A controversial part of the terms and conditions of many car insurance policies in South Africa could see you overpaying dearly for coverage, or being under-insured.
The particular clause automatically changes the value of the insured property as time passes – usually once per annum – with the increase or decrease depending on fluctuations in the market over the last year.
It could apply to any short-term insurance policy, including your vehicle, home, and even cellphone.
Should the automatic adjustment not align with the real value of the insured goods, you could be vastly overpaying for coverage, or be left with a pay-out that is too little.
If you’ve had the particular policy for a long time, the insured value of the asset and, consequently, what you’re paying, could be tremendously out of odds with the market.
“When last did you check that the value of anything that you insure; your cellphone, your car, your home; is accurately specified on your insurance policy? For many, probably most people, that was quite a long time ago, especially if the policy was taken out a while ago, and that could and very well is likely to mean that that key value and the premium which is linked to it is no longer appropriate,” said consumer advocate Wendy Knowler.
“So, you could either be vastly overpaying or be left with too little in terms of a payout if you had to claim after losing the asset.”
A R3.8-million valuation with a R6-million insured value
Knowler told The Money Show of a case in which a consumer financed an investment property in 2006 through one of the country’s biggest banks and took out building insurance from the same institution.
The building insurance policy contained a vital clause, which read: “We will automatically increase the sum insured on your insured property each year on the anniversary of the policy start date. We will base the increase on our calculation of building cost inflation.”
It furthermore states that despite the automatic nature of the increase, it is the responsibility of the client to ensure that the building is at the correct replacement value.
Initially, the replacement value of the building in 2006 was R391,000 which called for an insurance premium of R96. Over the next few years, the owner completed renovations and upgrades and the premium jumped up to R371 when all was said and done.
“And then she just wasn’t paying attention as a lot of us do, [the premium] was part of what she paid to the bank every month for that property, and it was an investment property so she wasn’t living there,” said Knowler.
The premium increases thus kept climbing every year with the client being none the wiser.
Come June 2024, the owner was already paying a monthly premium of R1,557 and was notified that it would once again be going up to R1,692 for the coming year.
She finally decided that this was far too high and started looking into the finer details of the contract, including the replacement valuation, and found that the bank had pushed up the insured value of the property to just over R6 million.
She queried the figure as she was convinced that the property was not worth as much, and her financier duly sent out an assessor who valued the property at a much lower R3.8 million, which significantly reduced her monthly dues.
She then challenged the bank, claiming it overcharged her on her policy, and demanded a refund for excessive payments dating back to 2010 which she calculated to be in the region of R30,000.
The bank said that it was all in the fine print when she initially signed the contract and that there was no foul play. However, it agreed to refund a portion of the last three years of payments which totaled around R13,400.
It also said that, by law, it was not required to refund her for payments made further back.
The disgruntled client contacted Knowler for assistance, who in turn reached out to the bank with all the relevant details.
“[The bank] said that while they gave her the refund of R13,400, it wasn’t actually an overcharge because the building costs [of homes] had escalated,” said Knowler.
“Here’s the interesting part, they suggested they got the value down considerably because they estimated the replacement value at a lowering finish and quality in the case of a total loss.”
In layman’s terms, the bank said that should the property be destroyed, it would replace it with lower-quality materials and finishes to the value of R3.8 million, instead of the higher-quality materials the owner originally used which would cost in the realm of R6 million in today’s money.
It also highlighted that there’s a difference between the insured value and the market value, the latter of which can be described as the price you would get if you sell your asset, while the former is the cost of replacing it with a like-for-like version.
“The bottom line is, you really should interrogate those figures, don’t ignore them. Do it for your cellphone, or your home, or your car,” concluded Knowler.
“They’re going to be automatically adjusting them, and they might not be adjusting them in a way that you’re comfortable with in terms of value.”
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