Since the Government of India’s Motor Vehicle Act of 1983, it is mandatory for all vehicles to have a motor insurance - a third-party insurance. Despite the fact that it is mandatory, almost 60% of the vehicles on the roads of India do not have a motor insurance. For those citizens that have taken out an insurance - either a third-party insurance or a comprehensive insurance - getting your head around on how insurance premiums are calculated might be a daunting task. For those taking out motor insurance for the first time, motor insurance premium is decided based on the age and the model of the car. This is where IDV (Insured Declared Value) comes into play.
Types of Car Insurances
Before we get into what IDV is and how it is calculated, it is important to first know the types of car insurance one can avail. There are two types of car insurances:
- The first is a third-party insurance plan, also known as compulsory insurance. It is mandatory for vehicles in India to at least have third-party insurance. As already mentioned, third-party insurances covers the costs of damages, injury, death, of the the third-party involving the vehicle of the first-party.
- The next car insurance is comprehensive insurance. Comprehensive insurance is beneficial as it covers the damages (vehicle damage, injury, death) caused to both - the first-party and the third-party - in the case of an accident, natural calamity, fire, etc.
What is an IDV (Insured Declared Value)?
In simple terms, IDV is basically the market value of your car. Based on the IDV, the insurance company decides on the claim settlement amount it will disburse in the case of total loss of the car. A constructive total loss is when the loss incurred - due to an accident or in an instance when the car has been stolen - is more than 75% of the IDV. For example, if the IDV of the car at the beginning of the policy is Rs.3 lakh, based on the model and age of the car, at no point can the insurance claim of the first-party exceed Rs.3 lakh, even if the car has been stolen or has been heavily damaged following an accident, natural calamity, etc.
How IDV is calculated?
The Insured Declared Value is calculated based on the current selling price of the vehicle, the brand and the age of the car. The older the car, the less the IDV. When an insurer is computing the insurance of the car using the IDV formula, the current selling price of the car is taken into consideration and not the amount one spent to purchase the car. For example, if the car which was bought in 2014 was priced at Rs.11 lakh, but now costs Rs.9.5 lakh, the current selling price of Rs.9.5 lakh will determine the IDV. The additional accessories fitted in the car after the purchase is also taken into consideration when calculating the IDV of the car.
| Age of the car | IDV |
| New (0 to 6 Months) | 95% (Ex-Showroom Price) |
| 6 Months to 1 Year | 85% |
| 1 Year to 2 Years | 80% |
| 2 Years to 3 Years | 70% |
| 3 Years to 4 Years | 60% |
| 4 Years to 5 Years | 50% |
| 5 Years and Above | Flexible |
IDV Formula
IDV = {[Ex-showroom price + Sales Tax + Accessories that are not included in listed selling price – depreciation] – Depreciation + Registration costs + Insurance costs}
How IDV is calculated for vehicles more than 5 years
For cars more than 5 years or vehicles that have become obsolete, the IDV is based on the condition of the car and its age. A mutual agreement is made between the insurer and the insurance policy holder when it comes to deciding the IDV of the car insurance. The age of the car, condition of the car, miles done are some of the factors that determine the IDV of the car insurance. It is important to know that the IDV depreciates with the age of the car. Taking out an expensive insurance for a car more than 5 years old is not an advisable option.
Why you shouldn’t claim a higher or lower IDV that the market value of the car when taking out a car insurance
There have been cases when people have claimed higher or lower IDV than the market value of their vehicle when taking out a car insurance. The reason why people go with a lower
IDV than the market value of their car is because they wish to pay lower premiums. In the case of an accident, in this case, one would need to shell out from their own pocket for added expenses over the insurance claim. At times, people have even claimed a higher IDV that the market value of their car when taking out an insurance. During the claim settlement process, the age of the car and the relative rate of depreciation results in one getting a lower claim settlement despite claiming a high IDV when taking out the insurance.
Insured Declared Value plays an important role in deciding the claim settlement of a car insurance in the instant of an accident, theft, natural calamities, etc. For those taking out a car insurance, it is important to know how the age and the condition of the car plays a vital role in claiming for insurance. Make sure that your IDV is aligned with the above mentioned factors, else you’re in for a shock when the insurance company computes your IDV - a deciding factor of the amount of insurance one can claim.
GST Update: GST of 18% is applicable on car insurance effective from the 1st of July, 2017
