One reason many people shy away from financial issues is because they are typically bombarded with legal and financial terms with which they are unfamiliar.
In insurance, the more you understand the concepts and the terms used, the less likely you are to lose money, either through paying too much or by having a claim rejected. Here are explanations of some common legal terms and concepts in short-term (property) and long-term (life and disability) insurance.
Average
In short-term insurance, you are required to insure your assets at their full value. Under the “average” clause, if the replacement value of the items is more than you have insured them for, your claim will be reduced in proportion to how much you are under-insured. For example, if the contents of your home are insured for R400 000 but valued at R800 000, it is insured for half its value. Therefore, if you claim for loss or damage, the insurer will pay out only half of the value of the claim.
Beneficiary
The beneficiary is the person or entity nominated to receive the benefits of a life insurance policy. It’s important to name your chosen beneficiary/ies on the nomination form and update them regularly, ensuring that the benefits go to the intended recipient/s.
Betterment
The purpose of insuring property is to financially restore you to the position you were in before the loss or damage to the property. You should not be better off financially than you were before the loss. In other words, the insurer may not compensate you for more than the value of your loss. This also applies to disability cover: if a disability forces you to stop working, the cover should not provide you with a higher income than you were earning when you were working.
Consequential loss
Consequential loss is normally excluded from cover. This is a loss you may experience as an indirect consequence of an initial loss, for which you are covered. For example, if you have a motor accident and consequently miss an air flight that causes you financial loss, it would be regarded as a consequential loss.
Excess
The excess is an agreed amount of money you pay upfront from your own pocket to the insurer towards repairing or replacing an insured item. A rule of thumb is the lower the excess, the higher your premiums, and vice versa.
Exclusion
An exclusion in a policy document is something that the insurer will not cover you for. This should be stated clearly in the contract so that you know what you are and are not insured for. For example, an insurer might not cover damage to a car caused by hail. A disability policy may exclude cover for claims related to a pre-existing medical condition.
Insurable interest
You have an insurable interest in something or someone if you will be at a financial disadvantage should the property insured be lost or damaged, or, in the case of life or disability insurance, where an insured person dies or is injured. Generally, an insurable interest is established by ownership, legal possession or a direct personal relationship.
Insured
You, the policyholder, are the insured. (An ugly term, in my opinion, and I try to avoid using it in my writing, but that is what policyholders are referred to in legal-speak.)
Non-disclosure
Non-disclosure is when you fail to disclose information, either when you take out a policy or when you claim when it is necessary or a requirement to do so. This may lead to the insurer incorrectly assessing your risk, and the insurer would be justified in repudiating a claim under such circumstances.
Replacement value
This refers to the cost of replacing an insured item with a new item. Home contents, building cover and all-risks personal lines policies are based on replacing the lost or damaged item with a similar, new item. However, vehicle insurance works differently: your car is typically insured for its second-hand market value.
Repudiation
This refers to an insurer’s refusal to honour a claim for a particular reason. A claim may be repudiated if, among other things:
- The policy did not cover the event which led to the loss or damage;
- You acted contrary to what was stipulated in the contract;
- The item being claimed for was not insured under the contract; or
- The contract had been terminated before the event that led to the claim.
Salvage
This refers to the insurer becoming the owner of your damaged property if it has compensated you for that property. This applies to movable goods such as motor vehicles and computers.
Subrogation
This is the right of an insurer to recover from the person who has wrongfully caused the loss or damage to your property the costs it has incurred to compensate you. If you are in a motor accident that was not your fault, the insurer will try to recover the costs of the damage from the third party and may then refund your excess.
Sum insured
This refers to the maximum amount the insurer will pay in the event of a claim. From a home contents perspective, it is the total amount your contents are covered for if all items are totally lost or destroyed. For building cover, it would be the cost of rebuilding your home if, say, it burned to the ground.
Third-party
This is the person or entity that, apart from you and the insurer (the first and second parties), is involved in a dispute or claim. In a car accident involving you and another vehicle, the third party will be the driver or owner of the other vehicle.
Underwriting
This is the process whereby insurers evaluate the risks associated with insuring a person’s life (in the case of life insurance) or property (in the case of short-term insurance). It may involve, in the case of life insurance, a questionnaire asking, for example, about past medical conditions. In short-term insurance, the insurer may seek to establish whether a property is, for example, in a high-crime area and therefore at higher risk of being burgled.
PERSONAL FINANCE
