Third party motor insurance

Insuring your own car against damage or theft is a choice. The workbook says so plainly: insurance of motor vehicles against damage or theft is not compulsory.

Insuring other people against what your car does to them is not a choice.

Insurance of third-party liability arising out of the use of motor vehicles in public places is compulsory. No motor vehicle can be used in a public place without it.

The word "third party" tells you who is protected. The first party is the insurer. The second is you. The third is everybody else on the road.

So this cover does not pay to repair your car. It pays what you owe somebody else, because you hit them or their property.

That is why the law insists on it and leaves the rest to you. Your own dented bonnet is your problem. A stranger's broken leg is not only yours.

What the policy indemnifies. Section 3.1.2(c) states it in one long provision. The company indemnifies the insured in the event of an accident caused by, or arising out of, the use of the motor vehicle, anywhere in India, against all sums — including the claimant's cost and expenses — which the insured becomes legally liable to pay in respect of:

Read limb (ii) carefully. It excludes the insured's own property and anything he is holding for someone else. The cover faces outward.

So a motor policy has two halves, and only one is compulsory.

On the no claim bonus. The workbook defines it as a reduction in next year's car insurance premium for own damage where no claim has been made for a specific number of years, and says it can go up to 50% of the premium amount where no claims have been made for 5 years. It also notes that the bonus belongs to the insured person and not to the car — sell the car and the new owner gets nothing, while the original owner can transfer the bonus on the own damage premium to a new car. A policy shifted at renewal carries the bonus to the new insurer.

How the premium is set. Section 3.1.1 says the premium is a function of the sum insured and the assessed risk, and names the risk factors the insurer uses for motor cover: the cubic capacity of the vehicle, its place of registration and its age. The term of a non-life policy is typically 1 year, though for a two-wheeler policy it may run to two or three years.

Where it sits among insurance needs. Section 1.7.1(a) classifies motor insurance under income protection needs — protecting available income from an unexpected charge — rather than income replacement or asset protection.

The wider family it belongs to. Section 3.1.2(g) defines liability insurance generally: indemnity for damages payable under law for personal injury to third parties or damage to their property. That legal liability may arise under common law on the basis of negligence, or under statutory law on a no-fault basis, meaning where there is no negligence at all. Compulsory motor third-party cover is the one member of that family an ordinary Indian household is required by law to buy.

The rupee figures below are illustrative; the workbook gives the rule and the 50% bonus but no premium or claim amounts for motor cover.

Mr Wagle drives a small car in Nashik. His annual motor policy costs Rs 9,500 in total: Rs 6,700 for own damage and Rs 2,800 for the compulsory third-party liability portion.

What each half does when something goes wrong.

The Rs 6,40,000 is the whole point of making this half compulsory. Mr Wagle could not have paid it; the pedestrian would have recovered nothing.

What he could drop, and what he could not. He could legally drop the Rs 6,700 own damage portion and drive on the Rs 2,800 third-party cover alone. He could not do the reverse. Without the third-party cover he may not use the vehicle in a public place at all.

And the bonus he would lose. After 5 claim-free years his no claim bonus has reached the workbook's maximum of 50%, taking the own damage premium from Rs 6,700 to Rs 3,350. He then sells the car. The buyer gets no bonus at all, because the bonus attaches to Mr Wagle and not to the vehicle — but Mr Wagle can carry the 50% across to the own damage premium on his next car.

Chapter 3 (Features of non-Life Insurance Products), section 3.1.2(c) on Motor Insurance, carries the indemnity provision, the two limbs, and the sentence candidates are examined on: own-damage and theft cover is not compulsory, third-party liability cover in public places is. The three "lesser known facts about Car Insurance" that follow give the 50% no claim bonus after 5 years, the bonus attaching to the person rather than the car, and the variability of the own damage premium. Section 3.1.1 gives the motor risk factors and the one-year term, and section 3.1.2(g) places the cover inside liability insurance. Chapter 1, section 1.7.1(a), classifies motor insurance as an income protection need.

Expect a true-or-false question on which part of a motor policy is compulsory, a question on the maximum no claim bonus and the years needed to earn it, and a question on whether the bonus passes to the buyer of the car — it does not.

• Only the third-party liability portion is compulsory. Cover for damage to or theft of the vehicle itself is not, and the workbook says so in the same sentence.
• The compulsion is tied to use in a public place. That is the workbook's wording, not "anyone who owns a vehicle".
• Limb (ii) excludes the insured's own property, and property he holds in trust or in his custody or control. Third-party property damage means somebody else's property.
• The claimant's cost and expenses are inside the cover, not extra. The insurer indemnifies all sums the insured becomes legally liable to pay, including those.
• The no claim bonus is defined on the own damage premium, and the workbook does not state a bonus on the third-party portion.
• The no claim bonus belongs to the person, not the car. Sell the car and the buyer gets nothing; the seller carries the bonus to his next vehicle.
• 50% is the maximum, after 5 claim-free years — and the workbook says the bonus "can go up to" that figure, not that it always reaches it.
• This is a specific product inside a general family. Liability insurance is the category; compulsory motor third-party cover is the named instance of it that Indian law requires. Motor insurance is the whole product, of which this is one half.
• Liability can arise without negligence. The workbook says legal liability may arise under statutory law on a no fault basis, as well as under common law on negligence.