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Definition and Examples of Ex Gratia Payment

How Ex Gratia Payment Works

What Does Ex Gratia Payment Mean for You?

Definition and Examples of Ex Gratia Payment

The Latin term “Ex Gratia” means “out of kindness.” When you receive an ex gratia payment from your insurance company, you are receiving a payment for a loss that the company was not obligated to cover under the terms of your policy. Ex gratia payments are not common, as there is no requirement for insurance companies to make them.

How Ex Gratia Payment Works

An ex gratia payment is different from a traditional claim payment because it is a payment that you are not entitled to under the terms of your policy. For example, let’s say you have been a loyal customer to your insurance company for years. You believed you had the water coverage you needed through flood insurance. But then, a sewer line gets clogged and causes your home to flood. You are surprised to find that your policy doesn’t cover this damage because the sewer blockage was not caused by flooding. You think your policy should cover the damage. But the specific terms do not cover this type of flood damage. Because the insurance company does not want to lose your business, they might decide to send an ex gratia payment to help cover some of the losses.

Why Are Ex Gratia Payments Made?

If your claim is denied based on the terms of your policy, the insurance company is not required to pay you anything. However, there are some reasons why the insurance company might decide to send an ex gratia payment to help you with your loss:

• If you sue and the insurance company believes it will cost them more to go to court and fight the claim, they may decide to send this payment instead. This decision helps the insurance company save money.
• Similarly, if the language in your policy is ambiguous and there is a reasonable argument from an insurance coverage advisor, the insurance company may decide to pay part or all of the claim to avoid going to court.
• The insurance company is concerned about losing your business, especially if you are a long-term customer paying significant premiums. The insurance company does not want to lose this business, so they might make an ex gratia payment to show goodwill and encourage you to stay.

What Does Ex Gratia Payment Mean for You?

Even if the insurance company denied your claim, you may still have a chance to receive money from the insurance company in this way. However, since there is no legal obligation to make these payments, you should not rely on this type of payment to compensate for your losses. Instead, it is best to have adequate amounts and types of insurance to ensure that any claims go through as expected.

In some parts of the world, these payments have tax implications. If you receive an ex gratia payment from your insurance company, it is wise to check with a tax accountant to ensure you understand any taxes you may need to pay on it.

Source: https://www.thebalancemoney.com/what-is-an-ex-gratia-payment-5201585