Understanding insurance terms
30 April 2018 Capital Insurance Brokers
Although most people appreciate that insurance is a necessary part of life, many are uncertain about what their policies actually cover, what some terms mean, and whether they really have what they need. Insurance may be something you wish you didn’t need to buy, but it is something that can be your saviour in a time of need.
There are many online resources and calculators available to assist and inform you, or you can enlist the help of a professional Insurance broker who can advise and guide you.
A few common insurance terms explained:
The Insured - The person or entity covered by the insurance, as shown on the policy schedule (and as per the definition in the policy wording/PDS).
Policy Wording / Product Disclosure Statement (PDS) - The legal document detailing the terms, conditions, restrictions and exclusions of the insurance policy. It forms part of the contract you have with the insurer when you buy a policy. The PDS will vary from one insurer to the next, and also between different products. It is important to read and understand this document, so you know what your rights and responsibilities are under the policy.
Underinsurance – This occurs when you have not selected a sufficient sum insured for the item you are insuring (eg your building). An underinsurance clause applies to many policy types, however most policies do provide some room for error. If you are underinsured, the insurer can reduce their liability by the portion that you have underinsured yourself. For example, if your home should be insured for $400,000 and you are only insured for $200,000 then you are taking on 50% of the risk, and the insurer is taking 50% (unknowingly). In this case, the insurer will only ever pay 50% of a claim. If you lodged a claim for $100,000 worth of damage, then the insurer would only be required to pay $50,000 (ie 50% of the actual loss incurred). It is therefore vital that sums insured are accurate. There are many online calculators that can help you assess the true replacement value of your home and contents.
Your Duty of Disclosure – Before you enter into a contract of general insurance with an Insurer, you have a duty, under the Insurance Contracts Act, to disclose to the Insurer every matter that you know, or could reasonably be expected to know, that is relevant to the Insurer’s decision whether to accept the risk of the insurance, and if so on what terms.
You have the same duty to disclose those matters to the Insurer before you renew, extend, vary or reinstate a contract of general insurance.
Your duty, however, does not require disclosure of matter:
- that diminishes the risk to be undertaken by the Insurer,
- that is of common knowledge,
- that your Insurer knows or, in the ordinary course of his business, ought to know,
- as to which compliance with your duty is waived by the Insurer.
Non-Disclosure – If you fail to comply with your duty of disclosure, the Insurer may be entitled to reduce it’s liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the Insurer may also have the option of acting as if the contract never existed.
Reinstatement and/or Replacement Cover – This insures property on a “new for old” basis. In the event of loss, the insurer will pay the cost of repairing or replacing the property to a condition no better or more extensive than when it was new, without deduction for depreciation.
Flood - The covering of normally dry land by water that has escaped or been released from the normal confines of a watercourse such as a lake, river, creek, reservoir, canal, or dam. (regardless of if it has been altered or modified).
Excess - Excess (also called a deductible) is the amount of any loss or damage that you must pay before your insurance policy starts to kick in. In effect, you are accepting a small part of the financial risk yourself. Your excess is stated on your policy schedule. In some cases you can negotiate a lower premium if you select a higher excess.
Agent - A person holding an agreement with an insurance company to sell insurance on their behalf, for reward. Such agents are also referred to as Authorised Representatives.
Insurance Broker - An intermediary, who acts on behalf of a person who is applying for insurance (ie their client). They may earn a commission from the insurer; however they have a responsibility to act in the best interest of the insured (ie - you).
Comprehensive Insurance - (Usually associated with motor vehicle insurance) Provides specified cover for damage to the insured vehicle, as well as damage the insured vehicle causes to the property of others.
Market Value - A vehicle insured for ‘Market Value’ is covered for the value of the same make, model, age and condition vehicle in the local market, at the time of the loss. This value is determined by the insurer using vehicle value guides (such as Redbook). It includes accessories, modifications, registration, GST and the like.
Agreed value - An Agreed Value motor policy covers you for a fixed vehicle value for the policy period. Not all insurers offer this type of policy on every type of vehicle, and it may result in a higher premium.
Loss of Rent cover - Commonly found as part of, or an option on, Landlords and Strata policies. This cover section will allow you to claim for the rent you are unable to collect due to an insured event (fire, storm etc) which has made your property unliveable. A tenancy agreement needs to have been in place prior to the loss/damage.
Subrogation - Subrogation is a term describing the legal right held by an insurer to pursue a third party that caused an insured loss to their insured. This is done in order to recover the amount of the claim paid by the insurer to their customer for the loss incurred.
A waiver of subrogation prevents the insurance company (who steps into the shoes of the insured after it pays a loss) from suing the other party– which may have caused the loss. Before signing a waiver of subrogation or hold harmless agreement, it is best to check with your solicitor and any insurer involved.