Difference between comprehensive insurance & third-party insurance

A gig worker’s insurance struggle

On May 13, 2024, a 120-ft x 140-ft hoarding—more than 1.5 times its permitted size—collapsed onto a petrol pump in Ghatkopar, Mumbai, unable to withstand a strong 12-minute gust of wind. The state government announced it would cover the medical expenses of the injured and provide an ex-gratia payment of ₹5 lakh to the families of the deceased, but survivors did not receive similar support. Insurance was their only recourse. 

Pravin Kumar narrowly escaped injury by jumping under a truck waiting in the petrol pump queue. His motorbike was damaged in the collapse, but when he inquired about insurance coverage at the workshop, he was informed that his third-party insurance did not cover such incidents.

"I had paid for insurance on my vehicle, but no one informed me about the need for ‘First Party’ insurance. I’m now trying to understand these insurance issues after this disaster," said Kumar, a gig worker who bought his motorbike over two years ago.

This real tragedy underscores the critical importance of insurance. Insurance provides financial protection in disasters and while government aid can be crucial there remains a gap in immediate support that insurance can help fill. Pravin's situation reveals how having only third-party insurance, which typically covers damage to others, is insufficient for personal vehicle damage or other incidents. Awareness of comprehensive coverage is essential. 

Let’s explore what the word comprehensive in insurance entails and the key differences between comprehensive and third-party insurance, so we can avoid making similar mistakes when purchasing auto insurance.
 

Comprehensive insurance Vs Third-party insurance

The term comprehensive in insurance is often used in the context of auto insurance. This type of insurance provides protection to the insured vehicle against a wide range of non-collision-related events. Such as, damage from theft, vandalism, natural disasters, or hitting an animal. It covers both third-party liabilities and personal damages from unforeseen events. In contrast, third-party insurance only covers liabilities related to damages caused to others. Simply put, comprehensive insurance offers all the advantages of third-party insurance, plus additional benefits.
 

Differences at a glance

Here is a summarized version of the key differences between comprehensive and third-party insurance that we will delve deeper into within this blog:

Coverage

When choosing vehicle insurance, understanding the coverage differences between comprehensive and third-party policies is crucial. Comprehensive insurance offers extensive protection. In contrast, third-party insurance is more limited, focusing solely on covering damages and injuries you cause to others. This distinction can significantly impact your financial security and peace of mind in the unfortunate event of an accident.

Premium rates

Third-party insurance rates are determined by the industry regulator (IRDAI). These rates are pre-defined for four-wheelers, two-wheelers, electric vehicles etc. according to various cubic capacities (cc) of their engine. Therefore, the engine capacity is the sole factor influencing third-party premium rates. You can check these numbers on IRDAI website here. 

Factors that affect comprehensive insurance

Premium rates for comprehensive insurance are generally higher than third-party insurance. The premium amount for comprehensive insurance is influenced by several factors:

> Vehicle type and model: high-value or luxury cars generally have higher premiums due to their higher repair or replacement costs.

> Age of vehicle: older vehicles may have lower premiums due to reduced repair costs, but they may also have a higher depreciation rate.

> Location: premiums may vary based on geographical location, considering factors like crime rates and the frequency of natural disasters.

> Driver’s Profile: Factors like the driver’s age, driving experience, and claim history can impact the premium.

> Claim History: A history of frequent claims can increase premiums.

> No Claim Bonus (NCB): A discount on the premium for claim-free years, which can reduce the overall premium.

> Insured Declared Value (IDV): The IDV, which is the vehicle’s current market value, affects the premium; a higher IDV results in a higher premium.

> Security Features: Vehicles equipped with advanced security features (e.g., GPS tracking, anti-theft alarms) may qualify for lower premiums.

> Add-Ons: Choosing additional coverage options, such as zero depreciation or roadside assistance, can increase the premium.

These factors collectively determine the comprehensive insurance premium, reflecting the level of risk and coverage provided.

How to calculate IDV

Insured Declared Value (IDV) is the maximum amount an insurance company will pay in case of a total loss or theft of your vehicle. It represents the current market value of the vehicle, factoring in depreciation. This calculation is required only to determine the cost of comprehensive insurance since your own vehicle value is irrelevant to third-party insurance. 

The IDV is determined based on the vehicle’s make, model, age, and condition. Formula to calculate IDV is as follows:

i) With Accessories

IDV = (Manufacturer’s Selling Price – Depreciation Cost) + (Accessories Cost – Depreciation of These Accessories).

ii) Without Accessories

If you have not added any accessories to your car, then the formula is IDV = Manufacturer’s Selling Price – Depreciation Cost.

Standard Car Depreciation Rate for IDV Calculation

Understating or overstating your IDV is never a good idea. Inaccurate depiction of your vehicle’s value can lead to denial of your insurance claim.

Motor Vehicles Act 1988 

Sections 145, 146, and 196 of the Motor Vehicles Act, 1988, are crucial for upholding road safety regulations. These sections address the "Duty to Insure Against Liability" and the "Power to Arrest and Seize Vehicles." They ensure that every vehicle on the road has the required insurance coverage, thereby safeguarding the public from financial burdens resulting from road accidents. 

To support effective enforcement, these sections grant law enforcement the authority to promptly act against violations related to vehicle insurance. Here’s a detailed breakdown of what they entail:

> Obligation to insure: It mandates that every person who owns a motor vehicle must have insurance coverage for third-party liabilities. This means that insurance must cover any legal liabilities arising from accidents involving the vehicle, including damages or injuries caused to other people or their property.

> Power of police to arrest without warrant: It grants police officers the authority to arrest without a warrant any person found committing an offense related to the insurance provisions of the Act. This typically involves cases where the vehicle is being used without valid insurance.

> Seizure of vehicle: In addition to arresting the driver, the police can also seize the vehicle if it is found operating without the necessary insurance coverage.

> Procedure and consequences: The section also outlines the procedures to be followed once a vehicle is seized or a person is arrested. This includes taking the individual to the police station and presenting them before a magistrate, and ensuring that the vehicle is not used until insurance compliance is verified.

In case of a violation of the insurance requirement, the penalties are outlined in Section 196 of the Motor Vehicles Act, which includes fines and other legal repercussions for non-compliance. As per the latest amendments to the Act:

> Fine: The punishment for not having a valid insurance policy is a fine of up to ₹2,000 for the first offense. For subsequent offenses, the fine can be up to ₹4,000.

> Imprisonment: Alternatively the accused can face an imprisonment of up to three months.

Note that penalties may be updated, so it's a good idea to check the most recent amendments or consult legal resources for the latest information. To do this you can search the keyword ‘insurance’ on indiacode handle. Or you can find the entire pdf on Motor Vehicles Act here. 

What to choose

To determine the appropriate insurance for your vehicle, consider its age and usage. For older vehicles that are used infrequently and have a lower value, third-party insurance is often more economical. This is because the cost of repairs is generally lower than the premium for comprehensive insurance. On the other hand, for new or high-value vehicles, comprehensive insurance with a zero depreciation add-on is more suitable.

Tip: Choose the right insurer. Your insurer may offer value-added services, such as instant pickup and free doorstep delivery, which can be extremely beneficial in emergencies.

Glossary

> Accidental Damage: Unintentional harm resulting from unexpected events or mishaps, such as collisions or vandalism. It often covers incidents not caused by neglect or deliberate actions, providing repair or replacement under insurance policy.

> Non-Accidental Damage: Damage resulting from deliberate actions, neglect, or misuse rather than unforeseen events. This includes vandalism, poor maintenance, or intentional destruction, typically excluded from standard insurance coverage and may not be covered for repairs or claims.

> Exclusions: Specific conditions or situations not covered by an insurance policy. These are detailed in policy documents to clarify what risks or damages will not be compensated, such as wear and tear or certain types of damage.

> Add-Ons: Optional coverage enchancements that can be purchased in addition to a standard insurance policy. They provide extra protection  tailored to individual needs, such as roadside assistance or rental car coverage.

> Consequential Damage: Indirect harm resulting from an initial event or failure, such as loss of income due to equipment breakdown. This type of damage arises as a secondary effect and is often excluded from basic insurance policies.

Why auto insurance can’t substitute for health insurance

Some people mistakenly believe auto insurance can substitute for health insurance due to the overlap in coverage for injuries resulting from car accidents. Auto insurance often provides medical payments or personal injury protection, which can cover initial medical costs from an accident. However, this coverage is typically limited to specific accident-related expenses and does not extend to broader health needs, routine care, or long-term treatments.

Health insurance, on the other hand, offers comprehensive coverage for a wide range of medical services, including preventive care and chronic conditions, which auto insurance does not cover. Thus, they serve different purposes and cannot fully replace one another. Having both types of insurance ensures you’re fully covered for all health-related needs, not just those arising from auto incidents. 

We’re here to help

If you now have a clear grasp of auto insurance and are interested in exploring health or term insurance options, check out more blogs here. For personalized assistance, schedule a free consultation call with Oneassure and find the health insurance that best meets your needs.