted and not cancelled.

* Skipping payments: You need to ensure you keep up your premium payments and do not skip any payments – you may have the nasty surprise of finding out at the claims stage that your insurance cover has fallen away because you skipped a payment.

Most insurers will allow you a grace period of 15 days and then they will debit your account again – and you may also have to pay a late payment fee. If the debit order is returned by the bank a second time you will have no insurance cover for that month. Some insurers will debit you as usual the next month. In other cases, the insurer may cancel your policy after not receiving one month’s payment.

If you are in financial trouble, you can speak to your insurer to try to reduce your insurance premiums.

Martin says one option to reduce your monthly premiums is to increase the excess amount you pay at the time of making a claim. If you do choose this option, you should ensure that you have sufficient funds available to pay the excess if and when you need to make a claim.

However, Martin warns of the danger of downgrading your insurance too drastically.

“Remember that you get what you pay for – a reduced premium is usually achieved by you agreeing to take on more risk. If you choose this option, make sure you know what cover you are getting. A saving of a few hundred rand a month can come at a huge cost in terms of your insurance cover – and many consumers only figure this out at claims stage when it is too late,” Martin says.

Decrease in complaints during financial crisis

The number of complaints received by the Ombudsman for Short-term Insurance, Brian Martin, decreased slightly between 2009 and 2010.

“As the general economy moves out of recession, we expect that the volume of complaints will start to increase again,” Martin says.

The number of complaints decreased from 12 316 in 2009 to 11 902 in 2010. Martin says the decline is in keeping with trends in the insurance industry. Many insurers reported that their claim volumes were down in 2010.

“The number of claims made by policyholders against insurers largely determines the number of complaints received by our office,” he says.

Historically, about 65 percent of the complaints received by Martin’s office relate to motor vehicle insurance, but this declined to 53.1 percent last year. According to the South African Insurance Association, motor vehicle insurance has been adversely affected by the global financial crisis.

“The sale of motor vehicles is driven by the availability of credit, which in turn carries the contractual obligation to comprehensively insure your vehicle. We expect that as and when motor vehicle sales increase, especially of new motor vehicles, there will again be an increase in the number of related complaints,” Martin says.

In 2010, the amount recovered by the ombud’s office for complainants was R130.9 million – R6 million less than the amount recovered in 2009. The office also achieved the highest recovery for a single complainant in its history: R3.7 million. Martin says the complaint was related to homeowner’s cover for a home in Camps Bay, which had extensive damage after a land slide.

“Although my jurisdiction is capped at R1 million, I was able to deal with this complaint and another relating to a claim for R2.6 million after the insurers involved agreed to abide by my decision,” he says.

Martin says the financial constraints imposed on ombudsmen need to be revised urgently and pointed out, for example, that the Financial Advisory and Intermediary Services ombud is restricted to awarding complainants a maximum amount of R800 000 even in cases where losses far exceed this amount.

Lessons for you in case studies

Each year, the short-term insurance ombudsman, Brian Martin, highlights a few complaints he received during the previous year, that stood out. Below are two such complaints. Note that each case is judged on its own merits and Martin’s office does not make rulings based on precedent.

* Falling tree. Mr X submitted a claim for damage to his household equipment. Mr X had been out and on returning home, saw that a tree had fallen against the power wire. When he entered the house, he heard a loud bang and saw smoke coming from his television set. The light switches also began making loud banging noises and began smoking.

The insurer rejected Mr X’s claim on the basis that a power surge had occurred and this was not an insured peril.

Mr X objected, saying the wind blew a tree over, causing it to fall against the power line, which then triggered the power point explosions.

Martin found the cause of damage was the tree that fell against the power line and, according to Mr X’s policy, “falling trees” was an insured peril. He ordered the insurer to pay the claim.

Lesson: Martin says you must make sure you fully investigate the cause of damage when you make a claim and read your policy document carefully so that you are aware of what you are covered against.

* Call confusion. Mr Y submitted a claim for a car accident that occurred on December 31, 2007. The insurance assessor declared the car a write-off but the insurer later rejected Mr Y’s claim on the basis that he had given them an incorrect insurance history when he took out the policy.

When he took out the policy, Mr Y was asked “for how many years in total did you have uninterrupted comprehensive vehicle insurance?” He responded that for the past seven years he had not made a claim.

Martin pointed out it was clear from a telephone transcript that Mr Y did not understand the question and understood “uninterrupted” to mean the period of insurance in which he did not have a claim.

Martin says the onus was on the insurance consultant to clarify the question and to make sure that the answer corresponded with the question. He ordered the insurer to pay the claim in full.

Lesson: Martin says that if you have a dispute with your insurer, you have a right to request a transcript of any telephone conversations you may have had with the insurer, during which you agreed to something or answered certain questions.

Chance to appeal

The Ombudsman for Short-term Insurance, Brian Martin, says he is still opposed to the introduction of an appeal mechanism against formal rulings or decisions made by his office. However, following a report by Judge Peet Nienaber, Martin has prepared a draft set of rules covering a proposed appeal structure.

Martin says the main sticking point currently is that the industry wants to charge you, the consumer, for the appeal costs, but he does not agree with this.

“The process of laying a complaint with our office is free of charge to consumers and the appeal process should also be free. Charging consumers for appeal costs is highly prejudicial and will act as a bar to appeals. This means insurers will be more likely to appeal since they are able to afford the costs more easily than a consumer would,” he says.

Martin says he is aware that the long-term insurance ombudsman’s office has an appeal process in place.

Jennifer Preiss, the Deputy Ombudsman for Long-term Insurance, says her office requires complainants to pay a deposit for an appeal, but only if the complainant can afford it and where the amount in question is substantial, which is “in a very few instances”.

“We appoint an outside party, usually a retired judge, to hear the appeal and the amount of the deposit varies according to the case details,” she says.

Preiss says the deposit for an appeal at the office of the long-term insurance ombudsman goes into an attorney’s trust account and is not held directly by the ombud’s office. She says the amount of the deposit is usually in the region of R6 000 but can go up to R10 000, and if the appeal is successful, your deposit is refunded.