Insurance Helpline | Loss of use claims: an insurer’s perspective

Last week's article - 'Insurers' loss of use policies defy spirit of fair competition' - drew responses from the managing director of British Caribbean Insurance Company, Peter Levy, and the Fair Trading Commission's (FTC) competition analyst, Verlis Morris.

Mr Levy is a regular reader of this of this column, so his response was not unexpected. The FTC's reaction was the exact opposite.

'Loss of use' in the headline, followed by 'defy spirit of fair competition,' caught the analyst's attention - as it did mine. As those who read the article found out, I did not suggest that insurers were: a) providing contracts of insurance that included loss of use; or b) were acting in concert to offer such coverage.

Had the word 'rules' or 'guidelines' been used, instead of 'policies', the headline would have been more in keeping with the content. I wish that the other regulator on Barbados Avenue was just as observant and enquiring as their FTC counterpart!

Insurance claims for loss-of-use expenses are often contentious. Claimants approach the subject with unease like the BMW Series 5 owner who contacted me. On the other hand, many of them, unlike him, often begin the process without doing any homework, are ignorant of the basic legal principles, practices and rules that govern these particular types of claims (that were set out in last week's article), have little or no experience in conducting negotiations, and do not have the benefit of seven years of tertiary education like BMW's owner.

Mr Levy is a key player in the local insurance industry. He is not shy about expressing his views about this industry and its practices. If my article last week was considered to be Part 1 of a tutorial about making loss-of-use claims, what Mr Levy had to say in his email to me is Part 2 of the lesson.

INCURRING EXPENSES

He wrote: "... my understanding of the rights and obligations (of the claimant and insurer) in this situation are:

1. "The claimant should act reasonably in incurring expenses. If hiring a car is a reasonable option, then there should be no issue with compensating him/her (admittedly, defining what is 'reasonable' can sometimes lead to differences of opinion).

2. "What is reasonable for one claimant may not be reasonable for another. For instance, a one-car family with two working parents and school-age children would likely be much more severely affected (while that vehicle was undergoing repairs due to an accident) than a retired couple, both of whom own cars.

3. "The claimant must prove his/her loss. In the case of hiring a car, this is straightforward - present the invoices provided by the hire car company.

4. "In the absence of invoices (and this is the case for the majority of loss-of-use claims), the insurance company and the claimant have to arrive at some other reasonable basis (for quantifying the claim). This situation is addressed by clause 3 of the FOS' guidelines.

5. "The cases with no invoices are those in which the $2,000 per day guideline operates. However, it is only a guideline. If a claimant can reasonably substantiate higher costs, he/she would be entitled to recover them. Similarly, if a lower daily amount is reasonable, the insurance company would be entitled to offer that lower amount.

6. "I will leave to the legal minds the question of whether the Fair Competition Act has jurisdiction in this situation. However, I will say that it is not suspicious that insurance companies operate with a common standard. This is quite predictable without the presence of collusion or explicit agreement. Remember, we are talking about a situation in which the claimant has not provided documentary evidence. It would be very difficult to explain why two claimants in similar circumstances would receive different amounts of compensation. There is therefore a natural tendency for the amounts of these types of payments to converge.

"Having said that, I think a problem does arise when a market practice rises to the level of a bureaucratic dictate. This is something that insurance companies should avoid. It is all too easy for a claims handler to treat the default amount as a strict rule, when in fact each case, should be assessed based on its own merits, and on what is reasonable in the circumstances. This point comes out very clearly in the FOS guidelines, which I have shared with BCIC's claims department so that we can ensure that our practices are in keeping with this approach."

INTENT AND SPIRIT

The FTC analyst sees the situation in a slightly different way than Mr Levy. She looks at it through the eyes of an economist. Was the process by which the default amount agreed by insurers in accordance with the intent and spirit of the commission's enabling legislation.

It is very clear, based on the guidelines of the UK's Financial Ombudsman Service and Mr Levy's opinion, that the BMW owner should not have been offered compensation based on a daily rate of $2,000 per day while his vehicle was undergoing repairs.

Finally, claimants and insurance companies claim staff need to develop negotiating skills. While the guidelines on the handling of loss-of-use claims may prove useful, negotiating skills on both sides will lessen much of the anxiety and difficulties associated with these claims.

- 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