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How does replacement car insurance work?

Finding the best car insurance rate can be as easy as comparing quotes online. When speaking to a broker ask them about replacement cost protection.

Canadian auto sales grew for the 6th month in a row in May (up +13.4% YoY). SO far, 2023 is up +6.6% from the previous year according to the latest data from Desrosiers. The cost of vehicles is also only getting more expensive, so if you bought a new car, you may want to consider replacement car insurance to protect your vehicle for it's full value. A typical car insurance policy only covers the actual cash value, which includes depreciation. In other words, it’s possible to be without a car and still owe money on it or not even be able to afford a comparable replacement vehicle with your claims payout without paying out of pocket.

What is replacement car insurance?

Replacement car insurance ensures your car is replaced, or you’re compensated, at full value following a collision. With a standard car insurance policy, you would receive the actual cash value, which includes depreciation. In other words, you might only get 75–80% of the price you paid for the vehicle.

There are two ways of ensuring your new car has coverage: replacement car insurance or replacement cost endorsement. 

Replacement car insurance vs. replacement cost endorsement

Replacement insurance (also known as gap insurance)

  • Typically replacement insurance is sold to you by the car dealership, but some insurance brokers do offer it. 
  • Cost is a fixed price based on the value of the car and is often added to your lease or payment plan. 
  • Depending on how many years you’ve selected, coverage can last for 1–8 years. 
  • You can’t transfer it to a different car. 
  • To make a claim, you’d first go to your insurance provider for the initial collision coverage (if you’re at fault), then to whoever sold the replacement insurance. 


Replacement-cost endorsement

  • With car insurance in Ontario, you can buy an OPCF 43, or OEF43, (SEF 43R in Alberta) which is a limited waiver of depreciation from an insurance broker or agent. 
  • The cost is based on your car insurance premium and typically increases as the car ages. 
  • Coverage is limited to 2-5 years depending on the insurance provider. You can cancel before renewing. 
  • The insurer can cancel or increase pricing for many reasons, including too many claims. 
  • Because it’s on your car insurance policy, it can be transferred to a new vehicle. 
  • Any claims are handled directly with your insurance company. 

What is OPCF43 Depreciation waiver?

In exchange for a set amount of money, this Ontario car insurance endorsement waives your insurers rights to limit their payout following a claim to the actual cash value, or depreciated value, of your vehicle. 

If you are the original purchaser of the car, and the loss or damage occurs within a period set out in the waiver. OPCF43 does not apply to tires, batteries, or modifications or betterments to the car beyond the necessary repairs. 

Your insurance company cannot be held liable for more than the purchase price from the original date of purchase. Unfortunately, sometimes a vehicles’ value, as brand new, can increase in subsequent years.

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Is gap insurance worth buying?

Cars depreciate by as much as 20% as soon as you leave the dealership. If you buy a $20,000 car, the vehicle’s value drops to $16,000. If you’ve leased the vehicle, which accounts for about 85% of new car buyers, your car insurance provider will give you $16,000. In industry jargon, you’re “upside down,” or in other words, you have no car, and you still owe $4,000 to the dealer. (For simplicity, we’ve left out taxes and down payments). 

So, if you’re buying the car outright or putting a down payment of at least 25%, gap insurance doesn’t make much sense. 

You might consider gap insurance if:

  • Your car loan is longer than 5 years
  • You’re buying a luxury vehicle or a model that loses value quickly. 
  • Your car is for business use so you put a lot of kilometres on it. 
  • You have a high interest rate on your car loan. 
  • You bought the car with zero down payment. 

The bottom line

Buying a new car is exciting. Don’t spoil it by not having the right insurance in place. Whether it’s an endorsement through your standard car insurance provider or subsequent gap insurance policy from the dealer, consider your options and protect yourself.