One in 10 complaints to the Insurance and Financial Services Ombudsman are about insurance "excesses".That's 350 angry policyholders shocked by the excesses their insurer has decided they must pay.But there's nothing ombudsman Karen Stevens can do, except explain to people that when they signed up for their policies, they agreed to pay excesses at claims time."We explain to a lot of people that, in most cases when an insurance claim is accepted, you have to pay an excess," she said.
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The purpose of insurance excesses is to reduce the number of small insurance claims insurers face, and to give policyholders some "skin in the game", to encourage them to take care, for example, by driving more carefully to avoid accidents."An excess is a form of self-insurance. It helps to avoid too many small claims which would increase premiums for everyone who is insured," Stevens says.
Without excesses, there would be claims for tiny sums like $5, $10 and $20, which would result in far higher costs to run insurance companies.That's the theory. The fact remains, however, that in some circumstances, excesses can cause a deep sense of injustice in policyholders.And it's debatable whether charging excesses in those circumstances carries any real "probity" value in guiding policyholder behaviour appears weak.
NOT MY FAULT
The first of these circumstances is when a policyholder was not at fault in the accident they are claiming for, but is still charged an excess."One common cause of frustration is when people are not at fault in a car accident, but still have to pay an excess," Stevens says."If the other driver at fault is insured, and their insurer accepts they were at fault, the excess may be refunded and the no-claims bonus reinstated. But, in many cases, the only way to recover the excess is through the Disputes Tribunal."
Landlords in particular may make a claim under their insurance for damage to their rental property. If they can't prove that each individual bit of damage was caused at the same time, they face an excess for each bit separately.In one case last year, a man's car was vandalised when he was overseas, as a result of attempts to steal it while it was unattended at his home in New Zealand.The damage consisted of a smashed window, dented left front door, scratches around the left wheel arch, scratches around the right wheel arch and damage to the glove box.The insurer "believed" the damage was the result of separate events, suggesting an attempted theft, a side-swiping, and some scraping against stationary objects. It offered to cover the damage, with a separate excess for each area of damage, three in all, adding up to $900.The onus was on the policyholder to prove the damage occurred in one event, which he could not do, as there were no witnesses.In another case, a couple claimed for damage to their car caused when it was parked on the road. The insurer inspected the car and found that there were at least seven separate areas of damage, and therefore planned to charge seven excesses adding up to $1750, just under double the $920 estimated cost of repairs.
RISING SHOCK VALUE
Excesses have risen, which may be adding to people's shocked reactions.Standard house insurance excess at State is now $400. Back in 2006 it was $150. That's a rise of 267 per cent. In that time CPI has increased by 25 per cent.But as well as insurer-imposed excess inflation, many homeowners have opted for higher excesses in a bid to keep down premiums in the aftermath of the Christchurch Earthquakes.Last year AA Insurance said half of homeowners voluntarily opted for a higher than $400, while 17 per cent of contents policyholders chose an excess higher than its standard $300.Sometimes the savings offered by insurers for higher excesses add up to just one or two dollars a week.
Some people would struggle to find the money to pay an excess, making it hard on people with lower incomes.No study has taken place in New Zealand, but in 2011 in the UK, AXA Personal Lines found just under three in ten of its car insurance policyholders didn't have enough savings to pay an excess.That can mean those without savings having to borrow to chip in to get their cars repaired, or having to do a deal with their insurer.Insurers can make cash settlements. While that might be merely disappointing after a burglary, it could mean not being able to fix a damaged car after a crash.Stevens urged people in financial difficulties to talk with their insurers, and ask for help, such as paying the excess over a period of time."I'm pretty sure that they would," she said.
Like many things in insurance, excesses can be confusing.Ombudsman cases include one of a man who was asked whether he had "ever had insurance declined, cancelled, renewal refused or terms imposed", when he took out a contents insurance policy.He said "No", which was untrue, though he claimed he had not known a higher excess had been imposed on him.