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How Does Scrapping Affect Your Car Insurance Policy?

By Juhi Walia
23 September 2022, 12:32 PM

The automobile industry in India has recently witnessed the scrapping of hundreds of old cars courtesy of the vehicle scrapping policy introduced by the Government of India as part of the voluntary vehicle-fleet modernisation programme. The policy aims to scrap old vehicles and improve the environmental condition by reducing and containing the rising pollution levels. Such a move aligns with the government's thought of maintaining a certain quality standard in the vehicle manufacturing industry. 

Scrapping your old vehicle can help in preventing any accidents on the road too. If you wish to sell your car, it needs to be in good condition and free from any damages or defects that may lead to accidents while driving it off the lot.

But if you are wondering what impact scrapping has on the car insurance policy of your old vehicle, there's no need to worry because we shall answer all your questions regarding the same in this article.

What Does Car Scrapping Mean?

Scrapping a vehicle means breaking it down into parts, or 'scraps', which can then be sold as scrap metal. Scrapped cars are usually sold to steel mills and other metal recycling companies, where they are melted down and reformed into new metal products. 

The most common metals used in car production include: 

  •  Copper
  •  Aluminium
  •  Magnesium 
  •  Steel

In India, the process of scrapping a vehicle involves three steps: 

  • Removing personal items from inside the cabin
  • Dismantling body parts
  • Crushing the remaining parts into small pieces

There are many reasons for scrapping a car, such as:   

  • Damage from accidents that are too costly to repair
  • An irreparable engine or transmission
  • Failure to meet emissions standards
  • The desire for a new model

Scrapping your car amounts to removing a wrecked or damaged vehicle from the road. When you scrap your car, you no longer own it and cannot be driven on public roads. Scrapping a vehicle differs from selling it for parts or dismantling it for spare parts.

How Does Scrapping Affect the Car Insurance Policy?

Scrapping your car is a widespread practice nowadays. It is also an excellent way of recycling your old vehicle and getting rid of it simultaneously. However, this may harm your car insurance policy if you do not follow the steps mentioned below correctly:

  • The first thing you need to do is inform your insurer about it. Give it a written notice regarding the scrapping of the vehicle before destroying it. This would assist them in cancelling or changing the car insurance policy accordingly.
  • The insurance company will ask you to surrender your licence plate after receiving the cancellation notice from RTO authorities. This may result in the loss of the premium amount paid to date and added expenses in the form of cancellation charges incurred by the insured.
  • As per the rules and regulations implemented by the Government of India, every vehicle with a lifespan of 15 years must undergo a mandatory test to ensure its roadworthiness.
  • Your car insurance policy will be rendered null and void once it gets scrapped, as the vehicle has lost its value as an asset and can no longer be used as a mode of transportation for anyone.
  • Incurred Claim Ratio is the ratio of incurred claims and earned premiums for an insurer for a given period (usually one year). It indicates how profitable an insurer is for providing car insurance coverage for their customers and the degree of risk they are undertaking to fulfill their contractual obligations towards their customers. A scrapped reduces this ratio decreases drastically.
  • If you want to sell or scrap your car legally, avoid any trouble and keep yourself safe from legal issues, follow all the rules and regulations correctly. One of them is declaring the insurable value of your car to your insurer and paying tax on it accordingly before selling or scrapping it off, which prevents any issues regarding compensation for damages because all requirements are met beforehand.
  • If you have a comprehensive car insurance policy, you can claim your car's insured declared value or IDV if it is damaged or stolen. This means you can reclaim the price you paid for it. The IDV in car insurance is referred to as your car's 'book value'.
  • The insurer will pay for repairs up to this amount. However, if the cost of repairs on your vehicle exceeds its IDV, you'll be liable for any excess charges.

Wrapping Up

Thus, if you plan to scrap your car, you should inform the car insurance company about your intentions beforehand. This will prevent any future complications in the processing of car insurance claims.

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1. When should you consider scrapping your car?

  • First is when your vehicle has reached its maximum mileage and cannot be used further on roadways. 
  • Secondly, if it does not meet the legal requirements set by government agencies like RTO or RTO for driving license renewal, you will also have to scrap your vehicle and get a new one from the market. 
  • Lastly, if your car gets stolen or damaged beyond repair, you will have to replace it with a new one from the market and get a new insurance policy for that new vehicle.

2. What's the first thing to do when you decide to scrap your car?

Once you have decided to scrap your car, you must submit a written request to RTO with an affidavit stating that the vehicle has been scrapped and is no longer fit for road use. This would help in cancelling the registration certificate of your car along with your insurance policy.

3. What is the process involved in the scrapping of a car?

Scrapping a car involves filling out some forms and submitting them to the RTO office where your vehicle is registered. On receiving these forms and documents, the RTO officer will issue a certificate of fitness that allows you to sell off your car for scrap. Once the RTO officer gives this certificate, you can take your vehicle to any authorised garage for scrapping purposes.

4. How does scrapping a car help prevent any mishap?

One of the biggest reasons you should scrap your old car is that it can cause accidents. If you own an old vehicle, it might not be able to handle sharp turns, bumps and other road conditions as quickly as newer cars can. This can be dangerous for other drivers on the road and may cause accidents.

5. How do you cancel your insurance policy after scrapping your car?

If you are going to scrap a car, cancelling the insurance policy is easy as there is no need for any paperwork or anything else.

To cancel your insurance policy, all one needs to do is inform their insurer about the plans of scrapping the vehicle for policy cancellation.

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