What Is an Ex Gratia Payment?

The Latin phrase “ex gratia” implies through favor.” When you get an ex gratia payment from your insurer, you’re receiving cash for a loss that the insurance company didn’t legally have to cover under your policy’s terms.
Important Takeaways
  • Ex gratia payments are optional payments that an insurance provider may give if your policy doesn’t cover your claim.
  • This payment doesn’t indicate that the insurer accepts culpability for the losses. It is solely paying out as a courtesy to the insured.
  • Ex gratia payments aren’t usual, given there is no necessity for insurance firms to make them.

 Meaning and Examples of an Ex Gratia Payment

An ex gratia payment is a voluntary payment by an insurance company or other institution, such as an organization or the government, that it isn’t legally compelled to make. With an insurance provider, this payment is directly tied to a loss not covered under your policy conditions.

It’s crucial to frequently examine your insurance policy to ensure you have the coverage you need so that your family and valuables aren’t at danger.

An ex gratia payment doesn’t need the insurer to acknowledge it’s accountable for a loss or indicate that the insurer’s repayment was legally compelled. It’s essentially a voluntary payment given by the insurance company, occasionally to limit its losses or to keep your business.

How an Ex Gratia Payment Works

An ex gratia payment is different from a standard claim payment since it’s a reimbursement that you aren’t qualified for based on the conditions of your policy.

If there is a legal requirement on behalf of the insurance company to make a payment, the money wouldn't be an ex gratia payment, it would be a standard payout from the claims procedure.

For example, let’s suppose that you’ve been a faithful client of your house insurance provider for years. You believed you had the water coverage you needed in place with your flood insurance policy. But then a sewage pipe backs up and creates floods in your house. You’re astonished to hear your insurance doesn’t cover this damage since the sewage backup wasn’t caused by a flood.

You believe your coverage should cover the damage. Yet the particular wording don’t cover this sort of water damage. Since the insurance doesn’t want to lose your business, it may opt to offer you an ex gratia payment to assist cover part of your loss.

In this situation, the insurance company had no duty to offer you anything. Nonetheless, it chose to do so as a courtesy to aid a loyal client through a hard moment.

Since there was no admission of guilt for an ex gratia payment, claims are paid as a business accommodation by the underwriting department. These sorts of payments don’t effect a customer’s claims history as a real claim payment would.

Why Do Ex Gratia Payments Exist?

If your claim is refused based on your policy conditions, the insurance company isn’t compelled to pay you anything. Nonetheless, there are a few instances why the insurance company may elect to voluntarily make you an ex gratia payment to aid you with your loss:

  • If you file a lawsuit and the insurance company feels it would cost more to go to court and defend the claim, it may elect to make you this sum instead. This choice helps the insurance save money. 
  • Similarly, if your policy wording is vague and there’s a reasoned argument from an insurance coverage counsel, your insurer could elect to pay some or all of the claim to avoid going to court.
  • The insurance company is afraid about losing your business, particularly if you’re a long-term client who pays significant rates. The insurance company doesn’t want to lose this business, so to urge you to continue around, it may provide a voluntary contribution to demonstrate goodwill.

Ex gratia payments don’t happen solely in the insurance business. An employer may grant these voluntary money as a part of a severance package, and the government also has been known to pay them. No matter whose group pays them, ex gratia donations are a manner of displaying generosity or goodwill to someone.

What Do Ex Gratia Payments Mean for You?

Even if an insurer refuses your claim, there is a potential that you still may obtain payments from your insurance company in this method. Nevertheless, since these payouts aren’t legally mandated, you shouldn’t expect on one to help compensate for your losses. Instead, it’s far preferable to have the correct quantities and kinds of insurance in place so that any claims go through as planned.

In several regions of the globe, ex gratia contributions have tax ramifications. If you receive one from your insurance company, it's worth checking with a tax professional to make sure you know what (if any) taxes you'll need to pay on it.