Bridget bought a second-hand car from a car dealer. At the same time she also purchased mechanical breakdown insurance. The period of insurance was for three years but the premiums were required in one lump sum payment of $1,500 when the policy was taken out.
A year after Bridget bought the car, she moved to Australia. Bridget contacted the insurer about a refund of the unused premiums. The insurer told Bridget she was not eligible for a premium refund as this is only available if the policy is cancelled within the cooling-off period – 15 days after the policy’s start date.
Dispute
Bridget considered the insurer’s response to be unfair especially when she had never claimed under the policy. Bridget contacted FSCL with her complaint.
Review
When considering Bridget’s complaint, we reviewed the insurance policy and in particular, the policy’s cancellation section which provided that the insurer could cancel the policy at any time by giving seven days’ written notice to the insured person. If the insurer cancelled, the unused premiums would be refunded. The section also provided that the insured could cancel at any time, however, the premiums would not be refunded unless the policy had been cancelled within the 15-day cooling-off period.
We considered this section could be an unfair contract term under the Fair Trading Act as it was a term that financially penalised the insured for cancelling the policy. However, the insurer would not be penalised if the policy is cancelled.
Resolution
We asked the insurer for its position on whether the cancellation section was an unfair contract term. The insurer agreed that changes to the cancellation section were needed. The insurer said its proposed changes were:
- An insured person would be able to cancel the insurance policy and receive a refund of the unused premiums if there was a total loss of the vehicle, or if the vehicle was repossessed.
- The insurer would only cancel the policy if the insured failed to comply with a policy provision, or if the insured did not pay the premium, or if the insured submitted a fraudulent claim. If the insurer cancelled the policy, the unused premiums would be refunded to the insured.
We were pleased that the insurer had taken steps to review and improve its policy wording. We considered that, with the proposed changes, the cancellation section would not be an unfair contract term.
However, even under the proposed changes, Bridget would not be eligible for a refund. To settle Bridget’s complaint, the insurer offered to refund her the unused premiums as a goodwill gesture. Bridget was happy with this resolution and received a refund of $973.93.
Our insight
Although in this instance the insurer Bridget a refund, this was only as a goodwill gesture. In other words, the insurer was not obliged to pay the refund.
Bridget said had she known that she could not cancel the policy at any time and receive a refund, she would not have purchased the policy. Bridget was in her 20s and said that when she purchased the policy she thought it likely that she would want to move overseas within the next three years, but never thought she would not be able to get a premium refund for the unused portion of her policy cover.
As with any agreement it is important to look at what you have signed and, in particular, the cancellation clauses.
