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Depreciation Loss in Vehicle Insurance? Think Zero!

You have bought a "Comprehensive" Insurance Policy to insure your vehicle.

However, when any damage happens, the claim payable is only a part of the total cost of repairs. This often leads to disputes.

The reason is (a) confusion about the term 'comprehensive' and (b) ignorance about the term 'depreciation'.

Let's first understand what is comprehensive insurance cover.

An accident can cause damage not only to you and your vehicle, but also to a third person and his property.

Any injury / death of a third person and / or damage to his / her property, on account of any accident caused by your vehicle, is known as Third Party Insurance. It is COMPULSORY to have this third party insurance cover. (By the way, it also includes compulsory personal accident cover for the owner-driver.)

However, third party insurance does not cover any damage to your vehicle. To cover for loss / damage to your vehicle, you have to opt for Own Damage cover. It is OPTIONAL to buy own damage insurance cover. (Of course, it is advisable to cover for damages to own vehicle too.)

A policy that insures your vehicle against both the Third Party Liability and Own Damage, is known as Comprehensive Insurance policy.

In other words, the word "comprehensive" does not mean that ALL your repair costs would be "fully" paid by the insurance company. It only means that it will insure your vehicle against various kinds of risks.

As per IRDAI guidelines, the insurance company will indemnify you against any loss or damage to your vehicle (and the accessories), due to
- fire, explosion, self-ignition or lightning
- burglary, housebreaking or theft
- riot and strike
- earthquake (damage due to fire and shock)
- flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost
- accidental external means
- malicious act
- terrorist activity
- whilst in transit by road, rail, inland-waterway, lift, elevator or air 
- landslide, rockslide

Zero Depreciation Cover to leave you smiling among many disappointed faces.

But when it comes to paying the claim, the insurance company will reimburse only the "value of the old part" (and not the price of the new part).

Now, it is obvious that the value of the part goes down, as the age of the vehicle increases. This, in common parlance, is know as depreciation. Depreciation is nothing but reduction in the value of a product with use.

In other words, when any part of your vehicle is damaged, your loss is the value of that "old depreciated" part.

Some parts depreciate faster than the others. Consequently, as a vehicle comprises many different parts made from different materials, the insurer applies various depreciation rates.

Rates of depreciation, as per IRDAI guidelines, are as under:
(a) 50% for rubber, nylon/plastic parts, tyres and tubes, batteries and air bags
(b) 30% for fiber glass components
(c) Nil for all parts made of glass
(d) As per age of the vehicle for all other parts including wooden parts
   - Nil : Not exceeding 6 months
   - 5%  : 6 months to 1 year
   - 10% : 1 to 2 years
   - 15% : 2 to 3 years
   - 25% : 3 to 4 years
   - 35% : 4 to 5 years
   - 40% : 5 to 10 years
   - 50% : Exceeding 10 years
(e) 50% on the material cost only of total painting charges (For consolidated bills, material component would be considered as 25% of the total bill, for the purpose of applying the depreciation.)

Thankfully, you have an option to avoid losing money on depreciation.

It's an add-on cover called 'Zero Depreciation'.

If you opt for this add-on cover, you become eligible to receive the "actual replacement cost" i.e. no deduction is applied on account of depreciation.

Naturally, you have to pay extra premium for this benefit. Normally, it would cost you around 20-30% more than the standard comprehensive policy.

In addition to the extra premium, there are a few caveats too...
... this cover is mainly available for new cars, up to 3-5 years of age
... there may be a limit on the number of claims in a year
... normal wear and tear is not covered
... normal mechanical breakdown too is not covered

In this regards, it is extremely important to read the "Exclusions" clause, to fully understand and appreciate what is covered and what is excluded.

But wait:

You should NOT blindly buy this add-on 'zero-depreciation' cover.

Parts used in mid / big cars are normally quite expensive. Moreover, buyers of such cars usually have big budgets. So, it probably makes sense for them to opt for the Zero Depreciation cover.

Small-car buyers could probably save this extra premium. Moreover, as mentioned in my earlier post '10 Ways to Save Money on your Car Insurance Premium', it is not advisable to claim for minor damages. As far as feasible, one should not lose the benefit of No-Claim Bonus, which goes up to 50% and is available year after year... and for each vehicle you own.

Finally, I guess, you have to make a choice depending on your driving pattern and budget.

Last but not the least, here's the list of 'Ten key aspects of vehicle insurance that you must know'.

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