Part 1 - Hong Kong Motor Insurers consistently underpaying on claims – Looking at betterment

The issue of ‘Betterment’

How would you feel if you owned a car, was in an accident that was not your fault, and had an insurance provider offer to pay 70% of the value of the parts arguing that they actually ‘made the vehicle more valuable’? Chances are high that you probably will not be happy being stuck with a parts bill and ultimately a car with a decreased value because of the accident. While this may seem unfair, it’s a common practice of Hong Kong insurers to do exactly this. Before we explain about this practice, it would be a good idea to first establish how insurance compensation should work in the city.

How compensation works in Hong Kong

With every car insurance plan in Hong Kong, regardless of type of plan, compensation to the policyholder is on an indemnity basis. What this means is that the insurance provider will provide compensation to the party that suffers a loss. E.g., if you are in an accident that is not your fault, you can recover some, or all, of the costs of the repair of your car.

In Hong Kong the indemnity is usually limited to the total cost of your loss based on the perceived value of the vehicle before the loss. In other words, insurance policies and the indemnity clause included with them, ensure that there is no profit from an accident.

Does indemnity work?

In a perfect world, indemnity ensures that parties who are in an accident will see the cost to repair their vehicle to the same condition/value it held before the accident covered. The problem however is that many older vehicles when damaged will require new parts that cost more than the value of the parts before they were damaged. Therefore, the owner of the vehicle has, in the eyes of the insurance provider, made money, which violates the concept of indemnity.

In order to negate this, all insurance policies include a ‘Betterment Clause’. This is a clause, usually found in the physical damage section of your insurance policy, that states that if the value of the parts replaced or repaired is more than the ones on the car at the time of the accident, the insurers will not pay for the net improvement, usually only paying to the determined value thus leaving the owner of the vehicle to pay the rest.

Here in Hong Kong, the betterment clause is applied to all vehicles and the insurance taken out on them, that are older than one year. It is standard practice in Hong Kong to apply this clause as a percentage based on the depreciated value of the vehicle. This means that newer vehicles will usually see a lower percentage applied in the betterment clause e.g., 10% (meaning the owner will pay 10% of the cost of repair, while the insurance provider will pay 90%). Older vehicles on the other hand, will see a higher percentage attached, meaning drivers will have to pay more of the repair bill.

Is this a problem?

An example of this in practice is a 7 year old car that has been in an accident and needs two new door panels. The total cost is HKD 50,000, but the insurance provider deems that the two new panels increase the value of the car beyond what it was before the accident. So, they tell the owner of the vehicle that they will only cover 70% of the 50,000, leaving the other HKD 15,000 to be paid for by the owner.

The problem is, the replacement panels really don’t improve the actual value of the vehicle - they may be a slightly different color, or they may not fit 100%, etc. Beyond that, the vehicle has now been in an accident which actually lowers the value of the vehicle. This leaves the owner of the vehicle to pay for repairs and a vehicle with a dramatically lower value than the insurance provider deems it to be. In other words, the insurance provider has just made money.

Speaking at The Claims Conference Asia - Hong Kong, Neil Raymond, MD at Kwiksure comments on this “Insurers often only pay 70% of the claim based on the repairs being better and more valuable than before the accident, which is obviously, to any layman, not true as often the value will actually go down due to the fact that the vehicle has been in an accident.” He continued, “This practice is not common in other countries, and in truth is thinly veiled institutional fraud that is harming the industry, vehicle owners, and other parties involved.”

That being said, betterment is not illegal and many car insurance companies around the world include it in their policies. The difference is that it’s meant to cover repairs and ensure the owner pays for any improvements to the vehicle that they want made. For example, if you have a car with 40,000 km on the tires and are in an accident that is not your fault, but requires one tire to be replaced, you may want to replace all four tires with new tires (a common practice in many countries as the other tires may have also been damaged). Doing so will increase the value of your vehicle. Betterment ensures that the insurance provider will pay for the replacement of the damaged tire up to the value of the tire before the accident, leaving you responsible for the cost of the other three tires.

Only in Hong Kong, many insurance agents will pay for the labour and then state that the one tire has improved the value of your vehicle even after the cost of the tire has been depreciated to the value before the accident, therefore they will not be paying you the determined cost of the tire, when in truth, the value related to that tire really hasn’t increased the vehicle’s total value at all, it’s likely only returned the vehicle to the original value.

What can be done?

Unfortunately, the way betterment is calculated and worded in many insurance contracts has become common practice, and indeed a part of a larger problem of the car insurance industry in Hong Kong. In the next part of this article we take a look at the claims process as a whole and what can be done.

In the mean time, there are insurers in Hong Kong who do offer more favorable terms, some insurers actually have car insurance plans that don’t even mention betterment. Of course, they may be more expensive up front, but can save you money in the long-run. Contact Kwiksure’s car insurance experts to learn about your options available and how you can find the best plan that meets your needs.