We all need a motor insurance policy, whether it is car insurance or bike insurance, at some point in our lives. With a barrel of information and terminology surrounding car insurance, you might feel confused and overwhelmed, especially if you are a first-time vehicle buyer. However, there are certain terms you must know about. ‘Total loss’ is one such term you should be aware of when purchasing any motor insurance policy. Let us understand this term thoroughly –
What is a total loss?
Total loss is an important term in car insurance which means that the expense to repair a vehicle to its pre-damage or normal state has exceeded the actual monetary value of the vehicle. There are two situations in which a total loss can take place – if there is a car accident or car theft, in which the car gets damaged to an extent that it is no longer functional and usable.
According to section 55 of the Motor Vehicle Act, 1988 – ‘If a motor vehicle has been destroyed or has been rendered permanently incapable of use, the owner shall, within fourteen days, report the fact to the registering authority.’ This means that in case your car has been declared a total loss, then you need to immediately connect with the Regional Transport Office (RTO) within 14 days. Then you need to submit the RC or registration card and get your car registration cancelled.
How to calculate total loss?
Any car or bike is declared a total loss only when the expense of damage repair exceeds 75% of the Insured Declared Value or IDV, which is your vehicle’s approximate market value. And if the cost of repairs goes beyond 100% of the current market value, then it is declared a Constructive Total Loss. Whether it is a Total Loss or Constructive Total Loss, you as a car wonder will be compensated with the amount equal to the Insured Declared Value, which varies over time with depreciation.
This is how depreciation is calculated –
|Age of the Vehicle||Depreciation (reduction in cost) Rate for Calculating IDV|
|Less 6 months||5%|
|Between 6 months to 12 months||15%|
|Between 1 year to 2 years||20%|
|Between 2 years to 3 years||30%|
|Between 3 years to 4 years||40%|
|Between 4 years to 5 years||50%|
|More than 5 years||Mutually decided between vehicle owner and insurer|
Let us take an example to help you understand further. If the cost of a 4-year-old car was 15 lakhs during the time of purchase, then in case of a total loss situation, you can claim about 7.5 lakhs from your motor insurance provider. This is how you can do an insurance claim if your vehicle is ever declared a total loss.
Considering the above example, also note that it is crucial to set the right IDV. Because if there is a total loss situation and your car cannot be repaired, the insurer will pay this IDV which is the closest amount to the current valuation of your car and help you cover all the costs.