In the realm of auto insurance, the depreciation of a vehicle as it ages can significantly affect claim settlements. It is a common misconception that a comprehensive insurance coverage would protect you from out-of-pocket expenses during the repair of your car, post an accident. In reality, the insurance provider utilises a complex formula to identify the amount that is payable. This formula takes into account the depreciation of the vehicle, and hence, you will be required to pay a considerable fraction of the overall costs.
The advantages of Zero Depreciation Cover
As implied by the terminology, zero depreciation cover provides you comprehensive coverage without factoring depreciation. If you have included the zero depreciation add-on cover in your car insurance policy, and your car is damaged in an accident, the insurer will cover the entire cost of repair of your vehicle.
A standard comprehensive cover will make estimations pertaining to the ‘current value’ of your car. The ‘current value’ is arrived at after considering the depreciation on the vehicle. If your car was damaged in a collision, the standard policy will pay for the repair, after subtracting the depreciation. On the other hand, the zero depreciation cover will pay the entire amount, irrespective of the current value.
The flip side
- An insurance policy with zero depreciation cover will cost upto 20% more than the standard comprehensive policy. So effectively, you will be paying a higher premium every year to ensure that you need not pay during a claim settlement in the future. This is not a very viable option for people who seek affordable insurance.
- The zero depreciation cover limits the number of claims that you can make on an annual basis. This is necessary from the insurer’s point of view, as it prevents customers from making claims for small issues.
- The zero depreciation cover is only relevant to new cars within 3 years of purchase. Older cars are not eligible for this cover.
Impact to the driver
If you have a standard comprehensive car insurance policy, you can only claim 50% for plastic or rubber replaceable parts and 5-50% for metal or glass parts. Since the driver bears these charges, his level of alertness on the roads will be higher.
Various studies have shown that drivers with the zero depreciation safety net were more careless on the roads. This could be due to the knowledge that all costs for car repair will be covered by the insurance. It was also seen that owners of brand new cars who had opted for the zero depreciation cover were a lot more cautious on the roads.
Who benefits from zero depreciation cover?
Zero depreciation attracts customers who are ready to pay higher premiums for peace of mind while driving. Owners of new cars will benefit more from it, as it is not cost-effective to pay higher premiums for older cars.
Car insurance is only for legal accidents
From the point of view of a new car owner, it is wise to be equipped with a comprehensive car insurance policy with zero depreciation cover. However, it should be noted that car insurance is only provided in the case of legal accidents. As per the Motor Vehicle Insurance law in India, policies will provide coverage in the following circumstances,
- Bodily injury liability - The insurance provides cover for individuals who were involved in the accident.
- Property damage liability - If there is any damage to property, personal or third party, the costs will be covered in the policy.
- Medical payments - In the event of an accident, the driver will be covered for permanent disability or death. But if there was also an injury to a passenger in the car, his expenses can be claimed under the third party cover of the insurance policy.
- Uninsured motorist coverage - This protects you when you are involved in an accident that was caused by a negligent driver who does not have a liability insurance.
- Underinsured motorist coverage - This protects you when you are involved in an accident, and the at-fault driver’s liability limits are too low to cover all medical expenses and vehicle damages.
The zero depreciation policy was introduced in the market for its customer oriented nature. Apart from the odd disadvantages that it has in terms of drivers resorting to careless driving, it is a good purchase for a car owner to whom the additional premium does not matter too much.
GST Update: GST of 18% is applicable on car insurance effective from the 1st of July, 2017