In a notification issued recently to four state-run non-life insurance companies, the ministry of finance has asked them to go for negotiated settlement or out-of-court settlement of motor third-party claims. The ministry has also asked companies to discontinue the norm of issuing cover notes in order to curb fraudulent practices and contain the losses in motor third-party segment.
Though the letter is addressed to state-run insurers, it has asked private insurers to participate as well. Here's what these changes mean for you.
Faster claim settlement
You know that motor third-party insurance is a mandatory cover for vehicles plying on the road. The cover saves you from any financial liability in case your vehicle causes any damage to the life or property of a third person.
In case of an accident that causes bodily injury or loss of life, the third-party cover is unlimited and the compensation is borne by the insurance company. In case of damage to property, the liability is limited to R7.5 lakh.
Usually third-party cases that involve loss of life or injury are taken to the Motor Accident Claims Tribunal (MACT). "Court proceedings may take a much longer time to give its judgement on motor insurance claims," says Vijay Kumar, head, motor insurance, Bajaj Allianz General Insurance. "To ensure speedy settlement in case of damage to the car, it is preferable that such claims are settled through own damage cover and not through the third-party cover."
Own damage cover pays for damages to the car. Delays also occur due to shortage of judges and courts.
"Cases can drag on for three to five years that's because there aren't enough judges and courts," says Swaraj Krishnan, chief executive officer, Magma HDI General Insurance.
In order to avoid this delay, insurers go for out-of-court settlements. In an out-of-court settlement, the insurer and the third-party negotiate the compensation and arrive at a consensus. Usually the compensation is lower but the process is faster, it usually takes about two-three months. It is then filed with MACT and after getting a go-ahead from the tribunal, the claim is settled.
"Negotiated claims settle faster and so private insurers settle about 40-50% of the cases out of court," says KG KrishnamoorthyRao, managing director and chief executive officer, Future Generali India Insurance. The government has asked for more negotiated claim settlement from the insurers.
No cover note
The other big change is discontinuance of a cover note. In insurance parlance, a cover note is the first legal document that can be used as an insurance policy until the main policy document, also known as the policy bond, reaches the customer. From the insurer's point of view, the cover note is the first formal acceptance of insuring you. Cover notes are typically given for non-life insurance policies and are used in motor insurance since vehicles cannot be taken out of the showroom without a cover.
Cover notes also lead to malpractices. And this is largely due to the fact that a cover note is a physical document which is not tracked by the insurer tightly. "A policy document is in the system of an insurance company," says Kumar. "So a person can track his policy through the policy number. Cover note is a physical book and it is not in our system. It does not get into our record immediately. Hence, the chances of issuing a fake cover note are much higher."
So now the ministry of finance has directed insurers to stop giving cover notes and issue the policy directly. However, this may be difficult to implement. "It will not be easy to completely do away with cover notes. Distributors in remote locations will need a cover note to insure vehicles immediately instead of waiting for the policy document to arrive. The other big challenge is information. The policy document will need the insured's vehicle engine number, chassis and registration numbers. The registration number often does not come immediately. In the interim, the customer will need the cover note to drive his vehicle," says Krishnan.
Remember that cover note is valid for roughly 60 days after which you are expected to produce your policy documents. For instance, if cops flag you down for a traffic violation and ask for documents, you will be expected to show the policy bond and not just the cover note after 60 days of getting insured or renewing your cover.