Most businesses utilize vehicles in their daily operations. With motor vehicle collisions being so prevalent on South African roads, businesses will at some time be confronted with the process of submitting a claim to, or defending a claim by, an insurance company.
The determination of the amount of damages when lodging or defending a claim, can at the best of times be a mystifying process and the question is often asked how an insurance company determines the monetary damages to a vehicle?
This process is referred to as the quantification or assessment of loss. Quantification relates primarily to the value of assets or any other interest that may be the object of the insurance.
- The principles of quantification
The quantification or assessment of the monetary damages is rife with theoretical and practical difficulties.
The aim of the quantification process is to determine the amount payable, to place the business in a financial position similar to what it occupied prior to the damage causing event.
A comparison of the value prior to the damage causing event and the value subsequent thereto normally constitutes the maximum loss in financial terms. This measure applies irrespective of whether the loss is total or partial.
- Calculating the extent of loss
The burden normally rests upon the business (insured) to prove not only the occurrence but also the extent or the amount of its loss or damages.
The courts have taken the view that if loss or damages has to be proven by an entity, (who despite having put forward the best evidence at its disposal, is unable to prove the amount of its loss or damages with mathematical exactness) it is the duty of the courts to assist such entity, by assessing the loss on the available evidence, and to allocate an amount of damages which the court determines as being fair.
Therefore, the insured does not necessarily have to prove with mathematical exactness the amount of its loss.
Two of the most applied methods for calculating loss in the insurance field are the doctrines of “market value” and “cost of repair”. These two methods are briefly discussed below.
- Market value as primary measure for quantification for loss
A business with a full interest in a vehicle (such as the bona fide possessor, or the entity that bears the risk of the vehicle’s destruction) is normally the entity affected by the damage causing event.
In order to make the required comparison between the values before and after the damage causing event the “true value” of the affected object must first be determined. The true value may be equated with the “real and actual” value of such an object.
A comparison will therefore have to be made between the real and actual value of the object before the damage causing event and the value of the same object after the damage causing event. In most cases the market value serves as a basis for calculating the real and actual value of the damaged object.
The word “value” in the concept of market value is commonly understood to mean the amount an article will fetch or be exchanged for in the market. Of particular interest in this regard is that the value of an insured motor vehicle is often determined by reference to its value in a schedule compiled by the motor trade industry. In this schedule, provisions are made for the trade and retail values as well as the market value of different types, makes and year model vehicles.
Although the aforesaid schedule might often be used as a guideline, the actual market value of the object remains a factual question and varies in most cases. Should an insurance claim result in litigation, the market value of the vehicle may be, and mostly are, proven by leading expert evidence.
- Cost of repair as an alternative measure for quantification of loss
An alternative method of proving the diminution in the value of the damaged property is to lead evidence of the necessary and reasonable cost of repairing, restoring and reinstating the damaged property to its previous condition. The courts have accepted this method of proving damages, (even though the costs may exceed the award in terms of the market value measure) provided that the repair cost is reasonable.
The insured bears the burden of proving that the cost, method of repair, as well as the reinstatement is reasonable, fair and necessary in the circumstances. Again, expert evidence will be required, but the courts will assist a party unable to prove the cost with mathematical precision, by making an estimate of such cost.
Once the cost of repair has been proven and there is no evidence that it exceeds the actual diminution in value or the pre- loss market value, a presumption arises that the cost of repair represents the diminishing value. However, the insured can rebut this presumption by providing the actual diminishing value.
In evaluating your company assets, most companies would wish to determine the diminishing effect of a collision. There is however no hard and fast rule in determining the monetary damages and therefore legal assistance should be sought.
Article by Niel van der Merwe – Attorney at Barnard Inc.
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Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)