If repairs are feasible, it could turn out to be a reasonable compromise between customising your car and keeping the cost of your insurance under control over the long term. - File
QUESTION: I was recently involved in an accident, which I reported to my insurers. They informed me that I would incur an excess which would be five per cent of the car's value. What is an excess and what is its purpose? Do all motor policies have it?
Also, one of the rims on my car was damaged. The repairer was unable to find a replacement. My insurers say that they will not replace the set of rims, citing indemnity. However, they said they would pay me for the one that was damaged.
I understand indemnity to mean that you will be put back in the position you were in before the accident. If a set of four new rims costs $20,000 and the insurers pay for only one, it means I would have to spend $15,000 to get back in the same position I was in before the accident. That does not seem to be indemnity. Please advise me.
aholness_8@yahoo.com
Answer: Your first question suggests to me that you are new to the business of motor insurance. If I had more details about your case -- for example, the make, model and estimated value of your car and the cost to repair it -- it would have been easier for me to advise you. In the absence of this information I shall have to make a few guesses. As result, you will have to do a little homework!
EXCESS CLAUSE
An excess (or deductible) is the amount of the loss (or claim) that the insured should spend before the insurer will pay. All comprehensive motor policies in Jamaica (as elsewhere) have an excess (or deductible) clause. The amount is a fixed percentage of the value of the vehicle. Most insurers here impose a minimum excess of five per cent.
Deductibles are used to make the cost of insurance more affordable. If the first dollar of damage to a vehicle was covered by insurers the premium would be much higher.
Assume: (1) The insured value of a car was $1.2 million. (2) The excess was five per cent or $60,000 ($1,200,000 X 5 per cent). (3) The cost of repairs was agreed at $250,000 following an accident. The insured would be required to fund $60,000 (the excess) while the insurers would pay the remaining $190,000.
All excess clauses are not created equal. Some apply to all types of damage claims to the insured vehicle. Others exclude claims for fire, lightning, explosion and theft.
THEORY OF INDEMNITY
Your understanding of the theory of indemnity is partly correct. Indemnity seeks "to restore an insured to the same financial position after the loss that he (or she) was prior to the loss." Further, the insured should not "be able to profit by damage of property nor should he be in a worse financial position after a loss."
The rule does not stand alone. It operates along with other policy terms. Sadly, most buyers only find this out when they have a claim.
When one item of a set cannot be fixed or, where it is not possible to find a replacement for the damaged part, insurers are under no legal duty to replace the entire set. Were they to do this you would have benefited from the loss. They can, at their option, 'repair, reinstate or pay in cash the value of the particular part or parts'. Your insurers can discharge their contractual duty to you by simply paying one-quarter the pre-accident value of the set of rims.
It could turn out that you may not have money to replace all four rims. Perhaps the damaged item can be repaired. There was a recent ad in The Sunday Gleaner by a company that specialises in fixing rims. This option appears not to have been considered by either you or your insurer. I suggest that you contact them.
If repairs are feasible, it could turn out to be a reasonable compromise between customising your car and keeping the cost of your insurance under control over the long term. This could be of some importance if recent reports about price hikes in motor insurance turn out to be accurate.
On the other hand, if the rim cannot be repaired you will have no choice but to accept your insurer's offer of settlement.
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. If you need free information or counsel to help you solve a problem write to The Financial Editor or contact Mr. Stephens directly at aegis@cwjamaica.com
