What is excess in insurance?

Insurance can be hard to understand. The industry uses words that we don’t necessarily use in our everyday lives, and when reading them, we may not be entirely sure what they mean.

Exhibit A: excess.

What exactly is excess in insurance? In this guide, we’ll answer exactly that, walking you through what an excess is, how the concept works in New Zealand, and how to make sure you’ve got the best excess for your situation.

An excess is the amount of money that you will pay towards any claim made on your insurance. Your insurance company then pays the amount over and above the excess for any claim that you make, up to the sum insured or the limit applicable. 

Let’s look at an example. You have a comprehensive car insurance policy with an excess of $500. Your car is damaged, and the cost to repair it is $4,200. In order to make your claim, you’ll need to pay the insurance excess of $500, while your insurance company will cover the remaining $3,700.

Excesses apply to varying degrees to almost all types of insurance: home insurance, contents insurance, car insurance, business insurance and more.

Why doesn’t the insurance company pay the full amount, you ask? The excess amount is designed to help keep insurance affordable. If all claims, big and small, were covered, insurance claim costs would balloon, causing everyone’s insurance premiums to increase. This is also why choosing the option of a higher excess can lower the cost of your insurance premium.

Excesses also act as an incentive for everyone to take responsibility for the safety and security of their property. If everything was covered and excesses didn’t apply, people may be less incentivised to take care of their insured property.

If someone else has caused the loss or damage to your property - a car accident where you weren’t at fault, for example - your insurance company might be able to recover the cost of the claim from the other party or their insurer. If that happens, you may not need to pay the excess (or it could be reimbursed to you if it’s already been paid).  

There is no guarantee that your excess will be recovered from the person at fault or their insurance provider, but your insurer will try their best to do so.

Some car insurance covers have an option that waives the need for you to pay an excess in circumstances where there is a fully identified third party at fault, and the liability is clearly on the third party. However, it’s critical to check the policy wording to understand whether this is how your cover works.

Many insurance companies will reduce the annual premium for customers who choose to increase their excess – this is called voluntary excess. If you’re thinking about reducing premium by taking a voluntary excess, it’s important to consider what amount of excess (i.e. the amount of money) you could comfortably contribute in the event of a claim. This is where we can help. Talk to us about the different options AMP can offer you.

There are many types of excesses and excess levels, but which applies to you and your cover? You will find this information on your personalised insurance schedule that you received when you took out your insurance or in the policy documents you receive each year when your policy renews. Make sure you check the list of additional excesses to see if any of them apply to you too.

Understanding excess in insurance is essential for making informed decisions about your insurance cover. Review your policy, consider your unique needs, and if in doubt, reach out to AMP, or your insurance adviser or broker to seek professional advice to ensure you have the best insurance excess for your situation.