MAKING SENSE OF MOTOR INSURANCE

Are you thinking of buying a motor insurance policy for your new car or renewing your current policy? Do you know what to look out for when buying a motor insurance policy and how to avoid problems when it comes to making a claim? In the first of a three-part series, we share two case stories on problems commonly encountered by consumers followed by tips on what consumers should look out for when buying motor insurance policies. The tips are taken from two guides produced by the General Insurance Association of Singapore under the MoneySENSE national financial educational programme: "Insuring your motor vehicle" and "What to do after a motor accident".

1)  Understanding what your motor insurance policy covers

Mr Kevin Phua bought a secondhand motorcycle through a dealer in September 2002. As he did not have much savings left after buying the motorcycle, he told his insurance company that he wanted the cheapest motor insurance policy available. As he thought that all motor insurance policies were quite similar, he did not ask about the type of coverage being purchased. In November 2003, Mr Phua's motorcycle was stolen. He reported the matter to the Police and filed a claim with his insurance company. To his surprise, he learnt that his policy did not cover loss or damage due to fire and theft. Mr Phua appealed to the insurance company, claiming that the staff had not explained the coverage of the policy to him properly. The insurance company rejected Mr Phua's claim as the policy contract clearly stated that the insurance company would not have to pay for any losses arising out of theft or damage to the insured's own vehicle.

MoneySENSE tips for consumers:

* In Singapore, it is against the law to drive a motor vehicle on the road without  a valid insurance policy.
* Insurance companies offer three main types of motor insurance policies:

(i) Third party - This type of policy covers death of, or injury to, other parties and damage to other people's property. Under the law, the minimum requirement is that the policy provides cover for causing death of, or personal  injury to, other parties. 
(ii) Third party, fire and theft - On top of third party coverage, this type of policy further allows you to make a claim should your own vehicle be stolen or damaged by fire.
(iii) Comprehensive - This type of policy provides cover for personal accident and accidental damage to your vehicle on top of protection against fire and theft, as well as third party death, injuries and property damage. Everything else being equal, this type of policy would thus cost more than other types of policies. Even so, most people opt for a comprehensive policy because of the peace of mind it brings.You may even be able to add on optional benefits, such as coverage for windscreen damage, by paying a higher premium.

* Before you purchase a motor insurance policy, read the contract terms and conditions carefully, including the fine print. You should have a good understanding of the policy. If there is anything in the policy documents that you do not understand, seek clarification from your insurance company or agent. Do not buy anything you do not understand as it may not meet your needs. 

2) Disclosure of information to your insurance company

In March 2004, Mr Mohd Kassim bought a motor insurance policy for his brand new car.  The policy carried an excess of $2,000. Although Mr Mohd had the intention of letting his 21-year-old daughter, who had just passed her driving test, use the car, he did not name his daughter in the policy as he felt that such details were private and unimportant. In May 2004, Mr Mohd's daughter was involved in a car accident while driving Mr Mohd's car and the claim amount worked out to $18,000. As a result of the non-disclosure of information by Mr Mohd (about his daughter driving the car), the insurance company applied a higher excess of $5,000 due to the unknown risk covered.    

MoneySENSE tips for consumers

* An excess is the cost you may be required to bear should you make a claim or in  the event of a claim being made against your policy.
* It is your duty to fully disclose information that may have a bearing on your policy  cover.  If your vehicle is damaged while being driven by a person not named in  your policy, the insurance company may apply a higher excess due to the  unknown risk covered. If the vehicle is damaged while being driven by a young or inexperienced driver not named in the policy, you may be charged a higher excess. The definition of young and inexperienced driver varies from insurer to insurer. You should check the definition in your policy.
* You should declare the names of the people who will be regularly driving your vehicle.  This allows your insurance company to assess the risk profile accurately and set the appropriate premium and excess.
* For some vehicles, such as high-performance cars, your insurance company may specify that coverage will only apply to drivers named in the policy, i.e. authorized drivers. In such cases, the insurance company has the right not to meet  its contractual liability if the car is driven by an unnamed driver, even though the person may hold a valid driving licence and may be driving with the knowledge and consent of the owner of the vehicle.

3) Understanding how premiums are set

Mr Mohd Ismail, an executive in his mid-twenties, was in the process of buying a new car and asked an insurance company for a premium quotation for a comprehensive motor insurance policy. The insurance company informed him that due to his age, the quotation was 10% higher than it would be otherwise. Mr Mohd questioned the insurance company on the rationale for imposing such a "levy". The insurance company explained that the premium was calculated based on the profile of the driver, which takes into consideration a number of factors including age, sex and occupation, as well as the characteristics of the vehicle.     

MoneySENSE tips for consumers

* Most insurance companies in Singapore consider a range of risk factors when  setting premiums. They include, amongst others:
      - Make, model and age of vehicle;
      - Age, sex and occupation of drivers;
      - Claims history of drivers; and
      - Use of vehicle (e.g. hire, private use etc.)
* When purchasing a motor insurance policy, you will need to provide the insurance company with information such as (i) how long you have been driving; (ii) your claims history; (iii) who will be driving the vehicle; and (iv) what the vehicle will be used for. This is to help the insurance company assess your overall risk profile as well as your needs as a policyholder. The information you provide will also enable the insurance company to set a proper premium for your policy. 
* It is your duty to disclose all information factually and completely to the insurance company. Insurance company has the right not to meet its contractual liabilities under the policy or void the policy from its inception for non-disclosure of such  material facts.

4) How the No-Claim Discount works

Ms Tan was involved in a minor road accident in August 2003. She reported the accident to her insurance company as required by the policy. Two months later, her policy renewal letter came and she realized that: (i) 30% of her No-Claim Discount (NCD) had been deducted; (ii) a sum of $3,000 had been set aside as a "claims reserve" in case a claim was filed; and (iii) the premium for her policy had increased. Ms Tan called the insurance company, arguing that neither she nor the third party had made any claims. As such, the insurance company should not have deducted her NCD and set aside a claims reserve. The insurance company informed Ms Tan that the third party had sent in a claim of $2,500 against her for rear-ending his car. In a typical rear-end accident, the driver of the vehicle behind is deemed to be at fault. So the third party had the right to make claim against Ms Tan. The insurance company further explained that should there be no claim against her for the next 12 months, they would reinstate her NCD and refund the extra premium which she had paid. The company also explained that practices with regards to NCD vary from company to company.

MoneySENSE tips to consumers:

* You are entitled to a No-Claim Discount (NCD) if no claim has been made against  your policy, either by yourself or by a third party for a period of 12 months between each successive renewal of the policy (such practice may vary across different  insurance companies). The NCD reduces the premium you have to pay for the following year. This is your insurance company's way of recognizing you for having been a careful driver. The following table shows how the NCD is awarded by all insurers  across the industry.

* When a policyholder reports an accident to the insurance company, and if the facts and circumstances seem to suggest that the insured driver is likely to be at least partly responsible for the accident, a claim reserve is created in anticipation of a claim to be filed by the third party or the policyholder himself.
* All insurance companies in Singapore use a guide called the Barometer of Liability Agreement (BOLA) to determine how much each party is liable in an accident. BOLA is designed to expedite up claims processing. It does not diminish your right to contest liability under the law. Under BOLA, your NCD will not be affected if your liability is 20% or less in an accident involving an identified vehicle. In all other cases, your NCD may be affected.  The amount of claim that is lodged or likely to be lodged does not affect  the proportion by which the NCD will decrease.
* You should always notify your insurer of any accidents in which you are involved, even if you are not claiming under your own policy.  By doing so, you are fulfilling the policy condition requiring you to inform your insurer of any possible claims arising from your policy as soon as possible.  Your insurer will thus have a record of the accident, so that if the third party decides to pursue a claim against you, your policy will respond. Under the policy contract, you should avoid entering into private settlements with third parties as this may affect your insurer's subrogation rights.  Entering into a private settlement is equivalent to admitting liability on behalf of your insurer.  This is in breach of a policy condition.  Therefore, if the third party decided to pursue a claim against you despite the private settlement, your policy would not respond.
* You should seek clarification on your NCD and premiums if there is anything you do not  understand.

5)  Spare parts used in repair works

Mr David Lee was involved in a motor accident in May 2004. His eight-year old car was assessed at the Independent Damage Assessment Centre (Idac) and subsequently referred to an authorized workshop of his insurance company. The price tendered by the workshop came up to $2,000. However, on checking with his car agent, Mr Lee discovered that the cost of genuine parts (not including the paint and labour) already came up to $3,500. Mr Lee asked the insurance company why the workshop was not using genuine parts for the repair of his vehicle. The insurance company clarified that according to its replacement policy, vehicles that are less than three years old will be repaired using new genuine parts, whereas vehicles more than three years old are likely to be repaired using reconditioned parts of a comparable quality. As a gesture of goodwill, the insurance company offered to pay Mr Lee cash of $2,000, which was the amount charged by its workshop, should he insist on repairing his vehicle at a workshop of his choice. 

MoneySENSE tips for consumers:

* The aim of most motor insurance policies is to have your vehicle restored to as near a condition as the one it was in before the accident. Based on this  principle, for a relatively new vehicle, damaged items will usually be replaced with new parts, which are either genuine or OEM (Original Equipment Manufacturer) parts. However, for vehicles more than three years old, the insurance company may opt to use good-quality reconditioned parts. In such  instances, a six-month warranty for repairs is usually provided by the workshop. When purchasing a motor insurance policy, you should ask the insurance company or agent to explain to you their replacement policy (i.e. whether your vehicle will  be repaired with new or used parts).
* Your insurance company may impose restrictions on who can repair your vehicle. More expensive policies may allow you to go to the workshop or dealership of your choice instead of only workshops authorized by the insurance company.
* Your insurance company is encouraged to disclose to you any restrictions on  repairs before you buy the policy. Nevertheless, you should ask whether there are conditions relating to use of dealer workshops and authorized workshops.

- Dealer workshops
The warranty on new or relatively new vehicles will often state that the vehicle has  to be repaired by the dealer or appointed agent of the manufacturer. If this is the case with your vehicle, you should check with the authorized motor dealer, agent or distributor on the terms and conditions of your warranty as repairs by other workshops may affect this. Some insurance companies that restrict repairs at dealer workshops may agree to take over warranty of the vehicles. You  should check with your insurance company on this.
 
- Authorised workshops
Some insurance companies limit your choice of repairer to a panel of authorized workshops, which does not always include authorized dealerships. Upon completion of repairs, a six-month warranty is usually given.

6) Cancellation of policy

Mr Muthu Krishnasamy bought a motor insurance policy for his three-year old car from an insurance company. Before his policy was due for renewal, Mr Krishnasamy received a written notice from the insurance company that his policy would be cancelled. No explanation for the cancellation was provided. Mr Krishnasamy had made two consecutive insurance claims in the last six months amounting to $21,000 and $38,000. He felt that it was unfair for the insurance company to cancel his policy due to these claims. The insurance company explained to Mr Krishnasamy that one of the conditions in his insurance contract gave the company the right to cancel the policy by giving the policyholder written notice of seven days.

MoneySENSE tips for consumers

* Both you and your insurance company have the right to cancel the motor  insurance policy for any reason by giving written notice of seven days to the other party. Insurance companies can decide not to renew a policy after a  major accident claim. These are business decisions of the insurance company.
* If your insurance company cancels the policy, it will refund you the unused  proportion of the premium. Some insurance companies refund the premium on a pro-rata basis with the deduction of a small administration fee. Others use a  method that calculates what would have been charged if your policy were a short-term policy. This usually applies if the cancellation is at your request. You should check with your insurance company how it calculates policy refunds.
* Note that refunds may be subject to a minimum amount, and that your insurance company may reserve the right not to refund any premium if a successful claim has been made on the policy.
* Make sure you check carefully and understand what the policy covers before you buy the policy.