Motor own-damage cover

What it means

Own-damage cover pays for harm to your own vehicle: collision, theft, vandalism and natural events. Third-party cover, by contrast, pays only for damage your vehicle causes to others.

The payout is reduced by the excess and based on the vehicle’s value at the time of loss, not its purchase price. On an older car the gap between expectation and payout is wide.

Own-damage cover does not pay for everything that happens to a car. Wear and tear, a mechanical failure with no external cause, tyres damaged by ordinary driving, or damage caused by a driver under the influence are usually left out. These exclusions differ between insurers and say more about the value of a policy than the premium does.

How it works in practice

On a company fleet the premium is managed by combining a higher excess with a fleet policy. The decision should follow the claims history rather than a feeling about how carefully people drive.

In the books the premium is a cost of the period, spread through accruals when paid annually. The payout is income and does not net off the repair cost.

The premium carries no VAT, since insurance services are exempt, but it does include the insurance tax paid over by the insurer. The garage invoice for a repair carries VAT as usual, and an insurer normally pays a VAT-registered business net of it, so the company pays the VAT on the repair itself and deducts it in its return.

What to watch out for

Under leasing or a loan the insurer must pay the finance company, not the business. That matters on a total loss, because cash flow is hit at once.

If the sum insured is lower than the car’s real value, for example after extra equipment was added or under a policy nobody has updated for years, the car is underinsured and the insurer cuts the payout proportionally even on a small claim. The sum insured needs checking whenever the equipment changes and at every renewal.