Diana Clement: Read the fine print - and understand it

Rental car excesses can be eye-wateringly expensive. Photo / Getty Images

When it comes to travel insurance there are pitfalls for the unwary.

Travel insurance should be simple. You buy it, and hopefully you never need to use it. If you do, you call an international toll-free number and the insurance company pays up. Sadly there are all sorts of fish-hooks to beware of.

I got to thinking about this when I used a rental car company in Christchurch a few weeks back.

I realised to my horror that the excess on the car was $2500 and unless I paid $25 a day to reduce the excess to $100 I could be in deep doo doos if I had so much as scratched the nasty smelly vehicle. It felt like I was having money extorted out of me by this middle-sized car rental firm.

At the time I wondered if my ASB Gold Card insurance, or my standard motor vehicle policy, would have kicked in and covered the excess, meaning I was paying for cover I already had. When I read both policies upon my return, the answer appeared to be "no".

My ASB card, which is underwritten by Southern Cross Travel Insurance (SCTI), provides overseas rental vehicle excess cover but it wouldn't cover me in New Zealand.

Only a commercial motor vehicle policy would extend to cover rental car excesses, says my contact at insurance broker Aon New Zealand.

Reflecting on the rental car excess cover rort I realised that a domestic travel insurance policy would have been a cheaper option. A policy for up to five days with 1CoverDirect, for example, would have cost me $42 compared to the $75 I paid the rental car company.

The 1CoverDirect policy would have given me wider cover than just the excess, such as additional accommodation and travel expenses if I missed a flight or had to return home for a family emergency.

Not all insurance policies cover rental vehicle excesses. The Mike Henry Aussie Essentials Travel Insurance Policy doesn't include this. Others, such as the Kiwibank MasterCard cover, may not have high enough cover. The Kiwibank policy, for example, covers rental car excesses up to $2000, which wouldn't have been enough for my South Island trip.

According to Aon, domestic travel cover is rare in New Zealand because most people rely on their contents insurance, ACC and the hospital system to cover them. "We only have a few clients that take this option as part of their annual business travel policy," he said.

Even so, travel insurance really pays for itself when it comes to hiring a rental car here or overseas. For example, a SCTI 12-day full travel insurance policy for Australia bought online would cost just over $50 for an individual and not much more for a family.

That's nothing compared to the rental vehicle excess waiver cover of A$250 ($315) for 12 days through Budget Rent A Car, which reduced the excess only from A$3360 to A$400. With SCTI you'd have the entire excess refunded.

The problem is, unless you pay the car rental company's collision waiver cover, you'll need to pay the excess up front and claim it from the insurance company on your return. This can be quite a problem if you've not got a spare few thousand dollars' credit on your card.

It's exactly what happened to one Kiwi who posted her experiences on Trade Me's forums. Kay99's 5-year-old daughter let the handbrake off the car causing damage and the rental car company wanted the A$1500 excess paid before the family could leave the airport.

"Although we did get our A$1500 back [from SCTI], it was stressful as it was at the end of our holiday and we did not have much credit left on our credit card."

From a business perspective it makes complete sense why a rental car company would need to charge you up front. Mark Righton, country manager for Hertz, says: "The issue why the customer has to pay [the excess] direct is because we are dealing with the customer, not the travel insurance company."

Typically, says Craig Morrison, chief executive of SCTI, an individual would pay the rental car company's excess and show the proof to their insurer. "We endeavour to pay claims within 10 days of receiving all of the necessary information to assess it; usually it's around three to six days, depending on the time of year."

The same is the case with minor medical bills. Usually people pay them, then claim them back from the insurer on return, says Morrison. In the case of a serious accident SCTI would place a letter of guarantee with the hospital and settle the amount directly - provided that no other policy exclusions applied to the accident, such as the accident being caused by the policy-holder being drunk in charge of a motor vehicle.

The biggest problem people have with their travel insurance not paying out isn't with rental car cover, theft or even medical emergencies. It's with the "pre-existing conditions" clauses. This means illnesses that you already have when you take the policy out aren't covered - even if you don't know you have them.

One policy-holder who was tripped up by this was Trade Me user "Chasing". Although aware that her husband's pre-existing heart condition wouldn't be covered, she didn't realise that meant she wasn't covered by her platinum card insurance when her husband had a heart attack and the trip was cancelled.

Typically you will not be covered if your trip is cancelled or curtailed as a result of your travelling companion or a member of your extended family suffering from a condition they had previously been diagnosed with. That was a costly lesson for Chasing.

In another case heard recently by the Insurance & Savings ombudsman, a man lost $20,000 of travel costs when he was forced to cancel a trip after being diagnosed with melanoma. Although he wasn't aware that he had a melanoma at the time of paying for the travel insurance, the ombudsman decided that he must have been aware of the lesion and the pain and the insurer was entitled to decline the claim.

Holiday thefts can also prove a problem for people. Steve de Jong, who happens to be a partner at life insurance company Pinnacle Life, was caught out when his camera was stolen from his luggage after it was checked in for a flight from South Africa to London.

"Okay. No problem. Isn't this the reason that I took out travel insurance with Travelsure? But alas ... my claim was rejected because I did not report the theft to the police in London within 24 hours as stated in the policy - I was referred to the small print on page 13 and also somewhere on page 17.

"How stupid I was not to open my bag and check what was missing right there on the floor next to the luggage carousel. And never mind that I didn't notice the camera was stolen because the thieves left the camera bag, which I opened only 72 hours later."

In a case heard by the ombudsman a travel insurance company declined a claim for a laptop stolen from a car in a secure hotel carpark because "it could not be shown the vehicle was locked when the theft occurred". It wasn't until the owner got evidence from the rental car company that the car had been repaired, that his insurer agreed to pay out.

If you're travelling on business, attending a conference while on holiday or carrying items owned by your employer or your own business such as iPads and smartphones, then you need to read your cover carefully.

That's not to say that you won't be covered. The National Bank Gold Card insurance, for example, does cover some business travel if paid for with your personal card. If, however, your employer or business paid for the trip, then it's unlikely you'll be covered.

The moral is, never travel unless you've read your travel insurance policy and understand it.