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NISM-Series-X-B: Investment Adviser (Level 2) · Non-Life Insurance Products

Motor Insurance: Third Party vs Comprehensive Cover for NISM

Updated 11 October 2026

Motor insurance covers loss from accidents involving your vehicle. Third-party liability cover is compulsory under law and pays for injury, death or property damage to others. Comprehensive cover adds own damage protection. Premium depends mainly on the insured declared value, vehicle details and risk factors, then is reduced by no claim bonus.

Understand Motor Insurance

A motor vehicle can hurt other people and can itself be damaged. Motor insurance deals with both risks. It is a contract of indemnity: the insurer pays for the actual loss, not more.

Third-party liability cover (the Act-only policy) is compulsory for every vehicle used in a public place in India. It pays for legal liability to a third party for death, bodily injury or property damage caused by your vehicle. It does not pay for damage to your own vehicle. Cover for third-party bodily injury or death is unlimited in amount as per the Act, while third-party property damage cover is limited to ₹7.5 lakh as prescribed.

Comprehensive (package) policy combines third-party liability with own damage cover. Own damage covers loss of or damage to your vehicle from named perils such as accident, fire, theft, flood, riot and natural calamities. Normal wear and tear and mechanical breakdown are not covered. Own damage claims can also be declined where the driver had no valid licence or was driving under the influence of alcohol or drugs.

Third-party liability is a separate head. In those same situations, the insurer remains liable to pay third-party victims under the Act, and it may recover the amount from the insured.

The insured declared value (IDV) is the sum insured for own damage. It is the vehicle's market value at policy start, which is the manufacturer's listed selling price minus depreciation based on the vehicle's age. It is the maximum the insurer pays on theft or total loss. A higher IDV means a higher premium. Setting it too low hurts you at claim time.

No claim bonus (NCB) is a discount on the own damage premium for a claim-free year. It rewards the policyholder, not the vehicle, so it stays with you if you change vehicles. The NCB slabs run 20%, 25%, 35%, 45% and 50% for consecutive claim-free years, and 50% is the highest. If you make a claim in a year, NCB is reset to zero at the next renewal. NCB can also be lost if the policy is not renewed within the grace period. It applies only to own damage premium, never to third-party premium. Add-ons are optional covers bought for extra premium, such as zero depreciation, engine protection, return to invoice, roadside assistance and consumables cover.

Key formulas to remember

IDV (basic idea)
IDV = Manufacturer's listed selling price − depreciation for vehicle age
Age-based depreciation percentages follow the schedule under the IRDAI motor tariff scheme. Use the idea, not a remembered table.
Total loss or theft payout
Claim = IDV (subject to policy terms)
Salvage and deductibles may be adjusted. IDV is the ceiling.
Own damage premium after NCB
Net OD premium = OD premium × (1 − NCB %)
NCB applies only to the own damage part.
Total premium (comprehensive)
Total = Net OD premium + add-on premium + third-party premium (+ GST)
Third-party premium follows rates notified by IRDAI and is not discounted by NCB.
Partial loss claim (concept)
Payable = Repair cost − depreciation on parts (if no zero-dep cover) − compulsory deductible
Zero depreciation add-on removes the parts depreciation deduction.

How to solve Motor Insurance questions

Most motor insurance questions test which cover applies, what the figure is based on, or what a claim pays. Work through this order.

  1. 1Identify whether the question is about third-party liability, own damage, or both.
  2. 2Check the policy type: Act-only covers only others; comprehensive covers others and your own vehicle.
  3. 3If a premium is asked, apply NCB only to the own damage premium and keep third-party premium separate.
  4. 4If IDV is involved, remember it is the cap for theft or total loss and is age-depreciated.
  5. 5For partial damage, deduct depreciation on parts and any deductible unless a zero depreciation add-on applies.
  6. 6Check exclusions such as wear and tear, no valid licence, drunk driving and consequential loss.
  7. 7Match the answer to the principle of indemnity: no profit from a claim.
  8. 8Eliminate options that give NCB on third-party premium or that call add-ons compulsory.

Quickest way: Three-question filter

When to use it: Use when the question is a one-line conceptual MCQ and time is short.

  1. Who is hurt: others (third party) or own vehicle (own damage)?
  2. Which number: IDV (ceiling for total loss) or NCB (discount on OD premium only)?
  3. Is the cover compulsory (third party) or optional (own damage and add-ons)?
  4. Pick the option consistent with all three answers.

Common mistakes in Motor Insurance

  • Applying NCB to the total premium

    Students think a discount covers the whole bill.

    Fix: NCB reduces only the own damage premium. Third-party premium is untouched.

  • Believing NCB belongs to the vehicle

    The discount appears on the vehicle's policy, so it looks tied to it.

    Fix: NCB belongs to the policyholder and can be transferred to a new vehicle.

  • Thinking a comprehensive policy covers everything

    The word comprehensive sounds absolute.

    Fix: It still excludes wear and tear and mechanical failure. Own damage claims can be declined where the driver was unlicensed or drunk, although third-party victims may still be paid. Parts depreciation applies without zero-dep.

  • Assuming a higher IDV is always better

    A higher payout on loss seems attractive.

    Fix: A higher IDV raises premium. IDV should reflect true market value. Overstating it does not give extra payout beyond actual loss.

  • Treating add-ons as part of the basic policy

    Add-ons are sold together with the policy.

    Fix: Add-ons such as zero depreciation, engine protect and return to invoice are optional and priced separately.

  • Expecting third-party cover to pay for own repairs

    The policy is compulsory, so students assume it is broad.

    Fix: Act-only cover pays others only. Own repairs need own damage cover.

Worked examples

Example 1

A policyholder has a comprehensive motor policy. The own damage premium before discount is ₹10,000, NCB is 25%, the third-party premium is ₹2,000 and add-on premium is ₹1,500. Ignoring GST, what is the total premium?

Show the solution
  1. NCB applies only to own damage premium.
  2. Discount = 25% of ₹10,000 = ₹2,500.
  3. Net own damage premium = ₹10,000 − ₹2,500 = ₹7,500.
  4. Add third-party premium: ₹7,500 + ₹2,000 = ₹9,500.
  5. Add add-on premium: ₹9,500 + ₹1,500 = ₹11,000.

Answer: ₹11,000

Example 2

A car is stolen. The IDV on the policy is ₹6,00,000 and the market value just before theft was ₹5,80,000. Under a standard comprehensive policy, which statement is correct about the claim?

Show the solution
  1. Theft is a covered peril under own damage cover.
  2. IDV is the value agreed in the policy, fixed from the market value at policy start.
  3. Theft and total loss claims are settled at the policy IDV of ₹6,00,000, regardless of the market value just before the loss. The ₹5,80,000 market value does not reduce the claim.
  4. The insurer adjusts the settlement for any deductible and salvage value.
  5. So the standard settlement is ₹6,00,000, less those adjustments. Nothing above IDV is payable.

Answer: The claim is settled at the policy IDV of ₹6,00,000, less any deductible and salvage, and not at the ₹5,80,000 market value. Nothing above IDV is payable.

Exam tips

  • Expect direct questions on which cover is compulsory. The answer is third-party liability.
  • Know that NCB applies only to own damage premium and moves with the policyholder.
  • Know the role of IDV as the ceiling for theft and total loss, and that it falls with vehicle age.
  • For add-on questions, pick the cover that removes the specific deduction named, for example zero depreciation removes parts depreciation.
  • Watch negative marking. If two options look close, re-check whether the item concerns third party or own damage.

Practice questions from Non-Life Insurance Products

Motor Insurance: frequently asked questions

What is the difference between third party and comprehensive motor insurance?

Third-party cover pays for your legal liability for injury, death or property damage to others. Comprehensive cover includes that and also covers damage to or loss of your own vehicle. Third-party cover is compulsory by law. Comprehensive is optional.

What is insured declared value in motor insurance?

IDV is the sum insured for your vehicle. It is the market value at policy start, based on the listed price less age-based depreciation. It is the maximum the insurer pays on theft or total loss.

How does no claim bonus work?

If you make no claim in a policy year, you get a discount on the own damage premium at renewal. The slabs run 20%, 25%, 35%, 45% and 50% for consecutive claim-free years, and 50% is the cap. A claim resets NCB to zero at the next renewal. NCB can also be lost if the policy is not renewed within the grace period. It does not apply to third-party premium.

How is motor insurance premium calculated in India?

The own damage premium depends mainly on IDV, along with factors such as vehicle type, engine capacity, age and location. NCB and any discounts reduce it. Third-party premium follows rates notified by IRDAI and gets no NCB discount. Add-on premium and GST are added on top.