In India, the law makes it mandatory for every vehicle to be equipped with a Motor Insurance policy with at least third-party liability coverage. With this in perspective, all car owners are also encouraged to buy adequate insurance for their vehicles so that they have a financial safety net to fall back on in the unfortunate event of an accident.
The Significance of Insured Declared Value:
In car insurance parlance, the concept of Insured Declared Value (IDV) is of utmost importance. It is essentially the maximum amount the car insurance company will pay you in the event of a total loss claim. So, if your car is stolen or is damaged in an accident beyond repair, the sum insured that you are liable to receive will be equivalent to the IDV of the vehicle.
So, in the interest of the policyholder, this begs a very significant question - who decides the IDV and how?
The Insured Declared Value is the current market value of the vehicle minus the depreciation on its parts. The cost of registration of the vehicle and its insurance premiums are excluded from the IDV. If the accessories in the car are not factory-fitted, then the IDV of these parts are calculated separately as well.
Total Loss Claims - Depreciation of a Car with Age:
Every vehicle depreciates with time. Apart from the wear and tear incurred with usage, the age of the car also contributes to its depreciation value. In fact, the depreciation on a car is applicable from the time it is driven out of a showroom! So, a brand new car that may be a day old is also considered to have depreciated in value by 5%.
The rate of depreciation considered to be effective across the motor insurance industry is as elucidated in the table below:
|Age of the car||Percentage depreciation (for calculation of IDV)|
|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||The IDV is calculated based on a mutual agreement between the insurer and the policyholder.|
As indicated in the table above, for vehicles that are more than 5 years old, the depreciation factor is not considered for calculation of IDV. It is based on vehicle assessment done by surveyors appointed by the insurer. Following the survey, the stakeholders arrive at a figure for the IDV on the basis of mutual agreement. The type of the car, make and model, and its availability also play an important role in deciding its IDV.
A vehicle is tagged as constructive total loss (CTL) when the cost of retrieval/repair exceeds 75% of its IDV.
Depreciation of Car Parts for Claims Pertaining to Partial Loss:
For partial loss claims the depreciation is applied on the car parts. The following rates are applicable for the replacement of parts for all categories of four-wheelers:
- The rate of depreciation for nylon/plastic parts, rubber parts, tubes and tyres, batteries, and airbags is 50%
- The depreciation rate for fibreglass parts is 30%
- For all car parts made of glass, the depreciation rate is nil.
- The rate of depreciation for all other parts is as per the following table:
|Age of the car||Percentage depreciation|
|Below 6 months||nil|
|6 months to 1 year||5%|
|1 year to 2 years||10%|
|2 years to 3 years||15%|
|3 years to 4 years||25%|
|4 years to 5 years||35%|
|5 years to 10 years||40%|
|More than 10 years||50%|
IDV Calculator for Cars:
The calculation of the IDV is based on the manufacturer’s selling price of the vehicle with depreciation deducted from it. The formula to calculate the IDV of a car is as follows:
Insured Declared Value = (Manufacturer’s listed price - depreciation) + (Cost of accessories not included in the listed price - depreciation of these parts)
The above formula considers that the car is equipped with additional accessories that were not part of the vehicle at the time of purchase. In case you do not have any such accessories in the vehicle, the IDV calculation is as follows:
Insured Declared Value = Manufacturer’s listed price - depreciation
It should be noted that the depreciation is taken from the values in the tables above.
IDV and Car Insurance Premium:
The you will be paying is directly proportional to the IDV of the vehicle. This implies that the premium decreases with the age of the car. From the policyholder’s perspective this makes complete sense, as it is not cost-effective to pay a high amount for insuring an old car.
IDV and Car Insurance Renewal:
The value of your car varies every year because of the depreciation factor. So when you renew car insurance, you should not just look at the premium quote that the insurer offers you. Check the IDV that you will get for that premium. The higher the IDV for each rupee of premium, better is the value of that insurance policy.
Another point to note is that when you get a “discount” in car insurance from an insurance company, you should look at the coverage carefully. It is quite probable that the insurer is offering the discount for any of the following reasons:
- The IDV of your vehicle has been reduced in the policy documentation
- The insurer has added a voluntary deductible that you will have to pay at the time of a claim
- The standard policy benefits have been reduced
If you are renewing car insurance online, there is more clarity on the coverage, as you can read through the policy terms and conditions before making a payment.
At the time of policy renewal, you would have noticed that different insurance companies offer you policies with different values of IDV for your car. So which one should you select? It is to be noted that the variation in IDV across policies would result in differing premium quotes. You should always look for the policy with IDV that is closest to the actual value (based on the depreciation table for total loss claims above). If the premium for such a policy is within your budget, then you should go for it. Also after you buy the policy, read through the cover notes to ensure that the values you agreed upon are the same as that in the policy documentation.
Points to Note When Calculating the IDV:
- The IDV of your car varies based on its age according to the schedule (tabulated above) provided by IRDA. As the owner of the car, it is your responsibility to be aware of its IDV. Otherwise, you may not receive adequate compensation at the time of a claim.
- At the time of buying Car Insurance, you should take care not to understate the IDV of the vehicle. If you quote a value that is lesser than the actual market value of the vehicle, you may benefit from paying a lower premium for insuring it. But you will also receive lesser coverage.
- On the other hand, overstating the IDV is also not recommended. If you think that you will receive a higher sum insured by quoting greater IDV, you will be disappointed to know that it does not really work that way. At the time of receiving a claim payout, the amount the insurer provides you will depend on the type of loss and circumstances as much as its IDV. So, overstating just your IDV may not have a significant impact. In fact, if the insurer finds out that you have provided inaccurate information, the validity of your claim may be jeopardised.
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