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25 October 2022

Add-on car insurance products offer meagre benefits to consumers

Consumer NZ is warning people to watch out for the hard sell of add-on insurances when buying a car.

Between 2018 and 2020, New Zealanders paid out about $442 million in premiums for add-on insurance at car yards. Only $128 million was paid out in claims.

Add-on insurance includes mechanical breakdown insurance (MBI), guaranteed asset protection (GAP), credit contract indemnity (CCI) and payment protection insurance (PPI). These insurances are sold as protection in case the consumer is unable to pay off the loan, or if the car breaks down.

“There are so many exclusions and conditions on these insurance products, it’s incredibly easy for a consumer to get hoodwinked into paying for a policy that provides very little protection,” said Consumer NZ Chief Executive Jon Duffy.

“Often MBI policies don’t provide much more cover than the Consumer Guarantees Act [CGA], so we’d recommend consumers really consider whether they need it.

“Under the CGA, if you buy a vehicle which isn’t of acceptable quality, the dealer is required to sort it out. Investing in a pre-purchase inspection and regular car servicing could be a better investment.”

CCI and PPI are designed to cover payments which can’t be made due to sickness, hospitalisation, accident, redundancy, bankruptcy or death. However, these policies come with a long list of exclusions, including but not limited to anxiety, stress and getting caught in a natural disaster.

In the case of redundancy cover, three out of four providers will only pay after 28 to 30 consecutive calendar days of redundancy.

If you need to claim because of an accident, the cover generally kicks in after five or seven days in hospital. However, the average stay in hospital for acute injuries is just 2.62 days.

“A lot of New Zealanders have sick leave, and if you can’t work because of an accident, ACC covers 80% of your income,” Duffy said.

“Before taking on a CCI or PPI policy, we encourage consumers to weigh up the benefits versus the costs. You may find you don’t need any add-on insurance cover at all.”

During 2020, car dealers earned on average between $304 and $636 in commission from each add-on insurance sale, according to the Commerce Commission’s Motor Vehicle Financing and Add-ons Review (2021).

In most cases, car dealers set the retail price and commission for these add-on products.

“We think add-on insurance is a nice little earner for car dealers and insurers, but a total rip-off for consumers,” Duffy said.

In its review, the Commission found some dealers were falling short when it came to helping their customers make informed decisions. Thirteen out of 62 customers didn’t understand the product they had bought. Eight were not aware they had purchased an add-on, or only discovered it once the contract was signed. Fourteen thought the add-on was a compulsory condition of getting car finance.

Under the Credit Contracts and Consumer Finance Act (CCCFA), any lender must make sure a consumer understands their rights and obligations. The Fair Trading Act (FTA) prohibits dealers and lenders from making false or misleading claims. Also, the car yard or finance company must make sure the insurance covers reasonable risks and doesn’t double up on existing insurance cover, is suitable and affordable, and will not cause substantial hardship.

Financial Services Complaints Ltd, a not-for-profit dispute resolution service, can investigate complaints if a consumer thinks they have been mis-sold an add-on product, for example, a policy which is not fit for purpose.

If a car yard is selling an insurer’s product, the insurer needs to check the dealer is meeting its CCCFA obligations.

“In Australia, a Royal Commission into add-on insurance found many issues,” Duffy said. “Sales were driven by commission, not demand. More than $130m in premiums have been refunded to consumers who should not have been sold add-on insurance, and now salespeople must wait four days after a car is purchased to sell add-on insurance. We’d like to see similar action taken in New Zealand.”

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