Are You Over Insured?

For most people the two most precious assets that constitute the huge bulk of their wealth would be their house and their car. These are, after all, the most expensive items you are likely to buy (unless you collect expensive jewellery or works of art). Normally, you take out insurance for both assets. But, you may ask, are you over insured?

The question of being over insured is most likely to apply to your motor vehicle. It is, of course, possible to be over insured with respect to your home, but that is not likely because, while it is affected by depreciation, it also benefits from appreciation in property values and by the improvements you add. Indeed, it is more likely for you to under-insure your home.

With a motor vehicle, things are different. It just depreciates. The moment you drive a brand-new car out of the car dealership, you automatically incur a loss of at least 20 per cent its value (for some models, it can be as high as 30 per cent). But, at this point, it will seem reasonable for you to insure the newly-purchased car at its original purchase price.

As the car gets older, it will suffer a continuous decline in market value due to depreciation. It is very likely for your insurance company to renew the insurance policy using the same original price — and charge you accordingly for the same amount of premium.

Is the amount of annual depreciation significant? Perhaps, not quite as much as when you first drove it out of the showroom. On the average, the vehicle will probably be valued 15% lower than a year earlier. If your insurer renews the car insurance policy at the original purchase price and your car is now two or three years old, you most definitely are over insured and the premiums you’re paying are way much higher than it should be.

Will it matter? If you are over insured and paying higher premiums, will you not receive a bigger payment when you make a claim? Unfortunately, that won’t be the case.

When it comes to settlement in case of loss of the vehicle, the governing clauses in your policy will be the ‘basis of loss settlement’ provisions. Cutting through all the legalese in these provisions, the important thing to remember is that the calculations will be based on your car’s retail and market value at the time the loss of the motor vehicle occurred.

Retail value refers to the current price of a second hand car exactly like yours. Market value refers to the average of your car’s trade-in value and the retail value. If your car has a retail value of R400 000 and a trade-in value of R300 000, its market value would be the average of the two or R350 000. The two base values, trade-in and retail, are not arbitrary figures but are based on an industry guide.

If your policy specifies that insurance cover is based on market value, the payout you would get on the insurance would only be R350 000 on the example above – even if you have paid premiums based on a much higher value. That surely is a situation you would want to avoid.

The thing to do is to ensure that the sum you insure your vehicle for will be proportionate to its value. Get an idea of your vehicle’s current worth. You can ask knowledgeable people to give an estimate, or you could look up a good auto digest. Your insurance broker should also be able to help you.

Once you have that figure, it will be necessary to remind your insurer to adjust the insured value each year to reflect the lower value on your car.