Auto insurance: Frequently asked questions

Auto insurance: Frequently asked questions
December 22, 2008
Now that most auto companies have reduced the cost of their cars and with interest rates also on a downswing isn't that often-dreamt-about car within your reach? While you may know what car best suits your needs, taste and budget you may not yet be worrying too much about insuring your dream car right now. If you really haven't thought about insuring your car yet, then it is about time you did. For according to a 2007 data released by World Road Statistics -- an independent global organisation that compiles road accident statistics -- as many as 94,985 Indians died in road accidents in the year 2005.
While motor insurance may not help save lives, it can help in saving you a lot of trouble in case -- God forbid -- your vehicle is involved in an accident. Hence the need for motor insurance.
What is motor insurance? Is it mandatory for a vehicle to be insured?
Motor or car insurance is a contract between a vehicle owner (you) and the insurance company (any insurance company that offers auto insurance) where the insurance company agrees to pay a sum of money to compensate for loss arising from accidents.
There are two types of motor insurance covers: Third Party and Comprehensive insurance.
Third party insurance covers only damage caused by the vehicle to other people or property.
The third party car insurance policy covers a vehicle owners legal liability for any compensation to be paid arising from any accident caused by the use of the vehicle. These include:

Death or physical injury to a third party person
Damage to third party property The liability is covered for an unlimited amount in case of death or injury. Damage to third party property is covered by the insurance policy as follows: up to Rs 1 lakh for private vehicles, scooters, and motorcycles and up to Rs 7.5 lakh for commercial vehicles.
In addition to the cover provided by the Third Party car insurance plan, the Comprehensive insurance policy protects you against any loss or damage caused to the vehicle and its insured accessories due to natural and man-made calamities.
Another mandatory feature is the third party legal liability cover. It protects the owner against legal liability arising from an accident causing any permanent injury or death as well as any property damage.
This insurance policy also pays for towing charges from the place of accident to the workshop, subject to a maximum of Rs 300 for scooters and motorcycles and Rs 1,500 for private cars and commercial vehicles. Also available is a restricted cover for fire and theft but only for vehicles that are laid up in a garage and not in active use.
All said and done, the India Motor Vehicles Act, 1938 has made it mandatory for every owner of a vehicle to obtain a motor insurance policy, either a comprehensive or a third party insurance. As evidence, a Certificate of Insurance must be carried at all times in the vehicle.

Inclusions and exclusions
December 22, 2008
A comprehensive car insurance protects you against any loss or damage caused to the vehicle and its insured accessories as a result of natural and man-made calamities like:

Natural calamities:

Fire
Explosion
Self-ignition or lightning
Flood
Typhoon/hurricane/storm/tempest/inundation/cyclone/hailstorm/frost
Landslide/rockslide
Fire and shock damage due to earthquakes
Man-made calamities like:

Burglary
Housebreaking or theft
Riots or strikes
Accidents by external means
Malicious acts
Terrorist activity
Damage whilst in transit by road, rail, inland-waterway, lift/elevator, or air Third party legal liability: A mandatory part of the insurance cover, it protects the vehicle owner against legal liability arising due to an accident, causing any permanent injury or death of a person or any damage caused to property.
Personal accident cover: The motor insurance plan compulsorily provides personal accident cover for individual owners of a vehicle while driving. The owner can also opt for personal accident cover for passengers in the vehicle.


What it excludes:
Typically, the motor insurance plan does not provide for:

Normal wear and tear or general ageing of the vehicle
Mechanical/electrical breakdown
Depreciation, wear and tear of consumables like tubes and tyres
Damages that occur while a person is driving with invalid driving license
Damage that occur while a person is under the influence of drugs or liquor
Damage due to a war, civil war, mutiny, or nuclear risk
Claims arising out of contractual liability
Use of vehicle other than what it is meant for. For example, if a private car is being used as a taxi and gets involved in an accident, the owner will not be able to claim damages.

What is the amount for which I need to insure my vehicle?
December 22, 2008
Motor vehicles are insured for a fixed value referred to as insured's declared value (IDV). If the vehicle is stolen or the vehicle is totally damaged and beyond repairs in an accident, the claim amount payable is determined on the basis of the IDV.

The IDV is estimated on the basis of the manufacturer's listed selling price of the brand and model of the vehicle (and accessories) at the commencement of the car insurance, after adjusting for depreciation every year.



Therefore, IDV = Ex-showroom price + sales tax -- (depreciation + registration + insurance).

How is the premium calculated on my vehicle?
December 22, 2008
Typically, insurance premium rates are determined by the type of your vehicle, its IDV, the city of registration, the period of coverage, and claims history.

The IDV is determined by the age, brand and model of your vehicle. The IDV determines the premium for your vehicle. The IDV is the sum that is paid to you in the event of theft of the vehicle or the vehicle is totally damaged and beyond repairs in an accident.



Another fact is that premium is calculated only on the cubic capacity of the vehicle. There is no consideration at all for those advanced technology and safety features in your vehicle (although some discount is available for the installation of an anti-theft device).



Another factor is claims history. If you have a bad claims history, you could be loaded with a higher premium on renewing the car insurance policy.


On the other hand, if you have been a cautious driver with a claims-free record, you are eligible for increasing discounts in your second, third, fourth years, leading up to the maximum discount of 50 per cent on premium in your fifth policy year. Of course, by the fifth year of ownership, it makes more sense to take out a third party Only policy as the reduction in the value of the vehicle and depreciation will make comprehensive cover too expensive and unnecessary.

| How long should I cover my vehicle? December 22, 2008 Your vehicle has to be insured at all times. This is required by law. All car insurance plans are annual policies issued for a period of twelve months. Therefore, you need to know when your insurance renewal is coming up. However, an extension for less than 12 months or a policy for a shorter period can be provided with special approval from a competent authority in the car insurance company. Comprehensive insurance or third party only policy? Let's resolve this confusion of choosing between a third party and comprehensive car insurance policy using the following example: Mr. X, due to the bad traffic on the city roads, employs a driver. One day, after dropping Mr. X at the office, the driver collides with another car on the highway and dies on the spot. As an employer, Mr. X is liable to compensate the driver's demise as he was in the vehicle in the course of his job. Now, as the Motor Vehicles Act has made it mandatory to insure liabilities under the Workmen's Compensation Act, the driver's son files an application to the Labour Commissioner and is awarded Rs 1,50,000. Now if Mr. X has had a third party policy then he can approach the insurance company, who in turn compensates the claim. The liability for compensation as per the Workmen's Compensation Act depends on the wages of the employee and her/his age, and largely represents the loss of earnings. Other losses such as mental pain and agony for the family, future expenses of dependents, and loss of prospective earnings are not accommodated. The driver's son now approaches the Motor Accident Claims Tribunal, demanding a compensation of Rs 1,00,000 towards these losses. Let us assume that the Tribunal awards him only Rs 50,000. Now that Mr. X's third party policy does not cover the second award as per the Motor Accidents Claims Tribunal he will have to pay the Tribunal award of Rs 50,000 from his own pocket. If Mr. X had purchased the comprehensive policy with additional personal accident cover for passengers and drivers, the insurance company would have paid the additional compensation as well. Moral of the story: It is always advisable to purchase the comprehensive policy covering additional liabilities.