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Motor claim depreciation

Depreciation-Motor claim

Depericiation in car-scooter-truck insurance claims

Application of term depreciation Works dynamically under different contexts & condition & rate of application of depreciation has different yardsticks for the fields like income tax statements, bank valuations & insurance vertical. But here we are going to discuss the applicability of depreciation. In motor vehicle insurance claims only.

There are two aspects of depreciation in motor insurance policies, one is for fixing the insured declared value (IDV) of the vehicle for calculation of the premium amount to insure the vehicle & the other is the application of depreciation to calculate the claim amount in case of any mis-happening. The rate of depreciation in both the cases differ with each other. Here we will discuss the application of depreciation in case of  two/four wheeler motor claim only.

One of the fundamental principles of General Insurance is Indemnity, which means insurance contract is only to cover loss and insured can not make any profit out of it. It is due to this fundamental principle of indemnity that while settling a claim, insured is supposed to contribute for the cost of life of a subject matter (property) which he has already enjoyed by using it.

For example, if a car has life of 15 years and it meets with accident in 3rd year. Then its owner has already enjoyed vehicle for 3 years and he suffers a loss of 12 years residual life of the vehicle and thus in event of loss to the vehicle, its owner is eligible to get a claim equal to the value of 12 years residual life only and not full cost of vehicle.

Now to evaluate life of a vehicle or a machine or any property, it varies according to its use and also maintenance. Less driven vehicle and well maintained one will have longer life as compared to more driven and negligently maintained vehicle. Thus, Such a variation of property life give a ground of dispute between insured and insurers on rate of depreciation.

In order to avoid such dispute, motor insurance policy gave defined rate of depreciation depending on the material of which the part is made of.

Motor Policies mention following rates of depreciation

  1. Glass – Rate of depreciation per year
  2. Rubber & Plastics depreciation per year 50%
  3. Nylon & fiber depreciation per year 30%
  4. Paint material depreciation 50%-As per IRDA guidelines paint material is calculated @ 25% of the total paint labour cost & so the paint depreciation works out to be 12.5% of the paint total paint labor bill.
  5. Metal parts depreciation according to age of vehicle as under

a. 6 months to 1 year                                                           5%

b. 1year to 2 years                                                                10%

c. 2 years to 3 years                                                             15%

d. 3 years to 5 years                                                            35%

e. 5 years to 10 years                                                           40%

f. 10 years & Above                                                               50%

 

Above deprecation rates are applicable in event of claims across all type of vehicles i.e cars, scooters, trucks, buses etc. and are uniform for the policies of all the 25 insurers operating in the country.

Notably above rates of depreciation were fixed almost 50 years back and taken as an average in view of the usage of vehicle generally and also the material used. Notably the plastic use in vehicles has come in 80s and prior to that there were broadly metals, rubber and glass used for vehicle components.

It may be seen that rubber components were subjected to 50% depreciation from day one. The reason for this was that rubber component has a shelf life i.e. it deteriorates with time even if not used. Secondly the rubber part once fixed, looses its original property after opening and technically it requires to be replaced. Thus, considering these two facts, rubber parts were subjected to 50% depreciated and that was considered to be fair indemnity in insurance claim.

Later when plastic also became an important material being used in vehicle components, then insurers fixed the same rate of depreciation for plastics also as that of rubber parts. But analytically, this is against the principle of indemnity. Plastic does not deteriorate like rubber nor has a limited shelf life. In fact plastic decays much longer than even metals. Thus 50% depreciation on plastic is against the fundamental principle of Insurance i.e. indemnity as the proper reshaping of the plastics was quite difficult Insurers have enforced this rate of depreciation @ 50%.

Plastic is now freely used in car components. In accidents and claims, such parts are vulnerable to be damaged. In premium cars the cost of spares is high and accordingly depreciation is also high.  For example, a Head Light of Mercedes Car (some models) costs  5 Lacs and it is made of plastic. Accordingly, it attracts depreciation of 2.5 Lacs, which is fairly high to be borne by insured also.

However new technologies have now come in market for welding/repairing of plastic components. Welding machines and welding material for plastic are now available in India. But manufacturers object to the repairing of the plastic parts for their profitability. Consumers should be willing to accept such repairs and Insurance companies must talk to vehicle manufacturers and adopt this new technology for benefit of Consumers and also for insurers. In order to challenge this anomaly on fundamental principles, Consumers must bring and represent to Regulator and get the same corrected.

Insurance companies have now started offering insurance cover with zero depreciation and charge additional premium for the same. The said policy is also known as Nil depreciation or bumper to bumper policy. Insured gets an advantage that he is not to Contribute any depreciation in even of a claim and entire cost of repairs is borne by the Insurance Company. But Insurance companies however charge extra premium which varies from company to company and is around 15% of standard policy premium or above. Such policies are again subject to some special conditions also, like Such add on cover for zero Depreciation can be enjoyed for some fixed number of claim  only during a policy period. After two claims The policy is standard Comprehensive Policy only.

It is the discretion of Insured to decide that should he buy a zero Depreciation policy or a standard Comprehensive policy. Zero Depreciation policy is issued to New vehicles and normally up to the age of 5 years. It is advisable that zero depreciation policy is purchased for new vehicle and certainly for middle and high end cars. Consumers should thoroughly study the conditions laid by different insurers in their zero depreciation policies as these conditions are different by different insurers. Insurers should also apprise car owner on this add on cover and its conditions to facilitate the proposer to take a decision.

For benefit of readers following table is given a chart of comparison to adjudge the benefit of zero dep/Nil dep/Bumper to bumper policy.

Value of Car Premium of Comprehensive policy (OD portion only) Extra Premium for Zero depreciation Cover @15% Value of parts Amount of depreciation

( Subject to veh. age & type of parts)

Depreciation to be born by policy holder in Comprehensive policy. ( as per age & type of parts) Amount to be born by Nil depreciation Policy Holder
1000000.00 20000.00 3000.00 100000.00 25000.00 25000.00 Nil

 

It can be seen from above table that by paying an additional premium of Rs. 3000.00 one got benefit of 25000.00 in event of claim. But if claim amount is less or there is no claim and applicable depreciation is less than extra premium or it is zero in event of no claim, then extra premium is paid without benefit. But this applies to the entire premium paid also. Here once again insured must study the terms of zero depreciation by insurers as the contribution of insured may not be zero always if there are some special conditions laid in policy. For example some insurance policies give riders that Tyre’s  Tread worn beyond certain limits will get a claim of percentage and not full.

In any case keeping in view the use of plastic & rubber parts in new vehicles, the writer is of the opinion that new vehicles being driven in Metro cities must be purchased with zero depreciation policy to keep the risk of loss lower.

 

Depreciation For IDV calculation: IDV is the value of motor vehicle fixed to calculate the amount of premium to be charged for insurance cover. This is the fixed value to be paid in case the vehcile is declared as total loss. The value remains the same throughout the currency of the one policy period.

Depreciation chart for IDV calculation for vehicle insurance policy

Age of the car                                                                        Depreciation

Less than 6 months                                                                       5%

More than 6 months but not exceeding 1 year                      15%

More than 1 year but not exceeding 2 years                          20%

More than 2 years but not exceeding 3 years                       30%

More than 3 years but not exceeding 4 years                       40%

More than 4 years but not exceeding 5 years                       50%

More than 5 years                                                                           Mutualy agreed between insured & insurer

 

Now some insurers have also come up with a fixed depreiciation chart for vehcicles aged between 5 to 8 years.

Exceeding 5 years but not exceeding 7 years 55%

Exceeding 7 years but not exceeding 8 years 60%

Exceeding 8 years but not exceeding 9 years 65%

NIC Depreciation table for IDV & TL claim calculation

IRDA Depreciation table for motor insurance policy

So the IDV is considered as the depreciated value of the vehicle & is calculated by applying the above formula & in case of Total loss of the vehicle this is the maximum value to be paid as compensation even if you are having a zero depreciation policy. So thee is no difference in normal depreciation & zero depreciation policy in case of a total loss motor claims.

 

However to cover up the above anomalies, the insurance companies have devised another add-on policy called “return to invoice”.in which the insured is entitled to receive the claim amount equivalent to the current purchase  price of brand new car in lieu of his old damaged car. So in other way ” return to invoice” insurance policy is another version of Zero depreciation insurance policy in case of the total loss insurance claims.

 

 C K BHATIA

Surveyor & loss assessor  

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