Dear Editor: Auto insurers underpaying claims

“[…] by underpaying settlements, insurance companies pressure consumers to use low-cost repair shops, regardless of expertise, tooling, workmanship or repair methods that are compliant with manufacturer warranties. Consumers are incentivised to buy used or substandard parts, which not only puts unsafe cars on the road but also supports car theft and the trade of stolen parts.”

The following letter to the editor about how auto insurance claims are settled was submitted to Wired868 by Gerard De Freitas, the owner of Auto Body Works Limited:

Some auto insurance companies are underpaying customers what they are entitled to under the terms of their insurance contract. Through a practice of applying unfair deductions and write-offs, companies offer claim settlements that often cannot restore the vehicles to pre-accident conditions. That means car owners are left with high out-of-pocket repair costs or unable to replace a wrecked car.

Here’s how insurance companies are able to collect premiums while paying as little as possible on claims:

Trade discounts are applied to the settlement figure.

Authorized dealers sell parts to repair your vehicle. These dealers usually give insurance companies a special trade discount on these parts, which should be extended to the customer.

In many cases, however, the required parts are not in stock. But insurance companies will still deduct the discount from the settlement amount paid to the claimant. That means the claimant receives a smaller payment and is still faced with the hassle the procuring the required parts. If the parts are not available locally, there is no additional payment from the insurance companies for shipping charges. As a result, the claimant bears this expense, too.

The trade discount should only be applied when the parts are available and purchased by the insurance company, so they would also pay the VAT.

New for old parts

Insurance companies apply up to a 25% reduction on the cost of parts on the basis that ‘old parts are being replaced with new ones’. But vehicle manufacturers give a bumper to bumper guarantee, some for up to 15 years. That means that unless you damage a part and conduct repairs to it, up until the moment of the accident, most of the parts are considered new. But it is the norm in the insurance industry to refer to a three-year-old car as old.

Some components are subject to wear and tear, such as batteries, ball joints, tires and belts, and these will attract a depreciation contribution. However, parts such as doors, bumpers and lights that had no previous damages should be treated as new. When insurance companies apply an unwarranted 25% devaluation on these parts, it leads to smaller payout the clients.

Vehicles are being ‘written off’ even though they can be repaired.

If the value of the damage approaches 50% of the value of the vehicle, the insurer may decide to write it off and say it’s a total loss. The insurance company looks at what will cost them more: to repair the vehicle or write it off. When the decision is made to write off the car, the client loses everything.

In some cases, the client is not only left without the use of a car but, if they have a car loan, they also have the continued burden of paying the financial institution for the duration of the loan period. Even if they were to sell the written-off vehicle, they may not be able to cover the outstanding loan. And that is often due to how insurance companies value the write-off.

The wreck valuation is too high

In most cases, the wreck value is far from actual market value. The insurance adjuster determines the wreck value and the validity of the estimates written by the auto body shops.

In a nutshell, if a motor vehicle has a high wreck value, it means that the insurance company will pay less to the claimant. If the adjuster surveys the vehicle and, based on the damages, says the wreck is worth X figure, the insurance company will pay the vehicle’s worth (less depreciation) minus the wreck figure.

Consider this example:

Vehicle worth             $100,000

Less Depreciation       $10,000

Subtotal                        $90, 000

Less Wreck Value       $55,000

Payment to client       $35,000

If the actual market value of the wreck is $35,000, there is a $20,000 shortfall for the claimant.

The insurance company should pay $90,000 to restore the customer to pre-accident conditions.

When a vehicle is written off the client loses:

• the excess of 5% of the vehicle value
• the no claim discount benefit (maximum 50%) even when not at fault
• the remaining time on yearly premium payment (the insurance the vehicle will be cancelled)

It is win-win for the insurance company, and clients are being taken advantage of, big time.

In a 2012 Trinidad Express article, then governor of the Central Bank, Ewart Williams, said more than 2000 complaints were made to his office over a three year period, mainly for unfair claims practices, such as forcing legitimate claims to litigation, underpayment of claims and unreasonable delays in paying claims.

But in my experience, it was not always this way. About 20 years ago, the insurance companies were all about service. Back then, when an accident occurred, a courtesy vehicle was provided to the client to use. Then the insurance companies and the autobody shop worked hand-in-hand to restore the customer’s vehicle to pre-accident conditions as quickly as possible.

Today, by underpaying settlements, insurance companies pressure consumers to use low-cost repair shops, regardless of expertise, tooling, workmanship or repair methods that are compliant with manufacturer warranties. Consumers are incentivised to buy used or substandard parts, which not only puts unsafe cars on the road but also supports car theft and the trade of stolen parts.

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