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INSURANCE: Insurance Cover – Difference Between An Excess & a Franchise

 





Recent Gauteng Business News

Not a day goes by that South African consumers are not bombarded by advertisements offering the best insurance rates, coupled with all measure of gimmicks and bells and whistles to secure the sale. But the reality is that – thanks to technology - finding the lowest-priced insurance company is relatively easy, but finding one that is reputable, honours the promises it makes about its claims fulfillment and takes the time to fully divulge the implications of the fine print in your policy is an entirely different exercise.

“This is one of the key reasons why a professional broker is a good investment. Every day consumers and businesses are exposed to risk and the brokers’ role is to examine your circumstances in detail and impartially recommend covers to meet those needs,” explains Mandy Barrett of risk consultants and insurance brokerage Aon South Africa.

“Comparisons between direct insurers and brokers are odious, but the reality is that by choosing to deal with the insurer directly, a policyholder in effect assumes the role of his or her own broker - often without the necessary specialised knowledge. If you choose to take on this responsibility, you should be well acquainted with insurance terminology, cover requirements and the minefield of terms, conditions, what's not insured and so on. Most consumers are not. A good example of this is the flood of new direct insurance offerings on the market that purport to have no excess on their policy provisions. But in many instances, if they have no excess built in, they will have a franchise provision built in. But very few consumers understand the implications of what this means for them financially when it comes to claims time,” says Mandy.

What is an excess and a franchise‘

The maximum amount paid following a loss under any policy is limited by your sum insured. However, there are ways where you could be paid out less. For example, your excess is a way in which your indemnity will be limited. An excess is an amount of each and every claim which is not covered by the policy and is therefore borne by you.

A franchise is a level below which you agree to bear the cost of your own losses up to an agreed amount. The operation of a franchise can be distinguished from an excess in that for losses up to the amount of the franchise they operate the same as an excess and you have to pay the amount stated. If however, your claims exceed the amount of the franchise, the insurer will pay the whole of the claim without the deduction of the franchise amount.

So by definition...

A franchise is a provision in the insurance policy whereby the insurer will not pay unless damage (or loss) exceeds the franchise amount whereas, an excess (deductible) is a provision in the insurance policy whereby the insurer will pay any amounts of damage that exceed the excess (deductible) amount. The following example demonstrates:

· Franchise: Your vehicle is insured for R100 000. The insurance policy contains the franchise provision that claims must exceed 10% (R10 000) of the insured value. Say you have an accident and the total value of your loss is R8 000. Under this circumstance, you are responsible for the entire R8 000 and the insurance company will not pay you anything on this loss. However if the total value of the damage to your vehicle is R15 000, the insurance company is responsible for the full R15 000, and you will receive this amount in full.

· Excess: Following the same example as above, the difference being that your insurance policy contains the excess provision that the insurance company will not pay the first 5% (R5 000). If your damage is less than R5 000, you are responsible for the R5 000 in its entirety and the Insurance Company will not pay you anything (same as the franchise). However, in the second example (loss at R15 000), you will be responsible for the first R5 000 (your excess) and will therefore receive only R10 000 from your Insurer.

Sounds like the franchise is the better option‘ But beware the inevitable hidden costs!

The above explains the difference between an excess and a franchise type of provisions for an insurance policy and at first glance it may look like the franchise is a better option. However you should carefully consider which option really is better for you - remember that your premiums will vary in accordance with what type of provision you choose and although the franchise might seem appealing at first, it will in virtually all instances cost you more on your monthly premiums.

“Do the sums and compare the difference in premium with an excess and with a franchise – in almost all instances the difference in premiums is far more expensive than the perceived benefit of no excess!” warns Mandy.

“It’s easy to get caught up in the hype of the bells and whistles. But by consulting with a professional broker, you ensure that not only do you have the choice of comparing a number of insurers with the most competitive premiums and cover, but you also have expert knowledge on all the provisions contained in the policy fine print. And in the event of a claim, you also have a professional on your side to negotiate on your behalf with the insurer, using their business clout and expertise to arrive at the best settlement,” concludes Mandy.

 
 
 
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