Tue | Aug 14, 2018

No, do not welch on your insurance premiums!

Published:Sunday | August 31, 2014 | 12:00 AM

QUESTION: I renewed my auto policy during the first week of June. I paid 50 per cent of the premium and gave an undertaking to pay the balance during the first week of September. However, the vehicle was written off due to an accident in July. Because of this, I do not need insurance until such time that I replace my vehicle. If I do not pay the balance next month when it is due, is that likely to affect the payment of my claim as well as my future relationship with the insurance company?

- E.G.B.

HELPLINE: The quick response to your question is: Forget it! It would be absolutely pointless to try to avoid honouring your undertaking to the insurer.

If you were to withhold payment, they could either turn down the claim or deduct the amount that you owe them from your claim.

Also, you would ruin your standing with them - assuming that you have not done so already by being involved in a serious accident. Remember the ad on cable?

Trying to welch out of the deal to pay the balance of the premium could probably affect your credit score. This could mean that in addition to paying higher premiums because of the accident, assuming you were at fault, you could also pay a higher interest rate on loans.

Would you have posed a similar question if you had obtained a three-year bank loan to buy a car that was destroyed in an accident - for which there was no insurance - a few months after repayment of the loan started?

Would you walk away from your loan obligation, or would you have to continue making the monthly repayments even though the subject matter of the loan was no longer in existence?

Paying the premium is one of the many duties that a policyholder owes to an insurer. The importance of that responsibility can be measured by the fact that it is one of the first things that is listed in all contracts of insurance with words like "the insured having paid or agreed to pay the premium stated", or "we will insure you against ... during any period of insurance for which we have accepted your premium".

The premium is the price paid by the policyholder for the policy. The premium may be payable in a lump sum, or, as you are aware, by way of instalments.

There can be two or more instalments, depending on the nature of the agreement between the insurer and the customer.

The two wordings previously cited can be interpreted to mean that the payment of claims is conditional on the premium being paid.

The fact that the subject matter of the insurance - the vehicle - was destroyed in the second month of a 12-month contract does not relieve you of your contractual duty to pay 12 months' premium.

Careful reading of the contract will indicate that you must pay the full premium, not part, to get your claim paid.

It is also a generally accepted principle of insurance that when the subject matter of insurance is destroyed, or no longer exists, coverage automatically comes to an end.

To quote the UK's Marine Insurance Act 1906: "Where the subject matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss," and no insurable interest.

A person has an insurable interest when loss of or damage to that thing would cause the person to suffer a financial loss or other kind of loss.

The cancellation clause in your policy also weighs in on the subject. It gives you the right to end the insurance at any time by returning the certificate of insurance and giving seven days' notice in writing. It further states that "we will refund part of any unexpired premium due to you provided no claim has arisen during the current period of insurance".

When a claim is reported to an insurer, it triggers the start of a process that has many parts. One of the first is to check to see whether the premium has been paid in full. It is likely that your claim will fall between "the cracks" if it is found that your premium remains unpaid.

Think about it. Would it be in your financial interest not to pay $30,000 now and avoid collecting $750,000, or pay $30,000 now and collect $750,000?

From the insurance company's point of view, they would obviously prefer if you chose the former option.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com