Add-on insurance products for motor vehicles - are you entitled to a refund?

In January 2018 the Australian Securities and Investment Commission (ASIC) announced, following a major investigation, a number of large insurance companies had agreed to reimburse around $100 million in insurance premiums obtained from the purchasers of new motor vehicles.

The 3 largest insurers who have agreed to provide refunds are:

·      Allianz which has agreed to reimburse $48 million to around 110,000 customers;

·      Swann Insurance which has agreed to reimburse $37 million to around 68,000 customers; and

·      Suncorp which has agreed to reimburse $17 million to around 54,000 customers.

The refunds relate to insurance premiums paid by customers for various motor vehicle “add-on” insurance products (sometimes called “car-yard insurance”) purchased through motor vehicle dealers. The refunds do not relate to premiums paid for mandatory CTP insurance or property damage insurance.

 

Types of add-on insurance products where the refund may be available

The types of add-on insurance products where refunds may be available include:

·      Guaranteed Asset Protection (GAP) insurance which covers the difference between the amount a customer owes on their vehicle loan and the amount the vehicle is insured for under comprehensive car insurance, in the event the vehicle is written off;

·      Loan Protection Insurance (LPI) or Consumer Credit Insurance (CCI) which covers some of the repayments under a customer's loan contract if the customer dies, suffers a serious illness or becomes disabled or unemployed;

·      Loan Termination Insurance (LTI) which covers the difference between what a consumer owes on their vehicle loan and the market value of the vehicle if the customer returns the vehicle because they cannot make the loan repayments because of illness or injury;

·      Tyre and Rim Insurance (TRI) which covers the cost of repairing or replacing a vehicle’s tyres and rims if they are punctured or suffer a blowout; and

·      Extended Warranty Insurance (EWI) or Mechanical Breakdown Insurance (MBI) which provides cover for some vehicle repairs once the manufacturer’s warranty has expired.

 

Little or no value from motor vehicle add-on insurance products

Following its investigation of vehicle add-on insurance products, ASIC found that they largely provided little or no additional value to consumers and that:

·      only a very small percentage of the total premiums collected by insurers were being returned to customers in the form of claim payouts (ie approximately $1.6 billion was collected by insurers with only $144 million paid out to customers for insurance claims – a return to customers of about 9 cents in the dollar);

·      the policy wording of some of the additional insurance products made it impossible for customers to make a claim;

·      customers were often sold a higher and more expensive level of insurance cover than what was required;

·      some of the insurance products provided cover which already existed under a comprehensive insurance policy which the customer had purchased.

ASIC also found that there were many cases where motor vehicle dealers had not properly explained the coverage or value of the insurance products. Often, customers did not understand what they had been sold - or that the cost of the insurance was included in the lump-sum purchase price of the vehicle. In nearly all cases, the insurance products were not requested by customers – but sold at the recommendation and insistence of the dealers.

ASIC was also critical of the commission arrangements in place between the dealers and insurance companies and the incentive this creates for dealers to “over-sell” insurance products. The data obtained by ASIC showed that dealers received in commissions about 4 times more than customers received in insurance payouts.


Refunds to be provided

The premium refunds to be provided by vehicle insurers are targeted to address those situations where the add-on insurances were unwarranted and were of little or no value to the customer. The insurers have also agreed to pay interest on some of the refund amounts as, in most cases, the additional premiums were paid as part of the vehicle’s lump sum purchase price.


Prospective changes in the law

As a result of the issues identified by ASIC, there has been a range of responses from the insurance industry and government including:

·      insurers changing their practices and procedures in relation to the sale of “add-on” insurance products to ensure that unnecessary insurance products are not sold to consumers and better disclosure is provided;

·      insurers changing their commission arrangements with motor vehicle dealers;

·      the Commonwealth government preparing draft legislation which will require insurance companies to identify an appropriate target market for their insurance products to ensure that they are being sold to the right people;

·      the possible introduction of a “deferred sales model” for some insurance products. This will mean that a motor vehicle dealer will be prohibited from selling some insurance products within 30 days of the date of purchase of the vehicle (a similar law applies in the UK). 

Summary

Around 250,000 customers around Australia may be entitled to premium refunds for “add-on” insurance products purchased with new motor vehicles.

You should check your motor vehicle purchase contract and other documentation to see if you may have purchased add-on insurance for your motor vehicle and whether you may be eligible for a premium refund. If you cannot locate the relevant documents, then you should request a copy from your motor vehicle dealer or insurer.


At Coutts, we can assist you with the process of considering whether you may have a claim for a premium refund and the nature and extent of such a claim.