Small print and onerous exclusions make the benefits advertised by some insurance companies virtually worthless, writes Catharine Munro.

When lawyer Catherine Uhr arrived at Sydney Airport to pick up a hire car recently, she did something most customers don't do. She read the insurance contract.

With four children keen to start their school holiday, their mother stood at the counter and crossed out several of the worst clauses.

Knowing she needed the people-mover she had booked ahead of her trip in order for the family holiday to be a success, she did not have many options.

"My hands were sweating when I signed the document," Uhr recalls, having seen so many victims fall foul of bad car-hire deals. "It's illusory insurance, which is about as useful as a marshmallow bullet-proof vest."

Consumer lawyers say there are plenty of insurance policies that are not worth buying, even though sometimes it feels as though there's no choice.

Insurance on hired cars is at the top of Uhr's list. Others point to travel, extended warranties on retail goods, consumer credit and a mysterious car insurance called "gap". Consumers are wasting their money in paying for them, they say.

Despite this, proposed legislation designed to better protect consumers from unfair terms in their contracts will not cover insurance policies. The minister for competition policy and consumer affairs, Craig Emerson, has indicated he is happy with the laws governing insurance, even though there is no direct law against writing in an unfair clause.

Some products carry policy exclusions that are so onerous as to negate any benefit to the policyholder.

As a Legal Aid Queensland lawyer, Uhr receives about one phone call every six weeks from distressed tourists who have hired cars.

Their complaints fall into two categories: those who have received mysterious charges, often thousands of dollars, on their credit cards weeks after the car is returned; or those whose claims for repairs have been refused.

"It's devastating, if you are hit with a $10,000 credit card bill after you return the car," Uhr says.

After analysing some common policies recently, Uhr realised drivers were often signing up for an arrangement that does not cover damage that occurs in rain or hail, or as a result of hitting animals, or rolling the car, or damage to the undercarriage or roof, or damage from deliberately thrown rocks.

"You must not travel in convoy because if you run into another vehicle and you know the person [you are not covered]," she adds.

The hire-car policy often allows a company to avoid that troublesome question of who is actually responsible for the damage.

"They don't [always] make the assessment [of any car damage] when the car is returned," Uhr says.

"There's real issues about liability. Of course, they would want to deduct off a credit card because they would never win [the argument]."

The only option a consumer has is to read the lengthy car-hire agreement before signing the deal, even if it means having the document emailed by the company beforehand.

Products like these persist because companies make so much money out of selling policies they almost never pay out on, according to consumer advocacy group Choice.

"Insurance at best spreads risk ... at its worst it exploits fears and elevates and exaggerates risk for people so they can be seduced into buying peace of mind," Choice spokesman Christopher Zinn says.

Insuring against the risk of writing off a car bought with borrowed money is a classic example. So-called "gap" insurance covers the difference between the amount borrowed to buy the car and the amount the car is covered for.

It is appropriate for motorists who have bought an expensive new vehicle, whose value depreciates as soon as it hits the road, but not for those who have bought a second-hand bomb, they say.

However, it is sold by agents who receive a commission for each policy.

The principal solicitor with the Consumer Credit Legal Service in NSW, Katherine Lane, says: "It started being sold because there is a limit on the commission on consumer credit insurance of 20 per cent [under the consumer credit code].

"The commission for gap insurance is not limited so it can be up to 50 per cent. It represents very poor value for consumers because it only applies in very narrow circumstances."

Don't get a lawyer started on so-called extended warranties – the deals offered to shoppers, often in electronics and white-goods departments that supposedly cover a product for longer. Consumers are already entitled to take their item back to the merchant under Australian law, whether there's an explicit warranty or not.

Treasury has issued a discussion paper ahead of the Government's takeover of consumer finance laws from the states. It notes exercising the right to a refund can be tough.

"It generates considerable levels of consumer detriment each year in Australia and is a significant issue in both Australia and overseas," the paper, released last month, says.

It estimates the cost to Australians is $12 billion a year.

Shopowners break the law if they make statements that suggest consumers don't have that entitlement. "No refunds", "no refunds after 30 days", "store credit", "no responsibility", as well as blaming the manufacturer and demanding goods be returned in a tradeable state are all potentially misleading and deceptive conduct under the Trade Practices Act, Treasury says in the paper.

"Goods must be of merchantable quality ... goods must be fit for their intended purpose ... the goods must match the description given to the consumer ... [and] a consumer must receive clear title to the goods," it notes.

Nevertheless, "extended warranties are becoming more prevalent – they are widely offered by retailers and many consumers are purchasing extended warranties on offer – even though most consumers in fact will rarely use them," the paper says.

Policy holders who want to complain about the way a claim was handled by their insurer can appeal to the industry-funded complaints service, the Banking and Financial Services Ombudsman. However, there is little that can be done when the fine print sets out the terms of the deal.

Travel insurance, a long-time bugbear of consumer advocates, falls into this category. It is the third most common form of insurance after motor and home, with 3.5 million products sold last financial year, according to the ombudsman's annual report for last year.

But while 9212 of the 1.6 million motor claims were rejected, 16,208 of 189,922 travel claims were knocked back.

"For motor, you get far more claims with far fewer disputes," consumer lawyer Denis Nelthorpe says.

The product can be dodgy because, since they are also often sold on commission, the agent has no interest in warning travellers of all the exclusions the policy contains, he says.

The ombudsman's list of decisions over disputes between a policy holder and insurer are full of cases of travellers doggedly persisting with claims.

After exhausting internal dispute-resolution processes with an insurer, policy holders have the right to bring their case to the ombudsman's service.

While "utmost good faith" and "fairness" are taken into account by the ombudsman, the service has its hands tied if the insurer has outlined its exclusions in its policy. In January, the service upheld an insurer's decision to reject a claim for damage to a car because the vehicle was leased rather than hired. The tourist, while travelling in Italy, had damaged a tyre and replaced it at a cost of €150 ($257). The ombudsman was the tourist's last avenue of appeal.

"I would say that if you can find the sort of insurance that covers you for just medical overseas, do it because you don't need it for anything else," Nelthorpe says.

Travel policies were rejected at the second highest rate – 8 per cent – of all products last year when customers took complaints beyond the insurer to the financial ombudsman's service.

The most commonly rejected policy was consumer credit insurance. The rate was 17 per cent, compared with 1 per cent for motor vehicle insurance, the service's annual report says.

According to Choice, the policies are offered along with personal loans and credit cards. They cover repayments in case of sickness, unemployment or death. But Choice recommends taking out an income-protection policy instead.

Nelthorpe agrees, saying: "A lot of people simply don't need credit card insurance."

There was a time when insurers were up front about how much money they made. Their loss ratios were published by the now-defunct Insurance and Superannuation Commission. The figures showed how much of their income was paid out to customers making claims.

These days the figures are controlled tightly and difficult to obtain.

Last year, amid public outrage over the continued failure of the building warranty insurance to cover claims in NSW, the minister for fair trading, Linda Burney, revealed companies were only paying out roughly 10 per cent of their income. But most of the time, those figures are unavailable.

"It's the only way to know whether a product represents good value for money," Nelthorpe says.

Travel policy fine print found wanting

Beware travel insurance attached to a credit card.

The Financial Ombudsman Service recently ticked off an insurer for trying to avoid paying a claim to a man whose daughter became sick on a family holiday in India.

The insurer argued it was not necessary to cover the claim because the father had returned to Australia earlier than his family. The travel insurance linked to the credit card was not valid if the policy holder was not there, the company argued.

However, the ombudsman forced the insurance company to pay $855.18 plus interest because the terms and conditions of the policy were not clear enough.

"It is the member's obligation to ensure its policy wording is precise and clear in its intent," said the finding, issued in June.

"A member who frames the document which constitutes the contract of insurance is bound to make its meaning clear in order to prevent a policyholder being misled into the false belief he/she is to receive a benefit to which he/she is entitled."