What is motor vehicle insurance?

Motor vehicle insurance is a contract between the insurance company that provides insurance cover and the person who owns the vehicle. According to the terms and conditions of the insurance contract, the insurance company reimburses the policyholder for losses and damages. This insurance policy covers the financial risks of the motor vehicle owner. Electronic vehicles are also covered in a vehicle insurance policy, but the insurance rate is relatively higher than other motor vehicle insurance. Motor vehicle insurance is otherwise called an automotive insurance policy.

Types of motor vehicle insurance

The following are the major types of motor vehicle insurance:

• Comprehensive insurance policy
• Third-party liability insurance policy

Comprehensive insurance policy

Comprehensive vehicle insurance is one of the insurance types which offers coverage for third party and policyholder’s damages and losses. This policy protects both the parties to an accident, the policyholder who committed the accident, and the victim of the accident.  This insurance covers damages and losses that arise due to accident, natural disaster damages, theft, or other losses. Electronic vehicles are insured under the comprehensive insurance policy to protect the owner and third party from damages.

What is covered in comprehensive motor vehicle insurance?

When the motor vehicle is damaged due to fire, weather, and natural disasters, the comprehensive policy protects the policyholder financially from the damages.

When the motor vehicle is damaged by a third party, comprehensive vehicle insurance covers the damages and losses of the policyholder and the third party.

When the motor vehicle is stolen, comprehensive motor vehicle insurance secures the policyholder from financial loss.

What is not included in comprehensive motor vehicle insurance?

• The depreciation value of vehicles is not included in comprehensive motor vehicle insurance. Because depreciation occurs due to the usage of an asset over the life of the vehicle.
• Comprehensive motor vehicle insurance coverage does not cover accidents if at the time of the accident the driver was under the influence of alcohol or drugs. Drunk driving is a criminal offense in states and hence, no claim would be provided in such a case to the insured.
• Damages that happen to a motor vehicle when the driver didn’t have a valid driver's license are excluded from comprehensive motor vehicle insurance.

Third-party liability insurance policy

The policyholder is required to mandatorily cover third parties from the damages and losses which is caused to them because of the policyholder’s vehicle. Third-party liability insurance protects the third party damages.

How does third-party insurance work?

The insurer should financially protect the third party in the accident when the policyholder meets an accident. The policyholder is legally liable to pay for the third party’s damages and other losses. To settle these damages, the policyholder should file a claim to the insurer along with the details of insurance, accident, the third party in the accident, and damages. The insurer conducts verification in regard to the accident and examines the damages. After verification, the insurer covers the third party for the damages.

Importance of third party insurance

Mandatory requirement: Third-party liability insurance is mandatorily required by law. This is included in the coverage options of motor vehicle insurance. A policyholder should obtain third-party insurance to protect the other party/third party in the accident from the damages.

Financial assistance: Third-party insurance provides financial assistance to the policyholder when he is liable to settle another party in the accident. A third party can legally file a claim for damages. Third-party liability insurance helps the policyholder settle the claim.

Peace of mind: Third-party liability insurance provides peace of mind to the policyholder when the third party files a claim against the policyholder. Policyholders can enjoy financial protection during financial distress.

The process to claim third-party insurance

Policyholders should comply following steps to receive compensation from insurers:

• First, the policyholder should inform the insurance company about the accident within the specified time provided in the insurance agreement.
• The policyholder should contact the police station near the accident place and file a police report. Policyholders should obtain police reports after the completion of filing.
• Policyholders should submit claims to insurers along with a checklist of damages and police reports to claim insurance benefits.
• A surveyor who is admitted by the insurer will conduct the survey about the damage and accident to identify the cost. After the completion of the survey, the surveyor should file a survey report to the insurer.
• The insurer will settle damages and losses of the third party based on the file reported by the surveyor.

Inclusions of third party insurance

Third-party insurance protects the third party from the damages. It includes bodily injuries, vehicle damages, and property damages of the third party.

Exclusions of third party insurance

• If the accident has happened due to drunken driving, then it is excluded from third-party insurance. Insurance benefits are not available in the case of drunken driving as it is a punishable offense.
• Third-party insurance excludes the insurance claim when the driver does not have a valid driving license.
• If the motor vehicle is involved in illegal activities, then third-party insurance does not protect the policyholder and third party in the accident from damages.

Components of motor vehicle insurance

The following are the features of motor vehicle insurance that the policyholders should ensure before entering into a contract with the insurance company:

Bodily-injury coverage

If the policyholder is injured in an accident, the insurance can be claimed regarding the bodily injury to the policyholder and other passengers in the car as well. However, the degree of coverage would depend on the policy opted by the policyholder.

Property damage coverage

The property damage policy covers the policyholder for any damages caused to the property of the third party. It helps the policyholder to settle the property damages of the third party in case the policyholder has caused the accident. Property damage coverage does not cover the damages of the policyholder, instead, it only covers the property damages of the other person/third party in the accident.

Collision coverage

The requirement for collision coverage is applicable only if a policyholder commits an accident with another vehicle. These coverage benefits help policyholders to settle the repair and replacement expenses of their vehicle. Collision coverage covers repair expenses of the policyholder and the other party in the accident if the policyholder hits another vehicle.

Uninsured coverage

Uninsured coverage secures the policyholder in case the policyholder is found at no-fault in an accident but the third party (accident-causing party) does not have insurance. Uninsured coverage protects the policyholder when the party causing the accident does not have insurance.

Underinsured motorist coverage

Underinsured coverage is a type of vehicle insurance coverage. Underinsured coverage is applicable when the policyholder meets an accident with another vehicle but the insurance cover for the third party is not sufficient to provide accident expenses to the policyholder. In these circumstances, underinsured coverage assists the policyholder to get the underinsured portion.

Context and Applications

This topic is significant in general studies, professional exams, and also for both undergraduate courses and postgraduate courses and competitive exams, especially for

• Bachelor of Science in Business Administration - Insurance
• Bachelor of Science in Business Administration (Finance) - Insurance
• Master of Science in Insurance Management

Practice Problems

Question 1: Motor vehicle insurance is an agreement between the owners of the vehicle and_____________.

1. Government
2. Insurance company
3. Third party

 Answer: Option (b) is correct.

Explanation: Motor vehicle insurance is a contract between the insurance company that provides insurance cover and the holder of the vehicle. As per the contract, the insurance company indemnifies the holder of the vehicle against the risk of loss or damages caused due to accidents.

Question 2: What are the types of motor vehicle insurance?

1. Third-party liability insurance
2. Comprehensive insurance
3. All of the above

Answer: Option (c) is correct.

Explanation: Third-party liability insurance and comprehensive insurance are parts of vehicle insurance. Third-party liability insurance protects the other person in the accident. The comprehensive policy protects both the parties to an accident, the policyholder who committed the accident, and the victim of the incident. 

Question 3: What is not covered in comprehensive motor vehicle insurance?

1. Depreciation
2. Damages due to accident
3. Theft

 Answer: Option (a) is correct.

Explanation: Depreciation of vehicles is not included under comprehensive insurance. The motor vehicle is depreciated throughout the life of an asset because of its usage. Thus depreciation is not included in the insurance coverage.

Question 4: What are the components of motor vehicle insurance?

1. Collision coverage
2. Bodily injury coverage
3. All of the above

Answer: Option (c) is correct.

Explanation: The requirement of collision coverage is applicable only if the policyholder commits an accident with another vehicle. The requirement of bodily injury coverage arises when the policyholder and the other party are injured in an accident. This coverage gives benefits for injury-related medical expenses to both parties in the accident.

Question 5: ________________ secure the policyholder, if he or she is in an accident with other person who don’t have insurance. And the policyholder is found no-fault in the accident.

1. Uninsured coverage
2. None of the above
3. Underinsured coverage

Answer: Option (a) is correct.

Explanation: Uninsured coverage secure the policyholder if he or she is in an accident with another person who doesn’t have insurance. Uninsured coverage protects the policyholder when the driver doesn’t have insurance.