Cedric Stephens, Contributor

Question: Our daughter, who is 22, will be graduating from college next year. Her mother and I plan to buy her a pre-owned car. In order to save money, we have decided to insure the vehicle in our names even though she will be the main driver. She has been driving since she was 18 and has not been involved in any accidents. Are there any downside risks to our plan?

- BAS, Mandeville PO

Answer: Many persons believe that insurance costs too much for the average motorist. They feel that motor insurers - like the central bank - have a licence to print money; that those companies are not shy to use their power to meet annual profit targets.

Young drivers as a group are said to be treated even more unfairly. They are charged excessive premiums for coverage which is required by law. I salute you for raising a question about the practice, called 'fronting' in the United Kingdom, which many buyers here use in order to save money.

Insurance contracts are very different from other deals. In other types of contracts, the rule is: let the buyer beware.

In agreements for insurance, the buyer has a duty - which is, of course, explained in fine print - to tell the insurer everything which is material, or important, to the contract. That duty begins before the contract starts.

Material misrepresentation, to use a technical term, arises when had the insurer known the truth, it would have rejected the risk or, would have charged more premium. This rule has been around for many years. Persons who withhold material information from insurers are likely to have problems when they submit claims.

United against fronting

In 2005, Insurance Company of the West Indies (ICWI), Jamaica International Insurance Company (JIIC), NEM and United General Insurance (UGI) controlled nearly three-quarters of the $7.3 billion motor insurance market.

They are united against fronting. UGI is very candid. It says in its application or proposal form, in a section sub-titled 'Understandings', that: "... the policy is voidable if false statements are given or information is withheld for the purpose of obtaining insurance cover or reducing premiums."

That part of the form appears above a section called 'Declarations'. The latter section confirms the truth of the answers, makes them part of the policy and says that "any breach renders the policy void."

Applicants for insurance sign their names below the declarations in front of a witness. You and your daughter could run into serious trouble if UGI were your insurer, and you did not involve them in your plan.

The other insurers outlaw fronting in different ways. In the case of JIIC, it makes a specific attempt to find out the identity of the main driver - question No. 15 of its form.

The form also contains a note saying that the coverage will be "voidable" in the event of false statements or where material information is not disclosed.

Sanctions

ICWI and NEM deal with the practice of fronting in an indirect way. They appear to be relying on the buyer's duty to disclose material information to them.

In the event of a claim, their argument, in all probability, would be that your failure to disclose that your daughter was the main driver amounted to material misrepresentation.

Insurers have two choices when customers withhold material information. They could treat the contract as though it was never in force (it was void ab initio) and return the premiums paid. If this were to happen, you would end up bearing all the costs of the accident. The second option is less severe. They could offer to deal with the claim subject to your paying the premium they would have charged had the vehicle been insured in your daughter's name in the first place. Each insurer reserves the exclusive right to decide how to treat each case.

Obviously, fronting only saves money if you do not have a claim or, insurers do not find out about it. Are you prepared to take a gamble?

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, email: aegis@cwjamaica.com or business@gleanerjm.com.