Poor service and incompetence
Insurance Helpline with Cedric Stephens
Question: I insured my car comprehensively in August 2007. Since I was not living here during 2008-2009, it was not insured again until August 2009. I bought third-party coverage and paid a premium of J$31,000.
Four months later, I closed that policy and changed the coverage to comprehensive. I called to get my refund and was told that I would get J$18,000. They said that they would send an endorsement letter to the insurance company so that I could receive my cheque.
Two weeks ago, after numerous attempts to get information, they informed me that because I took so long to insure, the policy lapsed and they had to take some money. I will now get only J$5,000. Can they do so, and under what circumstances? Why didn't they take the money initially when I went to reinsure the vehicle?
Answer: You are a victim of poor service and the broker's incompetence. If they had your interest at heart, you would have been J$13,000 richer. As it turned out, the broker ended up earning more commission on the transaction, the insurer with more premium, and you the loser - all this the result of the so-called error by the broker! Life is so unfair!
This conclusion follows a discussion between your insurers and me. I sent them a copy of your email. Their reply:
"... We have investigated the case and our records show that email@example.com was insured with us through a broker in Ocho Rios. In fact, this was the second time ... at her request ... the policy was cancelled and in accordance with the cancellation provision ... short-term rates were applied. However, at the time of cancellation, she was informed by the attending clerk at the broker, that the refund would be based on using pro rata rates. This, therefore, was the reason for the sum of J$18,000, but on realising the error, the correct sum of J$6,325 was credited. She was informed at a later date by the broker that the original figure was incorrect. The cancellation process was also explained to her and that it was not a company but an industry method of calculation that had been employed. This appears to be the first indication of discontent on her part."
Benjamin Schneider and David E. Bowen in their book Winning The Service Game write that "people who work in financial institutions have become inured to how financial issues affect their customers because "they deal with such large amounts of money, the implications of a 'small amount of money' (like J$11,675, or J$13,000 in your case) for a customer are lost."
Could this explain why the insurers are so puzzled by your dissatisfaction?
Premium refunds are calculated in two ways when motor policies are terminated. Method number one assumes the insurer cancels. In this event, the insurer is required to give written notice.
The notice period is stated in the agreement and varies between insurers. However, all insurers use the same method. It is called the pro rata, or proportionate method.
This means that the refund is calculated based on how many days remain between the date of cancellation and the expiry date. For example, if the date of cancellation occurred on the 165th day and the premium was $65,000, the refund would be calculated using the following formula: 200/365 x $65,000. The policyholder would get a rebate of $35,615.43. This means that the insurer would retain $29,383.57 of the premium that was paid for 165 days of coverage.
Part two of the cancellation clause comes into play when the policyholder ends the contract. In this case, short period rates are applied.
The fourth edition of The Dictionary of Insurance Terms says short period rate cancellation implies termination by the insured of "a property ... insurance for which the returned unearned premium is diminished by administration costs incurred when the insurance company placed the policy on its books." Set out in the table below is the short-term table of one local company, which I have compared with that of an insurer in the United States:
There is, therefore, nothing unusual about your insurer applying short-term (or period) rates to this transaction.
The broker compounded the error. Your third-party policy could have been converted into a comprehensive policy. Had this been done, you would have paid a pro rata premium representing the difference between J$31,000 and the comprehensive premium. You would also have avoided the stamp duty charge and part of the GCT you paid on the new policy.
Frankly, I feel that you have asked the wrong questions. The more appropriate question is: why should you pay for the poor service and incompetence of those who hold themselves out to be experts in the business of insurance?
Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. Email: firstname.lastname@example.org or send text (SMS) message to 812-7233.