Bank Guarantee as an alternative to 3rd party liability insurance.

3rd party liability insurance is a mandatory insurance imposed on vehicle owners. It costs lots of money- like 3000 INR+  per year for a car owner with 1 to 1.5 liter engine capacity- roughly 10 INR per day. Bike owners also pay 5 to 10 INR per day on insurance premium, depending on engine capacity.

I have an idea how this insurance expense can be taken off without compromising on the risk, saving vehicle owners some money, if they are willing to take the risk.

3rd party insurance is imposed for the scenario that a vehicle may hit/damage life and property of someone else and their loss needs to be compensated.  If you hit someone and they are hospitalized, their medical expense and loss of income needs to be covered. If you damage someone’s property, it needs to be restored- all these cost money. If vehicle owner has 3rd party liability insurance, insurance will cover these expenses.

But it is not everyday scenario that you will hit someone and cause damage. 3rd party damage claims are rare. Most of us never experience it in our lifetime though we are paying hefty premium all the time. There is no concept of no claim bonus in 3rd party liability insurance. How much ever carefully you drive, you have to pay 3PL premium. It is lot cheaper to kill someone using a 69 cc TVS moped, than drive around in a liter class motorbike very carefully.

if you are using your vehicle rarely, you are very careful driver, you have some cash to compensate the affected person directly and willing to own the risk, then you should be given an option to skip 3PL insurance.

What kind of damage/loss vehicles cause?

Two wheelers cause bare minimum damage. Getting killed after being hit by a normal two wheeler is a very rare case. Mostly they would cause some injury and some minor property damage in case of collision. Of course more powerful liter class bikes can do more damage depending on the speed of impact.

Cars can cause more damage- they can crush someone to death and cause major property damage depending on at what speed the collision happened. Claim amount may run into crores in exceptional cases, when the dead person was a breadwinner for the family with good income. (Entire loss of income for the rest of their working years can also be claimed as compensation). Then cost of repair for other damaged vehicles, buildings and things.

Why Govt made 3rd party insurance mandatory?

Because many vehicle owners who caused damage were either not willing or or were unable to pay compensation to those who suffered damage, loss or injury from the vehicle. In order to ensure losses caused by a vehicle to 3rd party is compensated, Govt made it mandatory that every vehicle should have 3rd party insurance. Govt even went a step ahead and started mandating 5 year 3PL for two wheelers and 3 year 3PL insurance cover for all new cars. 3rd party liability insurance premium is a function of your engine cc. 999 cc turbo petrol making 120 PS has less insurance premium compared to 1.2 liter NA engine making only 83 PS. Irrespective of how little you use your vehicle or how slow/careful you are, this is a mandatory expense every year for vehicle owners. With work from home, lockdown etc vehicle usage has reduced, with more safety features, better roads accidents have reduced, but no reduction in 3d party insurance premium. 

What can be done to reduce 3PL insurance premium burden on vehicle owners?

Below is what can be done

• Vehicle owner to open special purpose FD with banks- say 2 lakh for bike, 5 lakh for cars
• This FD can’t be closed if vehicle owner is driving the car without 3PL insurance.
• In case of 3rd party liability claim, owner is required to settle out of court by paying affected party directly.
• If not, court may order compensation to be paid via this special purpose FD. With court order banks can pay the affected person directly

Vehicle owner can get their deposit back only in following cases

• Vehicle has been sold to someone else
• Owner has now purchased 3PL insurance
• Vehicle has reached end of its life (15 years) or is totally scrapped

Benefits to owners:

• Save on hefty insurance every year 
• Probably of 3rd party claim is very low, so if you are willing to own the risk, this you can gain rewards too
• Use your savings/FD as an assurance for any 3rd party damage you may cause.
• No need to renew every year.

Drawbacks:

Insurance companies will have less 3rd party premium flowing in, so they may increase premium

Govt loses massive 18% GST on insurance premium

Backs have to open a new FD type.

What do you think of this idea? Would you prefer to own the risk yourself in order to save 3000 to 5000 INR per year (for most cars) and be ready to pay for 3rd party damage yourself if the situation arises? Or you’d rather pay the premium and GST, let the insurance company handle the risk?

Similar: Vehicle Insurance Mafia * Tips to save on car insurance *