When not to claim your motor insurance

Mukesh Kumar, Executive Director HDFC ERGO General Insurance Company, tells you how you can benefit by doing so

For most of us, a car is a key asset. It takes care of your personal as well as business-related commute. Because it is so much a part of our lives, most of us are attached to our motor cars and consider it as a family member. We take all the care in terms of regular service, wash/cleaning and maintenance to ensure that our car stays in good shape for as long as possible. We also protect our car from any unexpected mishaps with motor insurance.

However, the reality of life is that despite all precautions, mishaps do happen -- at times due to other person's fault and sometimes due to reasons beyond our control. A motor insurance protects you from any financial liability that arises out of a mishap involving your car. Whether somebody damages or steals the car, or there is a natural disaster such as an earthquake or flood, a motor insurance protects you from any financial liability arising due to your ownership of the car.

Two types of motor insurances policies are available in India. The first type is the Liability Only cover, which insures the policyholder against any legal liability following an accident involving her/his vehicle. It does not cover any damage to the vehicle.

The other type is a Comprehensive cover, which covers all liabilities as well as damages caused to the vehicle due to an accident or a mishap.

Imagine a situation in which your car is involved in a mishap and there are financial implications to get it fixed. However, claiming the motor insurance on your car may not necessarily be the right thing to do. Let's see when not claiming motor insurance is a better option than making a claim.

Where the cost of fixing the damage to your car is lower than the No-Claim Bonus (NCB)

If you have been a good driver and you've had luck on your side, chances are that you have not claimed your car insurance in a while. Your good track record gets you a discount of up to 50 per cent on your next motor insurance premium, depending on the time period for which you've not made any claim. This discount is 'No-Claim Bonus (NCB)'.

A standard motor insurance premium has two primary components: a) own damage premium and b) third party premium. The NCB discounts are applicable on the own damage component and it accounts for more than 80 per cent of your overall motor insurance premium. Thus, the NCB discounts works out to be significant even after ignoring the Third-Party premium component.

For instance if you own a high-end hatchback and are paying an annual premium of Rs 15,000, of which the own damage premium is around Rs 12,000. As you have not made any claim in the first year, you will get an NCB of 20 per cent of own damage, which works out to Rs 2,400.

If your car is involved in a mishap and the cost of fixing is more than Rs 2,400, it is advisable that you do not claim the insurance. Paying for minor car repairs keeps your premium costs down and helps you save money in the long run.

It will help to know that your No-Claim bonus rises with every claim-free year. This discount on your motor insurance premium is usually 20 per cent for the second year, 25 per cent for the third year, 35 per cent for the fourth year, 45 per cent for the fifth year and 50 per cent for the sixth year. The value of the discount depends on the insurance claims the policyholder makes in that particular year.

NCB can be carried forward and is only allowed, provided the policy is renewed within 90 days of the expiry date of the previous policy. This means, a saving of a minimum Rs 3,000 (at 20 per cent) to a maximum of Rs 7,500 (at 50 per cent) on a premium of Rs 15,000 for a motor insurance on your car.

It is also important to know that once insurance claim is made, the NCB benefit goes back to nil. The next premium will be higher, since it will not include the amount of NCB that time. However, insurers offer an 'Add-on', which helps the policyholder retain the NCB earned on the policy regardless of a claim on the vehicle.

For instance, a policyholder having taken an 'Add-on' cover would retain her/his NCB, despite making an insurance claim in the same year. The policyholder can avail the benefit of the 'Add-on' only up to a maximum limit of three claims on policy.

When the other party involved in the mishap is proven liable for the damage

This option is subject to certain conditions. Imagine you have had five claim-free years and are expecting huge NCB benefits, and your car is involved in a mishap with another vehicle.

In such case, your options are either to pay the cost of fixing from your own pocket or file an insurance claim or file a third-party insurance claim.

If it is conclusively established with the Motor Accident Claims Tribunal that the accident occurred due to the other driver's fault, then the other party will be liable to pay for the damages to your car and you will retain your No-Claim benefit.

Illustration: Dominic Xavier/Rediff.com