Excesses in insurance contracts

An excess is the portion of an insurance claim which the insured is responsible for paying.

It is usually the first part of the loss claimed, up to a value determined by the insurance policy. Most policies will have an excess and if there is one in place, the amount will be specific to the policy.

An excess is sometimes referred to as a "deductible". The insurer will not make any payment in relation to the excess portion of the loss, but will instead make payment towards the amount exceeding the excess value. If the value of the loss is below the value of the excess, then the insurer will not be required to make any payment.

Motor Vehicle Accident - Imagine a valid claim arises from a motor vehicle accident where no third party is involved.

The cost of the vehicle repair is $2,000 and the cost of the excess under the insurance contract is $500. The insured will be liable to contribute $500 to the claim (i.e. the excess) and, following payment of this amount, the insurer will be liable for payment of the outstanding $1,500.

As can be seen in this example, because the insured is liable for a portion of the loss, it is important for the insured to elect an excess they can afford (from the optional levels offered by the insurer).

Excesses play a very important function in insurance contracts by helping keep premiums low.

They help reduce the amount of premium required by the insurer because the insured assumes some of the risk the insurer would have otherwise faced. The potential exposure faced by the insurer is lowered and accordingly the insurer requires less money (i.e. lower premiums) to cover the possible loss.

Furthermore, because the insured assumes a portion of the loss, they have an incentive to reduce the number and magnitude of losses incurred on that policy. An insured will likely take greater care of an insured item if they are required to make a personal contribution should it become damaged. Policies with excesses will likely have fewer claims made against them, which again allows the insurer to set lower premiums.

Excesses also help keep premiums low because they reduce the number of "low-value, high-administration-cost" claims made. A "low-value" claim will generally still incur a lot of administrative time and cost in processing. These costs can often be in excess of the actual amount of the insured loss. The reduction of this type of claim again leads to savings for the insurer, which can then be passed on to the insured through premium savings.

Standard Excess

A standard excess is the "standard" or common excess on a policy. For an ordinary house or contents policy it would typically be $100 - $200. It will generally be imposed on a policy unless one of the following types of excess is requested or required.

Voluntary Excess

A voluntary excess is higher than the "standard" excess and involves an insured voluntarily increasing the excess on their policy in return for a reduction in the premium charged. The best thing for an insured to do, when electing a voluntary excess amount, is to compare premium costs across a variety of excesses offered by the insurer.

Imposed Excess

An insurer can impose a "non-standard" excess on an insured at its discretion, if for example the insured has a bad claims history or has other negative characteristics which would increase the potential exposure faced by the insurer.

Graduated Excess

A graduated excess will vary depending on the characteristics of the insured, although the insured amount will remain the same. An example of a graduated excess would be where a large excess was placed over a "high-risk" applicant such as a young driver (commonly known as an "Under-Age Excess"), but the excess decreased as the age of the driver increased. For example, under a motor vehicle policy, a child of a family may be subject to a higher excess when involved in a vehicle accident in the family car than the parents would be.

Multiple Excess

A policy protecting against a particular loss may have different excesses in place depending on the nature of the loss; for example because of fire, theft or catastrophe. A policy may have a higher excess for loss caused by fire for example, because there may be a higher probability of that loss being caused by fire than anything else. A higher excess in this instance would be imposed to encourage an insured to minimise the risk of fire. For losses other than fire (or any other causes which the insurer might apply a higher excess) the standard excess (or the voluntary and/or imposed excesses) would apply.

No fault, motor accident

There are a number of instances in which an insured may not be "at-fault" for damage caused to their insured property. The damage may have been caused by another person, or a falling tree or rock for example. Nevertheless, the insured will generally still be liable for payment of the applicable excess despite not being "at-fault" because this part of the loss is uninsured.

However, where another party is involved in a motor vehicle accident and is "at-fault" and has insurance, then in some instances the insured may waive the requirement for their not "at-fault" customer to pay an excess and will instead make payment in full and recover the payment from the "at-fault" party's insurer. Conversely, sometimes the insurer will still require the insured to pay the excess. In each particular circumstance the insured will have to refer to their policy and insurer.

If the "at-fault" person does not have insurance it will usually be the insured's responsibility to recover any paid excess from that person directly.

Multiple policies at play

Where a loss involves more than one policy, for example a house fire where the property and its contents are covered by two separate policies, both excesses may be called upon. However, in some cases where the two policies are with the same insurer, the insurer may choose to apply only the larger excess of the two. Nevertheless, any voluntary or imposed excess will usually need to be paid.

Excesses come in various forms and their application may differ across different insurers.

If an insured has any concerns around their policy or its associated excess they should contact their insurer directly. Nevertheless, it would pay to note that in most circumstances an insurer will not be required to make any payment on a claim until the excess has been paid by the insured. Often the excess will be deducted from the final amount paid by the insurer on settlement, but this should not be presumed. In each case, the specific policy will give direction as to the party's respective rights and obligations.