Third-party cover not enough

Covering your own damage, especially if the vehicle is old, is very important

G Srinivasan, chairman and managing director, New India Assurance, regrets customers do not buy a comprehensive policy when their vehicle gets old. Most, in fact, only buy third-party cover once the loan of the vehicle is paid. The premium of a third-party cover is just 10 per cent of a comprehensive policy. They might even not have bought any, if the law did not mandate it.

When an insurer sells you a comprehensive motor policy, it means it covers both liabilities, third party and own damage. However, insurers also sell standalone policies which cover only third-party damage. Third-party cover being mandatory by law, insurers are not allowed to sell standalone own-damage policies.

Today, about 70 per cent of two-wheelers and up to 30 per cent of four-wheelers on the roads that are uninsured. Insurance experts say, people start losing interest in buying or renewing their comprehensive motor policies to save on premiums. With the average life of a car getting reduced to 10 years, general insurers depreciate the value by 15-20 per cent annually. In addition, a car's rubber and plastic parts attract 50 per cent depreciation from the first year itself.

Hence, due to heavy depreciation on the car and its parts, the insurer pays less than the loss amount that is typically claimed by the insured on his vehicle. In other words, even if your loss on the car parts is Rs 20,000 you may not get paid in full due to its depreciated value. This in turn is a loss for the motor-policy holder and further discourages spending on motor policies.

A standalone third party liability cover is, on average, 80-85 per cent cheaper than a comprehensive policy. For instance, a Bajaj Allianz’s third-party cover will cost you Rs 925, as against its comprehensive policy for which you will have to shell out Rs 10,300.

“Most customers either stop renewing or refrain from buying a comprehensive policy as soon as they repay their vehicle loans,” says Sanjay Dutta of ICICI Lombard. The average tenure of a car loan is four to five years. Banking experts say, they don’t deny a loan to somebody who has bought only a third-party cover. But, they usually insist on a comprehensive cover. Standalone third-party covers were also called ‘One-time act only’ policies almost a decade ago. These policies were issued only for two-wheelers, covering third-party damage only. “These policies got wiped off from the market due to pricing issues and insurers couldn’t sustain those low level of premiums,” adds Srinivasan.

However, the insurance regulator is looking at issuing such long-term policies again for both commercial as well as private vehicles. An individual will be able to buy the long-term third party policy for a long tenure and will only need to renew his own-damage part annually. While such guidelines are yet to be put in place, vehicle owners should remember the old saying... better safe than sorry.