Bought a car through a dealership lately? Chances are you were pressured to buy what are called add-on insurances which, based on ASIC’s findings, are not only expensive but of little to no benefit.

Take a closer look at the numbers and it’s painfully clear who these insurance add-ons were designed to benefit.

Australians received $144 million in claims for the $1.6 billion they paid in car insurances add-ons in the three years to 2016. That’s a dismal claims ratio of 4 cents in every dollar, compared with 50 cents/$1 typically paid on car and home insurance.

Adding insult to injury, car dealers earned more than four times that amount ($602 million) in commissions, paid by authorised representatives of the insurer located within their car yards. In a worst-case scenario, an ASIC study found that one consumer paid $3650 on a warranty for a car worth only $2999 – $3100 of that was paid in commission.

The car industry has been one of the worst offenders in the add-on insurance market. Photo: Getty

Former ASIC deputy chair Peter Kell claimed that rorting was so endemic within the car insurance add-on market, the regulator should be given the power to ban certain cover that consumers neither need nor would be eligible to claim for.

In light of damning findings, a key ASIC report warned consumers to be wary of buying five specific types of add-on insurance products, including consumer credit insurance, loan termination insurance, gap insurance to pay out loans, tyre and wheel-rim insurance and mechanical breakdown (or extended-warranty insurance).

The regulator also singled out providers like IAG*, Suncorp, Allianz and QBE Insurance for past unfair conduct.

Enforcement actions subsequently taken by ASIC led to more than $100 million being recovered for consumers from a number of insurers. However, the Australian Law Action Centre (ALAC) claims Australians could still be owed more than $1 billion in oversold, misleading or unsuitable add-on insurances forcibly sold over the last 10 years.

To help consumers recover some of this money, ALAC established a website demandarefund.com in 2017, with 750 automated letters of demand already resulting in $1.8 million in refunds.

An extended warranty should deliver coverage against life’s mechanical misfortunes after your standard vehicle warranty has ended. However, due to excessive exclusions, often embedded within the small print, coupled with strict ‘obligations’ consumers may unwittingly breach, thereby voiding their warranty, ALAC’s CEO Gerard Brody says these products are valueless.

“We think these products, which contribute significantly to car dealers’ profits, are almost completely worthless, and encourage people to demand refunds to what are tantamount to donations they’ve paid to a warranty company,” says Mr Brody.

One of the big problems facing consumers, adds Mr Brody is not knowing that add-on insurance has been sold as what’s called a Motor Vehicle Discretionary Risk product, where payment of claims is solely at the discretion of the provider.

While these products are also being sold as dealer-issued warranties (aka junk warranties), all they’ve effectively done, advises Mr Brody, is transfer the discretion over payment from the insurer to the dealer.

“You think you’re protecting your car, but if you read the fine print, you’re at the mercy of the warranty company. There’s no guarantee you’ll be covered when you need it,” he warns.

“Never buy add-on insurance offered at point-of sale, and if you have been sold one of these products, go to our website and lodge an automated request for a refund.”

As an added protection for consumers against ‘bundling’, ASIC has proposed a deferral period (possibly 30 days) between the sale of a vehicle and add-on insurances being offered via the car yard channel.

More recently, the banking royal commission recommended that such a deferral be extended to all add-on insurances within any channel, for which the Coalition government has extended its in-principle support.

*An earlier version of this story incorrectly stated that AIG was singled out by APRA for past unfair conduct. It was not AIG but rather IAG. The error was made in reporting.