Private Settlement for an accident, correct or wrong?
“Private settlement” means to pay for any damages incurred in an accident and not file claims to the motor insurance policy for damages. Many motorists do not understand the financial impact of “private settlement”. Let’s review from each parties’ prospectives involved in an accident:
- 3rd party (motorist NOT at fault)
- 1st party (motorist at fault)
- Insurance company
3rd Party (motorist NOT at fault) – This party was the victim and will receive compensation for the damages to his or her vehicle. In a private settlement arrangement, he will have to get his or her vehicle assessed for cost of repair by the workshop. The workshop can be of the other motorist that caused the accident or it can be he or her workshop. We recommend to go to their workshop or a neutral workshop to get a fair assessment of the damages. After the assessment has been done and payment was paid by the 3rd party, the repair can proceed. In most cases, 1st party will try to minimise cost and not compensate “loss of usage” to 3rd party.
Pro -? make a new friend? (1st party)
Cons – Inconvenience to arrange, negotiation of cost, possible sloppy repairs by 3rd party workshop, no “loss of usage” and delay in getting back the car.
1st party (motorist at fault) – At first instinct, most 1st party will try to private settle with 3rd party the damages cost thinking by claiming against he or her insurance policy will impact his or her insurance premium next year and also most motorists are into protecting their No Claim Discount (NCD) which range from 10 to 50% depending on how long they have not made a claim to their motor insurance policy. Let’s consider and see if their action warranty any savings or is costing them even more. First, let’s put into consideration the maximum saving for private settlement without the actual cost of repairs for damages incurred for both cars. This is based on the assumption of a general car (Toyota Altis), maximum NCD, premium $1500.00(before NCD) and age 35, male. So if 1st party file for an insurance claim on the damages incurred. He or her estimated cost are:
- Excess payable $500.00 (payable for a claim to motor policy, range from $500.00 to $1,000.00)
- Premium loading estimated $1500.00? – this is hard to get right but let’s assume 50% increase to $2250.00
- Difference in premium $1050.00 due to NCD reduction (50% reduce to 20%) – we are factoring the loading and subtracting previous year’s premium amount
So total cost incurred for filing claim $500.00 + $1,050.00 = $1,550.00
Hence if the repair cost for the damages is more than $1,550.00, then it is not variable to do a private settlement. Many other factors to take into considerations:
- Accidents are not predictable hence the possibility of another accident which cannot be resolve by private settlement.
- Private settlement does not discharge one’s liability from the accident. 3rd party can still filed a claim for injury to their passengers. This will make an insurance claim in future difficult.
- Hassle of negotiating the cost of repairs and arrangement for the best repair work to both your car and 3rd party’s car due to the cost restrain.
Insurance Company – The big winner and in full favor for private settlement for accidents. Put in context, it is any insurance companies’ interest to collect premium and not pay out any claims. With the growing number of motorists private settling their accident, their claim payout will decrease, driving profitability. Some insurance companies even goes the extra effort to advise their policyholders to consider private settlement when they called their hotline to enquiry accident claim procedures. This irk us a fair bit as how does they know the extent of the accident damages to advise private settlement in the interest of their policyholders? We find that insurance companies and their representing agents are advising their policyholders to consider private settlement by aggravating the increase in premium.
By now, my views on this matter are clear but I will like to summarise with exception. I find no outright benefits for private settlement if the damages will cost more than the excess payable. One has to consider the principle of buying an insurance coverage. Insurance is a product to transfer financial risk to an insurance company if an unexpected situation or accident occurred. Policyholder can limit their maximum financial loss to the premium payable to the insurance companies. Hence it only make sense to file a claim should one met with an unfortunate accident. Over years, insurance companies have introduce complicated discount and loading structure to make anticipating motor insurance premium cost difficult hence policyholders have this undesirable efforts to maintain their discount tier not knowing they are indirecting losing money when they try to exercise private settlement in an accident. Last, there are exceptions one should private settle if you fall into these categories:
- Cost of damages are little – Just superficial damages whereby filing a claim will incur more money and time.
- If you have over 1 claim on your policy for the last 2 years.
For the above 2 situations, one should consider private settlement if given a chance. However it is best to speak to someone that can better advise based on a more in depth analysis of the situation. If anyone need further advice or to download a copy of a standard format private settlement form, please contact us via the contact form.