THIS STRANGE THING CALLED DEDUCTIBLE

Of the most important terms in a motor car comprehensive policy (a policy that covers not only third party liability but also the loss of or damage to your car) is the deductible.  Deductible is an American term; the British call it excess.  (Although the British were the first to make insurance a business, the Americans have always insisted on their own glossary.)

The deductible is the amount, being the first part of a claim, that the insurance company will not pay.  In a standard motor car policy, the deductible used to be P500; it is higher now, depending on the value of the vehicle.  This means that, if you accidentally crash your car into a lamppost, the first P500 of the repair bill will not be paid by the insurance company.  Or, if the repair cost will not exceed P500, the company pays nothing.

The reason for the deductible is that the company wants to avoid small claims.  Otherwise, the administrative costs will shoot up resulting in higher premiums to the insuring public.

There is also the more basic reason:  insurance covers loss arising out of fortuitous or accidental events.  Insurance does not cover events that are sure to happen.  (In life insurance, death comes to everyone, but nobody knows when.)

No matter how careful you are, your car will suffer some minor damage – a scratch, a small dent.  This is inevitable.  This is not a subject for insurance.

The premium has been so computed as to take into account that the first P500 of any claim will not be paid.

If you buy a policy with a higher deductible, the company gives you a discount.  And here is where you can save some money.

On a P400,000 Corolla, a comprehensive policy with theft, compulsory third party liability (CT{L) and P200,000 Voluntary third part liability VTPL) can cost as much as P20.000 (as of 1993) at a deductible of P500.

At a P1,000 deductible, the premium does down to P18,000, a saving of P2,000.  What you save is bigger that the increased deductible.  Unless you are an accident-prone driver (and, if you are, no company will want to insure you) a higher deductible is a darn good deal.

Deductibles are also found in other policies, albeit in varying forms.

Hospital and medical policies inevitably have deductibles.  One variation is the policy will pay only 80% of any claim.

Another variation (seldom used now) is found in marine cargo insurance where the company will not pay any claim not exceeding the deductible (this time it is usually called franchise).  But if the claim exceeds the franchise, the whole claim is paid.

Still another variation is found in an earthquake policy which carries this clause:  “the insured shall bear any loss or damage caused by earthquake shock equivalent to at least two percent of the actual value of the property at the time of the loss, provided that such loss to be borne by the insured shall in no case be less than P1,000 and not more than P1,000,000.”

Large corporate buyers always opt for a deductible in their fire policies.  A P100,000 deductible (the minimum allowed) will save the insured 13% in premiums every year.  If your premium is P1,000,000, you save P130,000 a year.  This time, the discount takes the form of a wholesale discount.  Once again, a darn good deal.

From the standpoint of the insurance company, a deductible is a means of avoiding minor and pesky claims.  But, since a substantial discount is given as a trade-off, from the standpoint of the buyer, the deductible is a way of saving money in a world of ever-rising costs.

———————————————————————————-

STRANGE CASE OF SUBROGATION

One of the strangest words in insurance is subrogation.  It is the right of an insurance company, after paying a claim, to step into the shoes and seek to recover the loss from anybody responsible for the accident.  This right exists in all lines of insurance.

Let us say a runaway bus rams into a parked car insured with Company A.  After paying P100,000 for the damage on the car, the company can seek recovery of the amount from the bus company.  Company A is merely exercising its right of subrogation.

Of course, the bus company can pass on the subrogation claim to the third party coverage in its own bus insurance policy – if it has one.

The right of subrogation is also exercise quite often in marine insurance.  When a shipment of imported goods arrived in damaged condition, the insurance company, after paying the claim, usually seeks to recover the loss from whoever is responsible, be it the shipping company, the arrastre operator or the trucker.  This is why the insurance company is quite strict when it requires the importer to preserve the right of recovery from whoever has handled the cargo.

It is in fire insurance where the right of subrogation is not often exercised by the insurance company, usually because of the futility of pursuing the action of recovery.  If a multi-peso factory is accidentally set afire by a negligent night watchman, there really is no point in after the poor fellow.

But a case of subrogation can be pursued under a fire policy, as happened with a client of mine.  My client owned and ran a garment factory.  His principal in New York would send him fabrics, already cut to specifications. The fabrics would be sewn into garments and shipped back to New York.

The contract specified that the fabrics would be insured by the principal being the owner.  As a result, the local policy that I arranged here for my client did not cover fabrics owned by the New York principal.

One day, there was a fire in the factory.  The loss was not total, but the damage to the fabrics was large enough that an adjuster flew over all the way from New York.

After the claim was paid in New York, the US insurance company filed suit in Manila against my client under the right of subrogation.  After more than 15 years, the case was finally decided recently.  My client lost.

There are a lot of local firms of local firms doing sub-contracting work that could find themselves one day facing a suit from the foreign insurance company of the principal.

Fortunately, there is now a policy available called Fire Legal Liability.  If you are a subcontractor like my client, ti will be worth your while discussing the policy with your insurance broker.

My client has learned his lesson.  He now carries a fire legal liability policy, not only on his factory, but also on his own subcontractors.

————————————————————————

THERE IS MORE TO INSURANCE THAN MEETS THE EYE

An insurance policy, with all its technical and legal wordings, is not really too difficult to understand.  The trouble is that there is more to the policy than meets the eye.

Your policy does not include a dissertation on or even a mere listing of, the legal principles uniquely developed for insurance over the centuries.  Neither will you read about the precedent-setting Court cases that may bear on your insurance claim.

Take the principle of proximate cause.  This principle says that an insurer is liable for any loss proximately (or most nearly) caused by a peril insured against, but is not liable for any loss which is not proximately caused by a peril insured against.  Simple?  Not always.

The problem is that, while it is relatively easy to state the principle of proximate cause, it is oftentimes hard to determine the proximate cause in an actual case.  The problem is particularly nagging when a claim arises from a series of events, some of which are insured perils and some are either uninsured or excluded perils.  This what happened in a recent claim of my client.

My client, who operates out of Makati, sells, installs and services automatic tellering machines.  One evening, one of his engineers had to make an emergency call on an installation in Manila.  While crossing South Superhighway at Vito Cruz Street, a car, running at near top speed, rammed into his van.  Badly bleeding from a heart wound, he staggered out of the wreck (the van was later declared a total loss by the insurance company).  It was all he could do to flag down a taxi and check in at the Makati Medical Hospital.

Four days later, the hospital released the engineer.  He went straight to the police and asked about the van.  The police told him that it was in the impounding area.  He asked about the computer spare parts that were in the van. ?The policy said that the spare parts must have been stolen at the scene of the accident because the van was empty when it was towed to be impounded.

The damage claim on the van was a snap.  The repairs would have cost over 75% of the value of the van.  The company readily accepted a total loss claim, paid the sum insured less the deductible, and took possession of the wreck.

The claim on the spare parts was a problem.  The policy on the spare parts covered collision, but not theft.  The company contended that theft was the proximate cause and turned down the claim.

I dug into my reference books, both of them.  The company had banked on the old rule that the last event to occur is normally the proximate cause of a loss.  But, in World War II, England’s House of Lords decided that this rule was simplistic and laid it to rest forever.

The case brought before the House of Lords involved a steamship which was torpedoed by a German submarine off northern France.  The ship managed to reach Le Havre and could have been repaired there.  But port authorities, fearing that that it might sink and block the quay, ordered the ship out.  Later, the ship was lost in a gale while moored in the outer unprotected harbor.  The House of Lords ruled that the series of events, the so-called chain of causation, from the torpedoing to the sinking was never broken.  In other words, each event in the series was the logical consequence of the previous one.  The torpedoing was ruled the proximate cause.

In a subsequent case, a merchant ship was buffeted by heavy weather and ran aground on the Spanish coast.  The restless natives robbed the ship of most of its cargo.  The judge who heard the case ruled that the weather was the proximate cause of the loss of the cargo.

In my client’s case, I explained to the company that the chain of causation from the collision to the theft was never broken, each event inevitably causing the ensuing event.  Had it not been for the collision, the engineer would not have been badly injured.  Had he not been badly injured, he would not have left the van to seek medical care.  If it was not necessary to leave the van to seek medical care, the theft would not have occurred.  As a result, the collision, not the theft, was the proximate cause of the loss of the spare parts and the policy covered it.

The company changed its initial position.  The claim was paid.

————————————————————————————-

HOW TO CHOOSE YOUR INSURANCE COMPANY

Choosing a good insurance company, one that will pay a valid claim fairly and quickly, is never easy if only because there are so many companies to choose from.

  1. Most are Pilipinos, of course, but there are Americans, British, Swiss, Taiwanese, Singaporean, Malaysian, Japanese, a Canadian, and a New Zealander.

Short of evaluating these companies by an actuary or a financial analyst, here are some guideposts.

Like some wines, insurance companies mellow with age.  This is especially true with life companies.  The rule of thumb used to be that the gestation period of a life insurance company used to be seven years.  Nowadays, because of stiff competition, the gestation period can be as long as twelve years.  An insurance company is not a get-rich-quick scheme.  Anybody who wants to make a quick buck had better put his venture capital somewhere else.

Since the late sixties, when insurance was seen to be an overcrowded industry, the Insurance Commission has licensed no more that five new companies.  Reckoned from the date of the original license, Philippine companies are at least 20 years old.

This is not to say that all the old companies must be good and the new ones are not.  A fee companies organized before World War II are creaky from old age as to be practically senile.  On the other hand, some of the new companies are vibrant with youth.

When someone tells you that all companies are the same because all are licensed by the Insurance Commission, politely but firmly show him the door.  In most cases, a license (it is actually called a Certificate of Authority) means nothing but that the company has met the minimum requirements of the Commission.  If having a license is about the only thing the company can say about itself – well, who wants a company with minimum requirements?

When a company tells you not to worry because it carries enough reinsurance, alarm bells should start ringing in your ears.  It is true that, for a company to take upon itself all the potential liabilities under a policy is not only suicidal.  It is against the law.  So, the company passes on the excess liabilities to other companies.  This is called reinsurance.  Those who accept reinsurance are called reinsurers.

But the reinsurers are not accessible to you.  They are not parties to your policy.  If you have to sue the company on an unpaid claim, you cannot bring in the reinsurers into the suit.

For the same reason that reinsurers are not parties to the insurance contract, the company cannot use the failure of the reinsurers to pay their share of the claim as a defense for not paying a claim.  In short, when you buy a policy, you rely entirely on the company to have reliable reinsurers to bank it up.

  1. But you cannot have a dossier on the owners and managers.

There is a short cut to all these.  Find an agent or broker who come highly recommended.  The rule of thumb is:  he should be making a good living at selling insurance on a fulltime basis.  He is your bridge to a good insurance company.  It is his professional duty to see to it that you buy the policy you need, at the best terns and conditions.  And when you have a claim, he works on the company and its adjuster to have the payment made fairly and quickly.  This is what he gets a commission for.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: