5 questions on replacement cost

You’re about to lease a new car and so far things are going smoothly. But your dealership and insurer are talking replacement cost.

We’re here to answer all your questions on this little-known coverage.

1. What’s the difference between replacement cost and replacement insurance?

People often confuse replacement cost and replacement insurance.  That’s because they’re very similar and serve the same purpose. 

Let’s start with basic car insurance. It covers you against damage caused by accidents, theft, vandalism, glass breakage and much more. However, it does not factor in vehicle depreciation.

Your vehicle depreciates year after year.  If you file a claim, the amount you’ll get will likely be less than what you would have to pay to replace your current car with a new one. 

There are two types of insurance you can add to your basic insurance coverage: 

• Replacement cost (Q.E.F. No. 43A and 43E “Change to indemnity” (Section B)
• Replacement insurance (QPF No. 5)

In both cases, you get a brand new car with the same options as the insured vehicle that was either stolen or declared a total loss. If you have replacement cost, you can choose to receive your indemnity in cash rather than replacing your car with a new one.

For a partial loss, parts will be replaced with new original parts.

Replacement cost is a type of coverage that’s added to your contract with the same insurer as your car insurance.

Replacement insurance is a separate contract from your car insurance. You can purchase it from your dealer, agents, brokers or damage insurance firms.

2. Is replacement cost mandatory?

No. You’re not obligated to add replacement cost to your car insurance contract.

Turn it down if it’s not something that you think you need.

3. If I turn down replacement cost, what is the impact if my car is a total loss?

Let’s take an example to look into the different possible scenarios. 

You’ve just bought a new car worth $50,000.

Two years later, you’re in an accident and your car is declared a total loss. Your car is valued at $30,000.

You file a claim with your insurer. You receive a cheque for $30,000. Why? That’s because the amount is calculated based on the value of your car at the time of the loss. 

To replace your car with a new, equivalent one, you’d have to pay $60,000. Without the replacement cost, you’ll have to pay $30,000 ($60,000 minus the $30,000 from your insurer) for a new vehicle.

4. And what if it’s only a partial loss?

Replacement cost not included in your car insurance contract? Your insurer is therefore not obligated to replace damaged parts with new ones. The parts could be refurbished or even used, but in good condition.

5. How long am I entitled to the replacement cost?

You can add the replacement cost to your car insurance contract within 3 months of buying your new car.  Otherwise, it’s too late. 

How long the replacement cost is valid depends on the insurer. It’s typically valid for 4 to 5 years. You pay the replacement cost once a year directly to your insurer. The cost is included in your car insurance’s total insurance premium and payment can be spread out over several instalments. When you’re up for renewal, you can choose to keep or cancel it.

Careful when changing insurers along the way! You can keep your replacement cost with Insurer A for 4 years.  However, if you change for Insurer B in the meantime, we recommend that you add the replacement cost to your new insurance contract for the remaining years your vehicle is covered under this endorsement.

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About to buy a new car? You have to take out car insurance .  Get a quote.