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Cheap Insurance Is Just That

Just like cheap insurance, a low-price consultant might end up with a high cost later.

Cheap Insurance Is Just That

Two key lessons for business owners emerge from the Western Cape High Court’s recent judgment on the Guardrisk insurance case. Although the story is about insurance, the learning is about any agency or advisory service.

In the case, a restaurant claimed for lost revenue during the COVID-19 lockdown against its business interruption insurance policy with Guardrisk. As reported in the court judgment by SAFLII (26 June 2020), Guardrisk repudiated the claim because the proximal cause of loss was the lockdown and not the disease. However, judge Le Grange ruled that the claim should be honoured.

The court also issued a costs order against Guardrisk to pay the restaurant’s legal costs. Although a costs order is usually given when the case or decision is relatively obvious, to deduce that this case was “cut and dried” against the insurer would be grossly inept.

The case report was lengthy and it referenced many legal facets and precedent case law. What’s more, the judge explicitly stated that this case does not set a clear precedent for similar cases and that each insurance claim must be assessed against the specific wording in the policy.

One of the factors in the restaurant’s success was getting good advice in taking the right actions and arguments to enforce their claim. But could the whole debacle have been avoidable if they got that advice earlier at the inception of the insurance policy?

When insuring against a risk event, a good insurance broker will reduce the risk (ironically!) of getting the wrong insurance. Aside from matching the right product to the client’s needs, this should at least entail deciphering the fine print, exceptions to exceptions, and other legalese. The “right” insurance is where the insured event the policyholder has in mind is, in fact, the same thing the insurer intends covering.

That good advice probably won’t happen in the burgeoning market of cheap insurance products. To attract more clients, many insurers offer direct sales of ever-simpler products that cut out the agent and the value they offer. Some insurance brands are  built on just this appeal, purportedly saving the customer “unnecessary” costs.

While some of these policies have their place, there are plenty of disgruntled people whose insurance claims were correctly rejected. Had they bothered to check the fine print of excluded risk events – with a broker’s help – the pain could have been averted.

The lessons are twofold: 1. you get what you pay for and, 2. if a risk is worth insuring against, don’t skimp on a cheap agent.

Beyond insurance, this parable is relevant to any agency, advisory or brokerage business. Think beyond the obvious financial services like retirement planning, life assurance or funeral schemes. Are you pinching pennies with a budget doctor, architect, or management consultant?

Although a high price doesn’t guarantee expertise, a cheap price almost always promises high costs later.