The Importance of Comprehensive Motor Vehicle Insurance Coverage


The Importance of Comprehensive Motor Vehicle Insurance Coverage

Motor Insurance: Motor insurance is an agreement between an insurance provider and the insured policyholder, in which the insurer agrees to compensate the insured for any loss caused by the insured in the event of an unforeseeable incident in exchange for a small sum known as the premium. The insurance of motors has been made compulsory in India following the introduction by the Motor Vehicle Act. Motor insurance is made mandatory for any vehicle plying in public places; the definition of a public place is a place that is not private but used by the public for any purpose. In the early days when motor vehicles were introduced in India, there was no mechanism to compensate the accident victims; owners of the vehicles were asked to compensate the victims. This proved an indicator in instances in which the owner of the vehicle does not have the ability to pay the victim. For instance, a bike rider killing a by passer in an accident might be unable to compensate the victim’s family due to limited funds. In such cases, the victims would be left at the mercy of the vehicle owners, which is why the government of India has introduced vehicle insurance and made it mandatory for third-party bodily injury and property damages.

Motor vehicle insurance consists of Liability and ownership damage cover, of which the liability cover is mandatory per the Motor vehicle act, 1988. Let us understand the importance of comprehensive vehicle insurance coverage for your vehicles:

Third Party Cover/ Liability Only Cover (TP):

Liability only covers, also known as third-party liability, bodily injury or property damage to third parties arising from an accident due to an insured vehicle. Third-party insurance is compulsory for all vehicles operating on public roads. The premium of third-party cover is decided by the Insurance Regulatory & Development Authority of India and the Government of India. The basis is the capacity of cubic (c.c) for the car. A higher capacity will result in higher premiums for third party insurance. One should not be driving a vehicle in a public place without a third party cover as it could result in imprisonment and a fine or both. Third-party liability occurs when the insured vehicle causes property damage or bodily injury to any third parties. In India, vehicle insurance is provided to the vehicle and not the person driving the vehicle, whereas in the USA, vehicle insurance is given to the rider, and any person who wants to drive a vehicle should possess valid liability cover. Third-party liability is also known as legal liability, as it is made mandatory under the Motor insurance act. It is important to note that the premium rates for third-party liability would depend on the vehicle class; commercial vehicles are charged higher when compared with private vehicles. Third-party premium rates would be decided based on many factors, such as the previous year’s claims, affordability of customers, etc.

One can calculate the value of an object but cannot calculate the value of a person, so the third party claiming settlement in case of bodily injury or death doesn’t have a fixed sum insured. The honorable courts handle third-party death claims, and the settlement is decided based on various factors such as the deceased’s income, age, dependents, etc. For this reason, TP insurance is made mandatory, as every insured might be unable to settle the claim awarded to the victims. In case of Hit and Run cases where it is not possible to identify the details of the vehicle even after considerable efforts, the Hit & Run fund would compensate the victims. The Government of India manages the Solatium fund and has contributions from the general insurance industry.

Own Damage Cover (OD):

Own damage insurance offers financial assistance to the insured in the event that there is damage or loss to the insured vehicle as a result of the insured risk. The insured vehicle is covered against damages due to natural calamities such as cyclones, earthquakes, Floods, fires, etc., and artificial perils such as malicious acts, strikes, riots, etc. Insurance for personal damage isn’t obligatory under the Motor Vehicles Act in 1988. But, you should think about this to protect their own interest and that of others. Own damage premium is decided by the insurance companies within the set range given by India’s Insurance Regulatory and development authority. IRDAI provides a limit above which the damage premium should not exceed, usually given as a percentage of the IDV. OD premium depends on the IDV of the vehicle; a higher IDV leads to a higher OD premium. The no-claim bonus is calculated upon the OD cost if the claim was not made during the prior year. No claim Bonus (NCB) starts from 0%, goes up to 50% of the OD premium, and increases every claim-free year. If there is a claim in the previous year, the no-claim bonus would fall to 0% and again increase for every claim-free year, thereby repeating the cycle.

Own damage cover cannot be taken on a stand-alone basis and must be mandatorily clubbed with the third-party cover. Long-term OD cover can be taken subject to long-term TP cover. Own damage cover enables insured customers to use a cashless claim settlement facility in any network garage.

Comprehensive Cover:

An insurance for a motor vehicle that is comprehensive covers both the third party insurance and the individual loss coverage. It is a complete cover, as it covers the damage to the insured vehicle and the property damage or bodily injury to third parties. Comprehensive cover in vehicle insurance is usually preferred when the vehicle is new, as the IDV of the vehicle would be high, and it makes sense to insure the vehicle against any losses. Once the vehicle ages, people only convert the comprehensive cover to their damage cover. One can customize their insured declared value IDV in the comprehensive cover and get a higher or lower premium while the TP premium remains unchanged with the IDV cover.

It is crucial to remember that coverage with comprehensive limits only means that certain claims will be fully covered. For instance, stand-alone engine damage due to floods or other natural calamities is not covered under the comprehensive cover; engine damage is covered only when it happens along with the vehicle damage. For this reason, the comprehensive cover comes with additional coverage in the form of chargeable add-ons.

Comprehensive Cover with add-ons:

Comprehensive cover with add-ons is aimed to enhance the protection of the vehicle. Add-ons such as engine protectors are designed to cover the stand-alone losses or damages to the vehicle due to an insured peril, key protection cover to compensate the insured in case of loss or damage to the key and lock, zero depreciation cover to not factor for depreciation of vehicle parts at the time of claim settlement. Depreciation is common due to an object’s regular wear and tear. Insurance is designed to replace the insured in the same state just before the occurrence of loss. So if you as an insured had lost your used car, then you would be eligible to get compensated after factoring for the depreciation arising out of usage of the car. Still, a new vehicle would only be provided if you had opted for a Vehicle replacement cover or Returned to invoice cover.

Certain parts in a vehicle cannot be used more than once, such as nuts, screws, engine oil, filters, etc., and need to be replaced with new ones in case of damage, known as Consumables. These parts would normally be excluded during the claim settlement as they cannot be used again, but having a consumables cover would help you pay for these damaged parts. There are numerous add-ons on the market, however it is possible that you don’t need every one. It is for you to decide the best add-ons to provide maximum protection to your vehicle. Opting for all the add-ons would only increase the premium if there is no commensurate risk.

So, comprehensive cover with add-ons is considered to be the complete coverage of your vehicle, and here we discuss further the importance of having a comprehensive cover for your vehicle. For example, if you are using your vehicle in a safe area with less risk of robbers, then there would be less need to take a key protection cover which covers the loss or damage to the key and the lock of the vehicle.

Importance of Comprehensive Cover:

Legal Requirements Meet:

It ensures that you meet the legal requirements, which state the compulsory purchase of Third party liability policy, which is a part of the comprehensive cover. If you are purchasing the comprehensive cover, it means that you have met your legal liability. In case of any third-party property damages or bodily injury, you would be covered as per the existing terms and conditions. Driving an uninsured vehicle can lead to imprisonment, a fine, or both.

Personal Accident Cover:

Comprehensive cover also includes the compensation payable to the insured in case of an accident while traveling in the insured vehicle. It also covers personal accidents which compensates the insured should they suffer the insured’s death or impairment caused by an accident travelling on an insured car. The limit of the coverage in motor vehicle insurance under the personal accident cover is Rs.15 Lakhs for the driver/owner and up to Rs.3 Lakhs in case of a pillion rider. Personal accident cover in motor insurance comes into play only when the insured suffers death or disability while driving the insured vehicle. One can take a comprehensive PA cover of Rs.15 Lakhs for all the vehicles insured in their name. Personal accident insurance can be added to the policy of passengers upon payment of extra cost.

Protection Against Man-made Losses:

Comprehensive cover protects your vehicle from man-made losses such as strikes, riots, and malicious damage. Malicious damage includes loss or damage to the insured property by an assailant with malicious intent. Man-made perils such as accidents while driving, riots, vandalism, and strikes are covered up to the sum insured limit under the policy. Terrorism is not covered under the policy, even though it is a man-made peril. These are all included by the own Damage section. This makes up the overall policy.

Protection Against Natural Disasters:

Comprehensive cover in motor vehicle insurance protects your vehicle from natural disasters. Natural disasters such as floods, inundations, cyclones, and storms can destroy your vehicle and cause serious losses. All natural disasters, including earthquakes, are covered under the motor vehicle insurance policy in the own damage section. The limit of liability in case of natural disasters would be the sum insured or the insured declared value (IDV) of the vehicle.

Complete Protection:

The comprehensive insurance policy provides total security to your car should it suffer damages. Complete protection covers third-party bodily injury, property damage, and own damage. In the above paragraph, complete coverage with additional add-ons is the most suitable protection for your car. Selection of add-ons should be based on the requirements and the risks prevailing in your location. For instance, if you reside in a low-lying area, there is a high chance that your vehicle might get flooded, leading to engine damage which is not covered in a comprehensive policy unless an “Engine protection” cover is opted for.

The importance of comprehensive vehicle insurance is known only at the time of loss or damage. To prevent such awkward situations, one should consult their insurance intermediary or do due diligence before taking a motor vehicle insurance policy. If you are still deciding on the comprehensive cover required for your vehicle, please book a call with Ethika Insurance to avail yourself of guidance from our motor insurance experts.

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Susheel Agarwal

Namaste. I'm Abhinay Nedunuru, a Fellow of the Insurance Institute of India with a passion to make insurance simple and crisp. I write on insurance and investment. I have a passion for teaching and training in particular to insurance. I'm currently doing my PhD from IIM in Management.