Are insurance companies taking flood-ravaged Kerala for a ride?

Insurance companies, in their desperation to offset their losses, are throwing ethics and caution to the winds while settling flood-related vehicle claims. Instead of turning vehicles that have been damaged beyond repair into scrap, they are putting them up for auction to the delight of the second-hand car mafia. The result: a flood of substandard second-hand cars, which could betray unsuspecting new owners any moment, would soon hit the Kerala market.

Shockingly, it is not just the private insurers that are doing this. Even insurance companies in the public sector are indulging in this unethical practice.

The insurance companies, after consultation with car manufacturers, have arrived at a simple formula to swiftly settle the avalanche of claims after floods. Under this formula, the damaged cars have been classfied into A, B, and C categories. In the 'A' category falls vehicles that have been filled with water up to their floor level. Those having water up to the seat level will be in the 'B' category. Those submerged up to the level of the dashboard and above will be in the 'C' category.

Ghosts on wheels

The car manufacturers have prescribed a list of parts that have to be replaced in vehicles coming under each of the three categories. The list will vary with each brand, which means the items to be replaced in an Alto and Datsun Go that fall in the A category will be different. The category assessment has to be done by the insurance surveyor. However, this replacement procedure is for vehicles that have not been damaged beyond redemption.

Now, if the assessed loss is over 75 per cent of the insured declared value (IDV) of a vehicle, the damage to the vehicle will be considered as 'total loss'. (IDV is the maximum sum an insurer provides the claim holder in the case of theft or total loss. It comes to around 95 per cent of the market price of the vehicle.) 

Once total loss is declared, the insurer has to cancel the RC (registration certicate) book, pay the owner the IDV, and make arrangements for the vehicle to be disposed as scrap. (The insurance companies are supposed to sell the scrap through Metal Scrap Trading Corporation, a miniratna PSU under the Ministry of Steel.) This, in insurance lingo, is called the 'constructive total loss' procedure.

Scrap vultures

Instead of the CTL procedure, which dumps the damaged vehicle for good, insurance companies have now resorted to the 'salvage loss' method. This is a process by which a vehicle that has suffered total loss is put up for auction. “Salvage buyers, big used-car companies in North India, are circling over the flood-affected regions in the state like vultures. They are constantly calling up insurance companies and surveyors,” a surveyor who works for public insurance companies said. Three surveyors said innumerable auctions had already been held in flood-affected areas in Kerala. “We have been asked to get quotes from three salvage buyers. The cars are sold to the highest bidder,” the surveyor said.

This salvage loss method helps insurance companies to reduce their losses. Take for instance a Maruti Suzuki Brezza on which 'total loss' has been slapped. The insurer will have to pay the owner the IDV of Rs 7 lakh. The Brezza that was put up for auction in Ranni fetched Rs 3 lakh for the insurer.

The insurance company sells the damaged car without cancelling the RC book but the problem is, the company is not obliged to ensure that the middleman has changed the ownership. “The existing buyer is made to sign Form 29 & 30, which is the form for ownership change. Now it is up to the new owner, the used car dealer mostly, to change the ownership. The insurance company will not guarantee this,” a surveyor who has been called up from Chennai to work in Ranni said. He said that 19 of the 20 cars he had surveyed have been given the 'total loss' assessment. “What if an accident happens? If the ownership is not changed, the former owner will be liable to pay up,” he added.

Four-wheeled Dorian Grays

Ownership change is but the least of the worries. “These vehicles, which have been submerged in water and slush for three to four days and have been assessed as 'total loss', are now made to look fresh and young after some superficial wash and scrape. The internal parts would still be damaged. You will never know when the whole thing blows up,” another surveyor working in Alappuzha said.

When asked if the 'salvage method' was being used widely, National Insurance deputy general manager Srinivasa Rao said, “Each damaged vehicle is surveyed by a surveyor licenced by the IRDA (Insurance Regulatory and Development Authority). Each vehicle has to be physically inspected by these surveyors,” he said.

So we put the question differently to Sivakumar who handles Maruti claims at New India Assurance. We told him we were from Onmanorama, and asked him whether it was fine to purchase a 'total loss' vehicle put up for auction by his company. “I would advise against it. There are many cars that have complex electric circuits, all of which would have been damaged,” Sivakumar said. But he said that 'total loss' vehicles will be put up for auction. “We have a group of buyers and we will send them a message once we get the report from the surveyors. We accept their quotes, and the vehicles will be handed over to the highest bidder,” he said.

The four public insurance companies alone have received over 12,000 claims worth over Rs 1,300 crore, of which more than 70 per cent are said to be vehicle claims. It is estimated that between 5,000 to 7,000 cars that have been assessed 'total loss' after the floods by both public and private insurers will now come back into the market via the 'salvage loss' method.

-Via Onmanorama