Insurance Helpline | Premium financing millstone

QUESTION: I insured a Toyota Rav4 that I bought with a bank loan through a broker in Mandeville. The premium was financed. I paid the broker a deposit and made a number of other payments, but I do not recall signing an insurance premium finance agreement.

The broker gave me a certificate of insurance for the period May 9, 2014 to May 8, 2015. Some time afterwards, I was told that the instalments were insufficient and that interest would be charged on the outstanding balance. I also learnt that the finance company did not accept the transaction and that the monies I had paid would be sent to the insurer.

I told the broker that I had no issue with interest being charged on the balance as I had a cash-flow challenge, but the payments would be made.

I immediately went to the insurer's Mandeville branch to regularise my status. I spoke with a clerk and asked to see the manager. The clerk returned and said that the manager would not see me. I left and went to another insurer nearby to see if I could get coverage there. The representative spoke with her opposite number at my insurer and was told that my vehicle was insured. I left beaming with confidence that my vehicle was covered.

On March 26, 2015, my car was stolen at gunpoint. When I called the broker to report the matter, I was told that my insurance was cancelled on October 5, 2014. Neither the bank that financed the purchase of the vehicle nor I received notice that the insurance would be cancelled. I am still in the process of repaying the bank loan. Can you help?

INSURANCE HELPLINE: Kindly accept my sincerest apologies for having overlooked the email that you wrote me nearly eight weeks ago. You and I spoke by telephone twice the same day that you resent the mail. I hope that the course of action that I suggested - the details of which will not be discussed in this article - will help you remove the $2 million-plus millstone that has been hanging around your neck for nearly 12 months.

Insurance-premium financing (IPF), insurance broking, and motor insurance are what you wrote about. I am familiar with all three. I led one of the country's largest insurance brokers for many years. It is still around today - even though one of its principal shareholders then claimed, inaccurately, that I wrecked it.

I was also the nominal head - my actual title was chairman - of a local company that offered premium financing. The business is no longer around, but that has absolutely nothing to do with me! Regular readers will know that I have been writing this column for nearly 20 years.

Even though I do not have the highfalutin title of professor, I profess to know something about insurance. With my bona fides established, I will now tackle the issues that you raised.

PREMIUM FINANCING DEFINED

An IPF company earns income by borrowing money at a certain interest rate from one source - that is, a bank, private investors, etc - and lending it at a higher rate to insurance consumers who need financing. Profits from premium financing also include late fees and other incidental charges. The costs of forming and running an IPF company include interest expense, that is, cost to borrow the money, overheads, licensing and accounting expenses.

Insurance companies, brokers, commercial banks and other institutions offer IPF loans. Applicants for loans are required to sign premium finance agreements. That contract is separate from the insurance policy. Under an IPF agreement, the lender has the right to cancel the insurance contract in the event that the borrower fails to honour the loan obligations.

Loans can run from six to 10 - or even 12 - months from the start of the insurance contract. Borrowers pay an up-front deposit. The IPF provider pays the premium to the insurer and bills the borrower in monthly instalments for the cost of the loan. Interest rates on IPF loans are typically calculated on an add-on basis. Those rates are higher than the lending rates most persons are familiar with. Brokers like IPF. It reduces their credit risk.

The downside is that IPF increases paperwork. Suppliers of IPF generally give brokers a supply of blank loan agreements, along with written procedures to initiate transactions. In more developed economies, electronic platforms are used instead of paper.

BROKERS AND THE LAW

Insurance brokers, by law, are expected to act on behalf of their clients and to provide advice in the interests of those clients. When a client suffers a financial loss due to an error or omission on the part of the broker, the client is legally entitled to compensation.

Mistakes can take many forms. Did your broker make a mistake in discharging their duties? On the other hand, did they omit to do something which was reasonably expected from a broker under the same set of circumstances?

Brokers buy insurance to protect themselves against errors. They are, however, very shy about coming clean when they make errors. The reason? Admission of liability compromises their insurance protection.

MOTOR INSURANCE PRACTICE

When a bank has a financial interest in an asset like a motor vehicle, it usually imposes a duty - by way of the loan agreement - on the borrower to insure. The borrower is also required to provide evidence of insurance. The bank then contacts the insurer. It asks that its interest is noted in the contract of insurance by way of a standard mortgage clause.

One provision of the mortgage clause reads as follows: "the insurer reserves the right to cancel this policy at any time ... provided that in the event of cancellation insurers shall give notice of cancellation to the mortgagees or assignees ... and that the policy shall continue in force for a period of twenty (20) days after the day the notice was posted".

The clause does not contemplate a situation where the cancellation was effected and no notice was provided.

If, as you have alleged, the policy on your vehicle was cancelled without notice to your bank, a fact that the insurer should have known, it would appear that the bank has a case against the insurer. You probably have a case against the broker.

I suggest that you tell your bank to flex its muscles to get insurer to pay for the loss of the motor vehicle and release you from repaying the car loan. If the friendly persuasion fails, I suggest that you contact a lawyer.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com