Publication:Sea Talk Summer 2007/Cover me! - a basic guide to car insurance

Cover Me!

By Jeffrey Lucy*

Buying a car is a big decision. Big because it will potentially cost you a significant amount of money. Big because it’s about your safety, and that of your family. And big because, to many, a car is a statement about personality and how you want others to see you.

If you have an interest in cars and, like me, spend a lot of time driving, you are likely to put a lot of effort into this decision. You’ll probably be most interested in considering things like torque, top speeds and performance exhausts. Maybe other ‘special’ features like GPS satellite navigation systems, mounted DVD players, sub-woofers and customised paintwork are up for consideration.

Amid the excitement of buying a car, new or second hand, you need to consider getting the car on the road – and that means insurance. Selecting the right insurance is just as important for you, and your family.

Before you buy

You should always consider the cost of insurance before buying your vehicle. Two cars that cost the same amount may have very different insurance costs. This will influence your budget and, therefore, your decision.

As part of your registration, you must buy third party personal insurance that covers injuries to other people if you have an accident. You can also choose to buy comprehensive cover, third party fire and theft cover, and third party property cover.

Take the time to compare different prices of insurance before you go to the car yard. The internet and telephone call centres make this easy. Remember to compare the cost of the premium and the amount of any excess. (The premium is the regular fee, and the excess is the amount you pay when you make a claim.) Usually if you elect to pay a higher excess in the event of a claim, you pay a lower premium for the insurance.

Other factors that affect the cost of your insurance include where you live, your car and your driving history. Powerful and ‘suped up’ cars cost more to insure. So before buying a car like this decide whether it’s worth the added ongoing expense. And if you’re a male and under 25 your premiums will be more expensive (due to the greater number of accidents by this group generally).

Sometimes car dealers offer to arrange your insurance for you. In this situation, you deal with the car dealer as an agent rather than the insurance company. You should never feel pressured into buying insurance this way.

Here are some things to know about car dealers who offer you insurance - they:

• Must be licensed (with an Australian Financial Services (AFS) licence) to sell insurance policies;
• Must tell you how much money they will receive from selling you the insurance (called a 'commission'); and
• Might only act for one insurance company, so they will not shop around for the best price for you.

Tell it like it is You will have to answer a lot of questions from the insurance company so they can accurately assess the risk of insuring you. They might ask you about:

• The driving record of the regular drivers;
• Who will be driving the car regularly;
• Previous car insurance claims; and
• Any modifications to the car.

It is very important you answer these questions honestly - this is called your ‘duty of disclosure’. Don’t be tempted to hold information back to get a cheaper premium. Deliberately withholding relevant information is fraudulent and this may allow the insurance company to legally refuse to pay out the policy if you have an accident. Here’s an example of why it’s important to ‘tell it like it is’.

Able Seaman Jones recently bought a new ute. When it came to filling out his insurance application forms, he had to disclose if he’d been involved in an accident in the last three years. Jones answered ‘no’ even though he ran up the back of another vehicle just two years ago. Jones knew that by saying he hadn’t been in an accident he would save a bit of money on his premium.

Just two weeks later Jones had a small accident and went to make a claim. His insurance company found out about the accident two years ago. Knowing that he had lied on his application and failed his duty of disclosure, his policy was cancelled and his claim rejected. He now has a large credit card debt that he’s paying off slowly.

As this story illustrates, the golden rule is to give the insurance company a complete and accurate picture of your situation. And don't forget, a car bought with finance that is written-off with no effective insurance puts you in the worst of both worlds – you still have the debt but not the car.

And always tell the insurance company if your circumstances change – it is part of your ongoing duty of disclosure. (For example if you change address or modify your car.) Also, avoid your policy lapsing by always paying your premium by the renewal date, because if your policy lapses, you are no longer covered.

Ask FIDO whenever you’re considering an important financial decision, including insurance. You can also find more information at www.adfconsumer.gov.au that has lots of information specifically on ‘Buying A Vehicle’. Email me with what interests you at ADFcolumn@asic.gov.au.

This article is brought to you by the ADF Financial Services Consumer Council, an ADF initiative which helps looks after our people through financial education and consumer protection. Visit the website of the Council at www.adfconsumer.gov.au

• ASIC Commissioner