Under partial losses of Insured vehicle, the question of the treatment of cost of color and painting charges and other miscellaneous expenses spent by insured on the new spare part to render it to fix in the place of damaged part arises, creating confusion, whether to treat such charges as an additional cost of spare part that requires replacement and thereupon to be clubbed along with the cost of bare spare part TO ARRIVE THE VALUE OF PART to be replaced or to treat such additional expenses spent on the bare part by insured as LABOUR CHARGES during the renewal of the spare part since the repairers of Insured Vehicle have been furnishing loss estimate showing the bare part (without color) under the list of parts to be replaced and color cost and painting charges under labor charges ON ACCOUNT OF NON-AVAILABILITY of color spares readily in the market.
SO-FAR all General Insurance Companies are treating not only color cost and painting charges but also other miscellaneous expenses spent by insured in course of replacement or renewal of a damaged part other than the cost of the bare part as labor charges in the process of settling the O.D. claims, perhaps presuming that depreciation does not apply to color and painting charges, and other miscellaneous expenses spent by insured, in bringing the new spare part on par with damaged part to be replaced into its similar condition before its being damaged.
The treatment of subject matter has been administered so-far by the insurance companies in respect of partial losses of I.V. where the damaged spare/part/component of Insured Vehicle is being rendered useful for smooth functioning by affecting repair works instead of replacement or renewal of total part / spare / component is correct, whereas the same treatment is not only doubtful but also not logical concerning the damaged parts which cannot be economically repaired and require replacement with new spare parts.
Since these aspects of the treatment of color cost and painting charges and other miscellaneous expenses spent by insured on the bare spare part before its placement in the place of removed damaged part from IV, need to be addressed, now the same is presented in detail, in more than one way to arrive at a reasonable and appropriate conclusion without ambiguity based on the basic principles of motor insurance.
When a Motor Vehicle has insured on I.D.V. basis and in case of total / constructive total loss of I.V., Insured is indemnified by Insured value (with standard deductions such as salvage value of wreck, voluntary and compulsory excess) as the same is already depreciated value of the I.V. put together combined value of parts + color + Labour Charges + Taxes (such as excise and CST or Sales Tax, etc.).
In case of partial losses of I.V. wherein total replacement of the part is required, the cost of the part including color and painting, labor charges constitute the value of part to be indemnified to insured after applying depreciation as per the schedule of section – I of the policy.
As in the case of T.L. of I.V. wherein the cost of the vehicle including the color is taken in arriving depreciated value as I.D.V.(S.I) in cases of replacement of part also the associated painting materials and painting labor charges along with the bare cost of part constitute the replacement value of spare part to be taken into consideration before the application of depreciation. (Apart requiring replacement is to be considered as a partial loss when compared to the value of the whole vehicle, and at the same time, it is a total loss when compared to the value of part itself.).
The operative clause of indemnity mentioned under the face of the Policy is as follows :
“The Company will indemnify the insured against loss or damage to the vehicle insured hereunder and/or its accessories, caused by the covered perils as mentioned under the policy, subject to a deduction for depreciation at the rates mentioned in the policy in respect of parts replaced.”
Now under the above operative clause of the policy, the moot point is to conclude whether the depreciation is applicable only on the cost of New Bare part being replaced or the entire amount spent by insured in making the new bare part to sit/fix in place of a damaged part in the functional condition in all respects (forms as the value of new spare part) to a similar condition on par with the part being replaced from the I.V. before its damage is to be addressed without any ambiguity.
The cost of ready-made shirt cannot be arrived without including the cost of buttons stitched to shirt and labor charged in the form of stitching or other words, it is the value of shirt before the addition of profit and tax aspects besides the cost of bare cloth used in the process of production of a ready-made shirt. In the same manner, a bare spare part is made ready with a similar condition (on par with damaged part before its being damaged), for placement into the place of removed damaged part, it is not only the cost of bare part but also the entire expenses spent by insured on the bare spare part in making/preparing it ready to be fitted into the vehicle forms as the value of the part or in other words it is deemed to be considered as the cost of such spare part.
As such except replacement charts of the part (R/RF) considered as labor charges, the rest of the expenses incurred by the insured to change or replace a particular part form as the value of the part. In other words, the entire amount spent by insured including the cost of the bare spare part (in rendering the part on par with the prior status of the part to be removed from IV, on account of its being damaged) before its placement into IV should be considered as the cost of such part on which the depreciation is to be applied.
FORMULA OF INDEMNIFICATION IN CASE OF REPLACEMENT OF PARTS :
(Total value of the part to be replaced) X (100 – a factor of depreciation in percentage as per the schedule of section 1 of the Policy)X 1/100 + (R / RF) charges of the part (Labor charges towards the removal of damaged part and fitting of new part) – salvage value out of the damaged part.
Where the total value of the part to be replaced = C.I.F. of part + Taxes of part + cost of color including the taxes if any + labor charges towards painting + any charges towards turning, trimming, machining, etc, in rendering the new spare part to fit into the vehicle in working condition.
In the above equation, charges of removal of damaged parts and fitting of new parts are to be considered as the replacement labor charges or in simple called labor charges of the spare part being replaced.
Given the above equation, it is quite evident that the cost of bare part cannot be treated as the total value of the part (considered as a unit to be replaced) without including the cost of color coated on the part and its painting labor charges and any other expenses other than R/RF charges of a part to be replaced, spent by insured in making this new space to fit in the place of the damaged part of I.V.
CONCLUSION
1) Under partial losses of I.V. when a particular part damaged on account of the operation of any one or more perils covered under the policy is retained along with the I.V. by making the damaged part functional in all respects or brought to the similar condition just before loss occurrence, by affecting repair works such as tinkering, beating out dents, throwing, painting, machining, trimming, etc., the expenses so incurred by insured are absolute to be treated as labor charges.
2) Under partial losses of I.V. when a particular part damaged on account of the operation of any one or more perils, covered under the policy is to be replaced with a similar new part, the sum of entire expenses spent by insured in making/rendering the new part to sit/fix in place of the damaged part in the functional condition in all respects similar and on par with damaged part (to a similar condition before its damage) being replaced, except charges towards the removal of damaged part and fitting of a new part in place of removed damaged part (which are deemed to be considered as replacement labor charges or in simple called as labor charges) such as cost of the part, taxes, painting charges including materials, any charges incurred towards machining, trimming, boring (gas and gas filling charges in case of replacement of A/C. compressors in cars), etc. are to be treated as the replacement value of the part on which the depreciation is applicable.
The above conclusion is arrived basing on the criteria in brief as stated below.
The parts which need painting are not like a dashboard or a kingpin or plastic part which can be straight away replaced without any additional cost apportionable to the spare part (is a price addition of that spare part just like taxes) and it needs application of depreciation on par with that part applicable depreciation.
The replacement of any part is complete only when the part is in functional condition. The functionality of a part includes the operational efficiency as well as compatibility with vehicle and suitability of appearance. It is, therefore, logical that the replacement value of the part for application of depreciation should be arrived at only after adding all the costs such as painting with compatible color or grinding, trimming, turning, welding of a part so carried out to fit into the vehicle to the base cost of the part, as available from suppliers, as these expenses are necessarily incurred by insured, for achieving suitability, similarity, compatibility with the vehicle and rendering the part functional in all respects.
The removal charges of the damaged part and fitting charges of a new part (R/RF charges) shall form as labor charges and the rest of the costs & expenses spent by insured in any form or shape on the new spare part (cost of bare spare part + painting charges including materials + labor charges) up to the stage before its placement in place of removed damaged part from I.V. are in nature of bringing or shaping the new spare part into the same status on par with damaged part before its being damaged, of a suitable and compatible replacement to the existing damaged part.
Therefore, as per the analysis of costs, the sum of the cost of bare spare part and the entire expenses spent by insured (on the bare spare part) before it’s placement into the insured vehicle should be considered as the exact cost of such part on which the relevant percentage of depreciation has to be applied, according to the real concept of indemnity beyond any second thought on the subject matter.
By Mr. B. Suresh Babu, Hyderabad, Published in The Insurance Times, February 2005
