Mayor Sunil Prabhu said that any participant injured during the festivities would be provided free medical treatment up to Rs.15,000 in any civic hospital.
However, in case of fatalities during the festival, the Brihanmumbai Municipal Corporation would give a compensation of Rs.150,000 to the family of the victim, he said.
The decision follows an appeal last month by Prabhu to Municipal Commissioner Sitaram Kunte seeking insurance cover for the millions of participants who throng the 'Dahi-Handi' and Ganeshotsav celebrations in Mumbai.
Prabhu urged Kunte to consider the proposal on "humanitarian ground" in view of the disasters that could take place during the two festivals.
While 'Dahi-Handi' falls this Friday (Aug 10), this year's 11-day Ganeshotsav will start Sep 19, attracting millions of people besides domestic and foreign tourists.
During these festivals, there is a risk of casualties or accidents involving revelers and volunteers which can leave maimed.
'Dahi-Handi' is celebrated with tall human pyramids of boys and girls, and Ganeshotsav sees participation of lakhs of youth, civil and police officials, especially during the celebrations and the idol immersion ceremonies on the fifth, seventh and 11th day.
The 'Dahi-Handi' also attracts some international groups besides locals who vie with one another to build the tallest human pyramids and bag the prizes worth crores of rupees each year.
Last year, the celebrations left over 200 injured, including some seriously, and there were two fatalities in 2010.
For Ganeshotsav, individual trusts and organisations provide heavy insurance cover to idols of the elephant-headed god, Lord Ganesh.
However, barring a few trusts, there is little or no insurance cover provided to millions of devotees and lakhs of volunteers during the festival.