Hypothecation In Car Insurance

Let’s say that you have taken a loan from the bank to buy a house, and the said property serves as the collateral. If you do not repay the loan within the stipulated period of time, the property may be seized by the bank - even if you have the legal documents.

The same applies to the car insurance as well. When you buy a car by taking a loan or credit, you make the down payment, and the loan covers the rest. This implies that the party who paid the majority of the car's price becomes its owner, known as the ‘hypothetical owner’. So basically, the bank who lent you the loan amount to buy the car becomes the hypothetical owner until you pay off the loan and this process is known as hypothecation. Consequently, the details of this hypothecation must be included in your registration certificate and insurance policy.

But, if you repay the loan, what happens to the hypothecation details? Do they need to be removed? All these questions and more information shall be discussed in this article.

Let’s get started!
 

What is Hypothecation in car Insurance?

As mentioned before, the bank is the hypothetical owner of your car till you pay back the loan which you took to buy your car. When the bank/lending party gives you a loan, it holds the car as collateral. This detail will be stated on the RC copy and insurance policy you have purchased for your vehicle. This hypothecation will be removed only once the loan has been fully settled.
 

How Do You Add The Hypothecation to The Insurance Policy?

Follow the steps listed below to add the hypothecation details in your insurance policy.

• After buying a car, you must register it with the RTO by obtaining a registration certificate. You must let the RTO know that the car has been purchased on loan so that they can include the hypothecation details in your Registration Certificate.
• It is vital to also include the hypothecation details in your insurance policy after adding them to your RC.
• In order to add the details to your policy, you should get in touch with your insurance company via-
  • Email
  • Calling the toll-free number
  • Visiting the branch
• Certain documents are needed by the insurer to add the hypothecation details. They are -
  • RC Copy (with hypothecation details), or
  • Letter of loan approval from the bank
• Following the submission of these papers, the insurance company verifies the same and adds the hypothecation details to the policy.
• After the loan has been fully repaid,then only hypothecation details can be removed from your RC andinsurance policy.
   

How Can You Remove The Hypothecation From RC?

Once you have repaid the loan, you need to follow the steps given below to remove the hypothecation details from your Registration Certificate.

• Get the NOC (No Objection Certificate) from your bank or lending party.
• The following documents must be submitted to the RTO along with your Registration Certificate -
  • NOC (No Objection Certificate)
  • Form 35
  • Valid insurance policy
  • PUCC (Pollution Under Control Certificate) - The PUC certificate ascertains that the smoke emitted from a vehicle complies with the standard pollution norms and is not detrimental to the environment.
• Please note that RTOs also levy a cancellation charge for hypothecation removal.
• You will receive a new RC without the hypothecation details within a certain number of days, as specified by the RTO.
   

How Do You Remove Hypothecation From The Car Insurance Policy?

After the hypothecation is removed from the RC copy, you can raise a request to the insurance company to remove the hypothecation from your insurance policy.

You will have to provide the insurer with the following documents in order to remove the hypothecation details from the policy -.

• New RC copy (with Hypothecation removed)
• NOC from the bank/Loan closure letter.

After receiving your documents, the insurer will verify these documents and then remove the hypothecation from the insurance policy. You will then receive an endorsement certificate from the insurer containing the revised/updated particulars of the policy.
 

Why is Removing The Hypothecation Important?

• To Avoid Complications While Selling The Car
  In order to steer clear of any hassles in the future, you need to remove the hypothecation details from your RC and insurance policy. Let's say you wish to sell your car. However, the hypothecation details are still mentioned in the RC and policy, which legally denotes that you do not own the car though you have fully repaid the loan. Due to this reason, you cannot sell your car.

• To Avoid Trouble During Total Loss Claims
  During the repayment tenure, if you file a claim in the event of a total loss of a car in an accident or theft, the claim amount shall be provided to the lender, since they are the hypothetical owner of the vehicle. However, if you have paid off your loan but haven’t removed the hypothecation details from the insurance policy, then you will not be considered as the owner.Hence, the lender will be eligible to receive the claim amount and you will have to run from pillar to post to sort things out.

• To Get Complete Ownership Of The Vehicle
  If the hypothecation isn't removed from the registration certificate and insurance policy, you cannot become the actual owner of the vehicle. Therefore, you cannot claim full ownership of the car.

Therefore, make sure you follow the due process to remove the hypothecation when your car loan is cleared off. It is crucial to clear the hypothecation from the vehicle's registration certificate and your car insurance. Ensure you double-check every piece of information and update the RTO and insurer to avoid any hassles down the road.