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Motor Insurance – Types, OD vs TP, & IDV

Note

Exam Relevance: This chapter is crucial for 5-mark short notes (IDV, NCB) and 10-mark questions distinguishing between Third Party and Comprehensive Insurance.

Introduction

The Motor Vehicles Act, 1988 makes it mandatory for every vehicle on Indian roads to have insurance. But beyond compliance, it is a financial shield against accidents, theft, and legal liabilities.

1. Types of Motor Insurance Policies

There are primarily two types of covers available in the market:

A. Third-Party Liability Policy (TP) - Mandatory

  • What it covers: Damage caused by YOUR vehicle to Others (People/Property).
    • Injury/Death of a third person: Unlimited Liability (decided by court).
    • Property Damage of third person: Up to ₹7.5 Lakhs (for cars).
  • What it excludes: Damage to your own vehicle.
  • Cost: Fixed by IRDAI every year. (Low premium).

B. Comprehensive Policy (Package Policy) - Recommended

  • What it covers:
    1. Third Party Liability (Everything in TP).
    2. Own Damage (OD): Theft, Fire, Accident, Earthquake, Flood, Riot.
    3. Personal Accident (PA): Cover for Owner-Driver (₹15 Lakhs).
  • Cost: Higher than TP. Depends on car value (IDV).

2. Distinction: Third Party vs Comprehensive

FeatureThird Party (TP)Comprehensive
Legal StatusMandatory by LawOptional (Voluntary)
ProtectionCovers only OthersCovers Self + Others
PremiumLow (Fixed by IRDAI)High (Depends on Car Value)
Claim PayoutTo the VictimTo You (for repair) + Victim
SuitabilityVery Old Cars (Low value)New/Expensive Cars

3. Key Concepts (Exam Definitions)

A. IDV (Insured Declared Value)

  • Definition: It is the maximum Sum Assured fixed at the start of the policy.
  • Meaning: If your car is stolen or totally destroyed, the insurer pays the IDV.
  • Calculation: Showroom Price - Depreciation.
  • Exam Tip: IDV is the "Current Market Value", NOT the purchase price.
    • Year 1: 95% of Price.
    • Year 2: 80% of Price.
    • Year 5: 50% of Price.

B. No Claim Bonus (NCB)

  • Definition: A discount given by the insurer for Good Driving (Not making a claim).
  • Structure:
    • 1st Claim-Free Year: 20% Discount on OD Premium.
    • 2nd Year: 25%.
    • 3rd Year: 35%.
    • ... up to 50% Max.
  • Rule: If you make even one small claim, NCB drops to ZERO next year.
  • Transfer: NCB belongs to the Person, not the Car. If you sell your old car, you can transfer the 50% bonus to your new car policy!

4. Important Add-ons (Riders)

A standard comprehensive policy has gaps. Add-ons fill them:

  1. Zero Depreciation (Zero Dep) / Bumper-to-Bumper:
    • Normal Policy: Parts like plastic/rubber have 50% depreciation deduction during claim. You pay 50%.
    • Zero Dep: Insurer pays 100% of part cost. (Must-have for cars < 5 years old).
  2. Engine Protection: Covers damage due to waterlogging (Hydrostatic lock). Standard policy excludes this.
  3. Roadside Assistance (RSA): Towing, Tyre change, Fuel delivery 24x7.

5. Factors Affecting Premium

  1. Car Model: Luxury cars have higher premiums.
  2. Location: Metro cities (Zone A) have higher risk/premium than small towns (Zone B).
  3. Age of Car: Older car = Lower IDV = Lower OD Premium (but TP remains same).
  4. Engine Capacity (cc): Higher cc = Higher Third Party Premium.

Summary (For Revision)

  • Mandatory: Driving without TP insurance is a crime (Fine ₹2000+).
  • IDV: The "Sum Assured" of your car. Don't set it too low to save premium.
  • NCB: A reward for safe driving. Don't claim for small scratches; you lose NCB.
  • Zero Dep: Highly recommended ensuring full claim settlement.

Quiz Time! 🎯

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Next Chapter: Insurance Documents & Claim Process! 📄

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