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Understanding Depreciation: A Comprehensive Guide to Motor Insurance Depreciation

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Introduction

Mr. Sunil had a Honda City car and in order to safeguard himself, he bought a comprehensive motor insurance policy. While purchasing the policy, his focus was on buying the cheapest plan and without understanding the coverages, he simply choose the plan with the lowest premium.

Unfortunately, 6 months later his vehicle met with an accident and the garage provided a repair estimate of Rs. 1.8 lacs. He filed a claim with the insurer for cashless repairs but to his surprise, when the surveyor came, he allowed for a claim of only Rs. 1,03,000/-. 

On questioning the reasons for deductions, the surveyor told him that he had not taken a Zero Depreciation or Nil Depreciation cover in his policy. Till this time, Sunil had no understanding of depreciation, but he realized how important it is to understand the coverages and not to just be penny wise and pound foolish. 

What is Depreciation: Definition and Implication in motor policy

As per accounting definitions, the monetary value of any asset decreases over time as it is used, experiencing wear and tear. This reduction in value is depreciation, which is calculated differently for various assets based on their lifespan and other factors.

Similarly, all motor vehicles are subject to depreciation. As they are used, their value decreases due to wear and tear. To calculate this depreciation, specific criteria are applied, which we will discuss below.

Types of Depreciation

Please note that there are two types of depreciation slabs that are levied on a motor vehicle:

Depreciation of the total value of a car: As soon as a car is driven out of the showroom, its value gets reduced. In fact, for a brand-new vehicle being purchased, the IDV taken by the insurer is 95% of the actual value, thus, deducting 5% as depreciation costs.
Also, every year the value is reduced by the insurer in the IDV in order to reduce depreciation costs. This depreciation is calculated based on the age of the vehicle and the slabs defined for the same are as below

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AGE OF THE VEHICLE % OF DEPRECIATION FOR FIXING IDV 
Not exceeding 6 months 5% 
Exceeding 6 months but not exceeding 1 year 15% 
Exceeding 1 year but not exceeding 2 years 20% 
Exceeding 2 years but not exceeding 3 years 30% 
Exceeding 3 years but not exceeding 4 years 40% 
Exceeding 4 years but not exceeding 5 years 50% 

For vehicles exceeding 5 years of age, the IDV is decided by mutual understanding of insurer and insured. It needs to be noted that IDV cannot be changed later in the event of a total loss or constructive total loss (Constructive Total Loss: where the cost of repairing or retrieving the vehicle is more than 75% of the IDV).

Depreciation on the various parts of the vehicle in case of partial loss claims

The depreciation not only applies to the total value of the car but also to various parts of the vehicle. For better understanding, let us say that you have a 2020 model of Maruti Wagon R. Now, in an accident, the bumper, bonnet, and headlights get damaged and need replacement.

The company cannot always get parts of 2020 and replacing the old parts with new will not be right with the law of indemnity. Hence the insurer deducts depreciation factor on these parts.

For different types of parts, the depreciation is different:

  1. For all rubber, nylon, plastic parts, tyres, tubes, battery and air bags: A fixed rate of 50% is deducted irrespective of age of the vehicle.
  2. For fiber glass components it is 30%
  3. For labor charges and glass components depreciation is NIL
  4. For all other parts i.e. metal parts, wooden parts etc.
AGE OF THE VEHICLE % OF DEPRECIATION 
Not exceeding 6 months Nil 
Exceeding 6 months but not exceeding 1 year 5% 
Exceeding 1 year but not exceeding 2 years 10% 
Exceeding 2 years but not exceeding 3 years 15% 
Exceeding 3 years but not exceeding 4 years 25% 
Exceeding 4 years but not exceeding 5 years 35% 
Exceeding 5 years but not exceeding 10 years 40% 
Exceeding 10 years 50% 

The depreciation on these parts is decided as per the above slab rates and only after deduction of the said % a claim is processed.

SAFEGUARDS: Choosing the right Add-Ons

The question arises, how to save your pocket from the above heavy depreciation deductions and the answer to this is plain and simple, get the required Add-Ons in your policy.

NIL DEPRECIATION – Zero Depreciation cover – Bumper to Bumper: There are multiple names to this cover, but the benefit is what is important. This cover provides safety from the depreciation deductions on the parts in case of partial loss claims. It is very important to have this add-on, especially in today’s times where replacing the damaged parts of the vehicle is very costly and depreciation deduction on the same can cost dearly.

Return to Invoice Cover: This cover helps against the total loss and CTL claims against the depreciation of the total value of the car. This add-on gets you the complete invoice value of the car along saving you from the depreciation deductions and also helps in getting back the registration and road tax costs.

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Conclusion

At the time of taking a motor policy, ensure that Nil depreciation and RTI covers are taken in order to safeguard yourself from depreciation deductions in case of partial, total and constructive total loss scenarios.

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By- Chirag Nihalani

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