Sumit gifted a brand new car to his wife Devi on her birthday. The car was insured against damage or loss with Wheels Insurance Company for an amount of ₹ 5 lakh with a deductible of ₹ 75,000 from her coverage. One day,
CS Professional · Insurance - Law & Practice · PYQS · June 2023
Sumit gifted a brand new car to his wife Devi on her birthday. The car was insured against damage or loss with Wheels Insurance Company for an amount of ₹ 5 lakh with a deductible of ₹ 75,000 from her coverage. One day, Devi, who was an experienced, driver, took the car out to visit her friend. On the way to her friend's place, she had to stop at a traffic signal. Although she stopped her car to avoid jumping the signal, a speeding driver from behind rammed into her car. The impact of the collision was such that Devi suffered severe injuries and she had to be hospitalized. Her car was reduced to a wreck. Investigations revealed that the car that hit Devi's car was being driven by Amit Garg. Devi filed a claim for loss with her insurance company and received ₹ 4,25,000 as damage claim. The insurance company, in turn, sued Amit on behalf of its policy holder, Devi for the same amount that it had paid her. Amit Garg approached the court challenging the validity of the Insurance Company's suit. (ii) What is a deductible? How does an insured benefit by having a deductible clause in his insurance coverage?
Answer & Explanation:
Deductible is the amount that an insurer deducts from the amount of loss before paying the remaining amount to the policyholder. For example, if a certain company has a ₹ 50,000 deductible in its fire insurance policy, the insurer will only pay for claims that exceed ₹ 50,000. Thus, a loss of ₹ 1,00,000 caused due to a fire or some other insured peril would produce a payment of only ₹ 50,000 from the insurer. The rule related to a deductible clause is "the higher the deductible, the lower is the insurance premium for a loss exposure". This means increasing the deductible amount in the insurance policies leads to considerable savings in the premium. Businesses too stand to benefit from increasing the size of the deductible in their insurance policies. By doing so, they can achieve a savings in their insurance premiums. However, in the process, the deductible portion in the insurance must not be increased to such an extent that it becomes financially difficult for the individual or firm to bear the risk assumed.
Topics: Motor Insurance
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