In April 2015 Ravi borrowed $12,000 from a lender to buy a car. Along with the loan, Ravi took out a number of insurance policies including:
- credit contract indemnity insurance
- guaranteed asset protection cover
- mechanical breakdown insurance.
The total cost of the insurance was $3,800, which was added to the loan.
When Ravi moved to Australia, he missed a couple of loan repayments and incurred a couple of default fees, but he repaid the loan in full a short time later.
In 2020 Ravi contacted the lender complaining that ‘junk’ insurance had been added to his loan without his knowledge. Ravi demanded a refund of $3,800. When the lender declined Ravi, through a claims agent, contacted the lender again, increasing his claim to include interest.
Dispute
The lender declined Ravi’s claim saying that Ravi had agreed to the insurance when he signed the loan agreement and he had received value for the insurance. Although Ravi had not needed to claim against insurance, it provided good value for money. The lender was satisfied that the dealership would have explained the products to Ravi and told him the insurance was optional.
Ravi’s claims agent did not accept the lender’s response saying that the insurance had been automatically added to the loan balance, with no explanation or advice about suitability. Ravi’s claims agent sought a refund of the insurance paid, the interest associated with the insurance, all default fees, and a $500 ex gratia payment.
When the lender did not agree, the claiming agent complained to FSCL.
Review
Because this lending was advanced before 6 June 2015 the responsible lending obligations, with respect to the provision of insurance, introduced by the reforms to the Credit Contracts and Consumer Finance Act 2003 (CCCFA), did not apply.
If this lending had occurred after 6 June 2015, we would have expected to see evidence on the lender’s file that:
- the insurance would meet Ravi’s requirements and objectives
- Ravi would be able to make the payments under the contract without suffering substantial hardship
- the lender had helped Ravi make an informed decision and was aware of the full implications of entering the contract.
Although the dealership may have been trained to give insurance advice, there was no evidence they discussed with Ravi his individual circumstances and the benefits and disadvantages of the insurance package offered. It seemed more likely that the insurance was presented as a “must have” product to protect Ravi from future risk.
If the lending had been entered into after 6 June 2015, in the absence of the evidence identified above, I may have required the lender to refund some or all of the insurance costs and interest paid.
As the lending was before 6 June 2015, we looked at the law in place at the time. I considered whether the insurance was fit for purpose under the Consumer Guarantees Act 1993. Although we had concerns that the exclusions in the mechanical breakdown insurance may reduce the value to the consumer and some of the insurance might be considered expensive for what it was, we were satisfied that the insurance would give Ravi some value.
We then considered whether, under section 9 of the Fair Trading Act 1986, Ravi was misled or deceived when the insurance was automatically added to the loan and did not tell Ravi the insurance was optional. On balance, we considered it likely the dealership did not tell Ravi the insurance was optional.
We see cases from time to time where credit related insurance is more useful to the lender than the borrower. This is particularly true of mechanical breakdown insurance. Under the Consumer Guarantees Act the car dealer guarantees that the car will be of an acceptable quality. By purchasing mechanical breakdown insurance, the consumer could be paying for something the dealer is obliged to provide for free.
However, we were satisfied the information provided by the car dealership to Ravi was adequate and there was no evidence that the lender withheld any information or actively deceived him.
Resolution
Applying the law as it was in April 2015, we explained to Ravi’s claims agent that the lender was not obliged to refund any of the insurance costs added to the loan. While the lender did not accept some of our comments, they agreed with the outcome. The claims agent and Ravi did not respond to our decision, so we closed our file.
Insights for participants
If you offer insurance, and include the cost as part of the loan, you must undertake a documented, rigorous insurance application process to ensure the insurance will meet the borrower’s needs and objectives and help the borrower to understand the full implications of entering the contract.
