Money Basics with Martin Hesse

INSURANCE TERMS YOU NEED TO KNOW

A MAJOR reason people shy away from financial issues is the wide use of terms that only financial experts and lawyers understand.

In insurance, the more you know about how it works, the concepts behind it and the terms used, the less likely you are to lose out, either through paying too much, or by having a claim rejected.

Here are explanations of some common legal terms and concepts in insurance.

ACT OF GOD

Any incident that is not manmade, which causes destruction to property or injury or death to people or animals. Examples are storms, earthquakes, lightning and tsunamis.

AVERAGE

You are required to insure your assets at their full value. Under the “average” clause, if the replacement value of the items is more than you have insured them for, your claim will be reduced in proportion to how much you are under-insured. For example, if the contents of your home is insured for R200000 but valued at R400000, it is insured for half its value. Therefore, each time you claim for loss or damage, the insurer will pay out only half of the value of the claim.

BETTERMENT

The purpose of insuring property is to financially restore you to the position you were in before the loss or damage to the property. You should not be better off financially than you were before the loss. In other words, the insurer may not compensate you for more than the value of the insured property.

CONSEQUENTIAL LOSS

Consequential loss is normally excluded from cover. This is a loss you may experience as an indirect consequence of an initial, or first, loss, for which you are covered. For example, if you have a motor accident and consequently miss an important meeting that causes you financial loss, it would be regarded as a consequential loss.

EXCESS

The excess is an agreed amount of money you pay from your own pocket to the insurer towards repairing or replacing an insured item. A rule of thumb is the lower the excess, the higher your premiums, and vice versa.

EXCLUSION

An exclusion in a policy document is something that the policy does not cover. All exclusions should be stated clearly in the document, and should be explained to you by your broker, so that you know what you are and are not insured for. For example, a policy might not cover damage to a car caused by hail.

NON-DISCLOSURE

Non-disclosure is when you fail to disclose information, either when you take out a policy or when you claim, when it is necessary or a requirement to do so.

REPLACEMENT VALUE

This refers to the cost of replacing an insured item with a new item. Home contents, building cover and all-risks personal lines policies are based on replacing the lost or damaged item with a similar, new item. However, vehicle insurance works differently: your car is typically insured for its second-hand market value.

REPUDIATION

This refers to the insurer refusing to pay a claim for a particular reason. The insurer may repudiate a claim if:

● The policy did not cover the event which led to the loss or damage;

● You acted contrary to what was stipulated in the contract;

● The item being claimed for was not insured under the contract; or

● The contract had been terminated before the event that led to the claim.

SALVAGE

Salvage refers to the insurer becoming the owner of your damaged property if it has compensated you to the maximum amount for that property. This applies to movable goods such as motor vehicles and computers.

SUBROGATION

This is the right of an insurer to recover from the person who has wrongfully caused the loss or damage to your property the costs it has incurred to compensate you. If you are in a motor accident that was not your fault, the insurer will try to recover the costs of the damage from the third party and refund your excess.

SUM INSURED

For each property insured there is a limit (a maximum amount) to what the insurer will pay or settle in the event of a claim. This is referred to as the “sum insured”. This should be the amount it will cost you to replace your property should it be completely destroyed or lost.

THIRD PARTY

This is the person or entity that, apart from you and the insurer (the first and second parties), is involved in a dispute or claim. In a car accident involving you and another vehicle, the third party would be the driver or owner of the other vehicle.