If a driver under the age of 25 has a car accident, an extra excess may apply. Picture: 123RF
If a driver under the age of 25 has a car accident, an extra excess may apply. Picture: 123RF

When money's tight, you may be tempted to cut back on your short-term insurance. But before you replace a policy, even with one that provides the same level of cover or more benefit at a lower premium, make sure you understand how your excess is determined and if additional excesses apply.

Most complaints received by the Ombud for Financial Services Providers relate to short-term insurance, and many of these concern the excesses that apply to vehicle cover.

An excess is the first amount payable in the event of a claim, and is the portion for which you are in effect self-insured.

Gerald van Wyk, the head of business development for Santam, says you need to be very careful when choosing an excess. "It's one of the most misunderstood concepts of insurance. Understand what it is, how it's applied, and what you can afford to self-insure."

At fault or not, an excess is due by you

You are liable for an excess regardless of whether you were at fault.

The excess is an attempt by your insurer to reduce the number of minor and fraudulent claims submitted by making you a co-insurer on the policy, Marc Alves, the manager of resolutions in the Office of the Ombud for Financial Services Providers, writes in a recent newsletter.

For an extra fee, you can opt for an excess waiver benefit, which covers your excess in the event of a claim. So, you pay more now, rather than later when you have a claim. But be warned: if any additional excesses apply to your policy, they are not covered by the excess waiver.

• Your choice of excess is critical

Your choice of excess will either reduce or increase your premium, so you need to choose wisely. The cheapest premium might mean the most expensive excess, and if you don't have savings to fall back on, you are likely to have to incur debt to cover the excess.

The most common excess is the basic excess of a fixed rand amount. Some insurers let you choose an excess expressed as a percentage of the claimed amount, subject to minimums such as 5% of the claim with a minimum of R2,500, or as a percentage of the value of the vehicle.

Our no-surprise policy guarantees that we don’t have hidden excesses that pop up at claim stage. 
Ernest North, co-founder of Naked Insurance

If applied to the value of the vehicle insured, then no matter the nature or extent of the damage caused, the excess will be higher (than an excess based on percentage of claimed amount) and could see many minor claims fall within the excess at your expense.

"So, you may pay a lower premium when the excess is based on the value of the vehicle, as opposed to the value of the claim, but you will feel the effects when it comes time to claim. This is therefore one of the considerations you must take into account when selecting a policy most suitable to your needs," Alves warns.

OUTsurance offers a standard excess amount that you can increase or decrease to determine the premium most appropriate to you, and doesn't have any percentage-based excesses, says Natasha Kawulesar, the head of client relations at OUTsurance.

Van Wyk says most insurers have moved to a flat excess structure. "It's safer than a percentage of claim, which you can't predict, whereas you can save up for a flat fee."

Watch out for extra excesses

There are also a host of additional excesses that can apply. These extra excesses are applied in instances where the driver is under the age of 25 or 30, or has had a licence for less than a year, or where a vehicle has been stolen or hijacked.

There are also extra excesses that can be applied when you have an accident that doesn't involve another vehicle or when you're involved in an accident at a certain time of day, say between midnight and 5am. "All these excesses are cumulative and in addition to the basic excess," Alves warns.

Bevan Collins, the managing partner at Harnacks, explains how excesses can add up and be especially punitive in the event of your car being written off.

"Assume the policy on your R500,000 Golf reads basic excess 5% [of the value of the vehicle] with a minimum of R3,500.

"The excess will be R25,000 and not the R3,500 you anticipated. Assume now the car was driven by your 24-year-old nephew, who has a learner's licence and he was driving late at night.

"You now have three potential additional excesses: 5% because he is under 25; 5% because he has a learner's licence; and 5% because he was driving at night.

"That's an additional R75,000 excess on top of the R25,000 basic excess, and we haven't considered any shortfall on the finance agreement yet!"

When a car is written off, the excess can make a big dent in the settlement amount.

Ernest North, the co-founder of new car insurer Naked Insurance, says their product breaks the industry norm by charging only a fixed excess, chosen by the client, and no other excesses, regardless of when the accident happened or who was involved. "Our no-surprise policy guarantees that we don't have hidden excesses in our small print that pop up at claim stage. This allows you to accurately budget for your car insurance."

Collins says a good broker will help you understand the offerings of various insurers and ensure you get the best value cover you can afford.

Brokers and/or insurers must make full disclosure

Whether you have a broker or bought insurance directly from an insurer, you are entitled to be properly informed.

The excesses payable have a significant impact on the premium payable, Alves says. These are material terms of a contract that a financial services provider must disclose to you to ensure you're in a position to make an informed decision, and to ensure that the proposed excess structure is appropriate for your needs.

"You must be placed in a position to make an informed decision as to whether to pay a higher or lower monthly premium in favour of paying either a higher or lower excess amount in the event of a claim."