It is a well-known fact that insurance companies only pay for what they cover in the policy contract. Therefore, you can damage your car, along with the engine, and not get cover for the engine because your policy isn’t broad enough. In situations like this, the insurer can stick to the legally binding document and offer no payment. They would not be wrong in doing so.
However, there is the flip side of favour and grace, where the company can choose to, despite not in obligation to cover such claims. They call this ex gratia in insurance.
What does ex gratia in insurance mean?
Taking the name, ex gratia is a Latin word, which directly translates as “by favour.”
They call it that because the party making the payment (insurer) is not obligated to compensate for the loss. It rather stems from an act of goodwill.
They mostly carry out ex gratia in insurance to foster a better relationship between the insurer and customer.
Ex gratia in insurance is a payment to a customer by an insurance company to compensate for damages or claims.
It, however, does not include the admittance of liability from the insurance company. Therefore, it is a gesture of good faith and not a legally binding obligation.
Ex gratia is not so common because insurance companies are not in legal obligation to do so.
What is the difference between ex gratia and compensation?
The major difference between ex gratia and compensation results from the reason for payment.
However, for both scenarios to hold, damages must have been incurred.
Having explained what an ex gratia means, compensation payments, on the other hand, are made directly because of the loss incurred.
The payment is made due to a legally binding contract that mandates the company to do so.
In simpler terms, your insurer makes compensation payments because they have to do so after a loss, while an ex gratia results from the goodwill after a loss.
Why Ex gratia in insurance?
Ex gratia does not make much sense from the business perspective because it seems like an unnecessary financial commitment.
However, this is not completely true.
Many insurance companies use ex gratia payments as part of a well-planned strategy for maintaining good relations with clients.
Although the insurer owes you no money, they could offer to help if they count you valuable. This is an investment in a relationship that could open more opportunities for them in the future.
Other companies outside insurance also practice this model too.
For example, a network service provider offering data bonuses to all of its customers after a service disruption. Or a retailer offering higher severance packages to staff that had to be laid off.
One thing that must be present to make it ex gratia in insurance is that such compensation must be linked to a loss.
Although not very common today due to its nature, ex gratia still exists and is done by a few insurance companies. The profit-oriented nature of the industry, however, means that ex gratia numbers keep falling rapidly. Most times, companies only throw out a favour like this when it’s in their best interest to do so.