How does replacement car insurance work?

12 minute read Published on Nov 24, 2023 by BrokerLink Communications

Close up of a broken car wing mirror.

No-fault insurance in Ontario comes in many forms, and one of the main types of risks it is designed to protect you from is collisions. If you get into a collision, you will first need to report the car accident, but after that, you will need to file a claim with your insurance company. If your car is totalled or deemed a write-off, then the payout you will receive to cover the cost of the damages will depend on whether you have actual cash value coverage or replacement car coverage. Although less popular, replacement car insurance has many benefits, which we outline below.

Replacement car insurance defined

Replacement car insurance is a type of car insurance in Toronto that comes into play when your vehicle is damaged in a collision. Specifically, your car must be significantly damaged to the point that an insurance company deems it a write-off, meaning the cost of repairing the car is greater than the value of the car itself. At this point, the insurance company will issue a payout to help cover the cost of replacing the vehicle. However, the payout you receive will be dependent on the type of coverage you have.

The two types of coverage are actual cash value coverage and replacement coverage. Actual cash value coverage is the more popular of the two, simply because it is cheaper to add to your policy. That said, actual cash value coverage accounts for depreciation, which means the payout you receive is usually far less than the value of the vehicle often between 75% and 80% of the price that you paid for the vehicle. This translates to you having to pay more money out of pocket to purchase a new car.

In contrast, replacement car coverage does not take into account depreciation, which means a larger payout. As such, replacement car coverage payouts may be enough to fund all or most of your new car purchase. How replacement car coverage works is like this: When you file a car insurance claim with your provider, an insurance adjuster will be assigned to your claim and they will be responsible for calculating the value of the lost or damaged car, as well as for looking up the current cost of a new, similar car. The insurance adjuster will take into account factors like the mileage, age, condition, make, and model of the car, pre-accident, to determine its market value. To learn more about market value versus replacement cost, contact BrokerLink.

Generally speaking, there are two ways of adding replacement coverage to your car insurance policy. The first is by adding replacement insurance, also known as gap insurance, to your plan, and the second is by adding a replacement cost endorsement to your policy. We outline each of these options below:

Replacement car insurance

Replacement car insurance, which may also be referred to as gap insurance, is a type of coverage often sold by car dealerships or lenders to drivers who lease or finance their vehicles. The coverage is offered at a fixed price that varies according to the value of your car. It is typically added to and paid for through your lease agreement or payment plan rather than your auto insurance policy. Replacement car insurance coverage may last longer than your average type of car insurance coverage. While some replacement coverage plans last one year, the length of a typical auto insurance policy, others can last up to eight years. It is worth noting that if you change vehicles during this time, the replacement car coverage cannot be transferred.

Instead, you will need to end your coverage and purchase new coverage. It is also important to note that the claims process for replacement car insurance can be a bit more complicated, as in the event of an accident, you would first need to file a claim with your insurance company before filing a second claim with the provider that sold you the replacement coverage, i.e. your car dealership.

Replacement cost endorsement

A replacement cost endorsement is the second way of adding replacement coverage to your auto insurance plan. In Ontario, it is referred to as an OPCF 43 or OEF43, which is also known as a waiver of depreciation. It is purchased from an insurance agent or broker, such as BrokerLink, and the cost is dependent on a variety of factors. These factors will include the make and model of your vehicle, your driving history and coverage limits. . Note that adding a replacement cost endorsement to your Ontario car insurance plan is likely to increase your premium.

In addition, the cost of replacement car coverage can change from year to year and usually does as your car ages. Terms and conditions for replacement cost endorsements vary between providers, but one such condition is that a driver may only be eligible for coverage for a period of two to five years. If you decide that you want to cancel your replacement car coverage before the end of the agreed-upon term, you can usually do so when your policy is up for renewal. On the flip side, your insurance provider is also within their rights to cancel your policy for various reasons.

For example, if you file too many insurance claims or start missing payments, they may cancel your coverage. Finally, the claims process is more straightforward with a replacement cost endorsement compared to replacement car insurance. Since coverage is purchased through your provider, you will only need to file one claim with your insurance company.

Who is replacement car insurance for in Canada?

Although most drivers can choose whether to add replacement car insurance to their policies, it might be better suited to certain people over others. If you fall into any of the following categories, you may wish to seriously consider adding replacement car insurance to your policy due to the benefits it provides:

Drivers with multi-year car loans

If you lease your vehicle and are currently on a multi-year loan plan, replacement car insurance is usually a smart choice. The longer you own your car, the more it will depreciate in value. Without gap insurance, you would likely receive a relatively small payout from your insurance provider in the event of a write-off. In turn, this means that you would have to pay a considerable sum of money out of pocket to not only pay the outstanding balance on your loan but also to buy or lease a new car.

Drivers of high-end, luxury vehicles

The second type of driver who may benefit from replacement car insurance is drivers of luxury vehicles. For example, if you drive a fancy sports car, replacement car coverage might be extremely beneficial to you. This is because vehicles depreciate in value very quickly, with high-end vehicles often depreciating faster than budget vehicles. Although any type of car is likely to lose 25% or 30% of its value in the first year alone, luxury cars can lose up to 70% of their value after just five years.

If you had actual cash value coverage and you got into an accident that totalled your car after five years, you might only receive a $30,000 payout from your insurance provider for a car that you originally paid $100,000 for. Even if you received more than 30% of the car’s original value, it is still likely to be a fraction of what you originally paid for your high-end vehicle.

Conversely, if you had replacement cost insurance, your payout would be significantly higher.

Drivers who made small down payments

The last type of driver that is well-suited to replacement car insurance are those who made small down payments on their car. If you took out a car loan to buy your vehicle, but you were only able to make a minimal down payment at the time of the purchase, then replacement car insurance is a wise decision.

When we say a small down payment, we’re talking about a down payment of 25% or less. Down payments of this size translate to very little equity in the car, which means if it was totalled, you would be at a greater risk of being on the hook for a large sum of money.

How replacement car insurance differs from actual cash value

To further explain how replacement car insurance works, we are going to compare it to actual cash value, the most popular form of auto insurance coverage in Canada. As mentioned above, replacement car insurance does not take into account depreciation whereas actual cash value does. However, no matter which type of coverage you have, the claims process will begin the same way.

First, find out if you have to report the car accident in Ontario. Next, call your insurance provider to inform them of the accident. Remember, calling your insurance company after a minor car accident is just as important as after a major car accident.

From there, you will file a claim with your insurance company, and they will assign an adjuster to your case. It is at this point that the process differs. With replacement cost coverage, the adjuster will seek to determine the value of the car according to its condition pre-accident. They will also research the cost of new or similar cars today.

Conversely, with actual cash value coverage, the adjuster will calculate the cost of your vehicle less depreciation. Since depreciation is significant for cars, the adjuster is likely to determine that the value of your car is far less than it was when you purchased it.

For example, even if the adjuster calculates that the current value of your car is $30,000, they will then have to deduct the depreciation, which is often a minimum of 15% and can be upwards of 60% of the car’s worth depending on the age of the vehicle. Therefore, your payout will be far less.

In contrast, with a replacement cost endorsement added to your policy, depreciation will not be factored in, which will translate to a significantly higher payout.

Choosing between replacement cost car insurance and actual cash value car insurance

Are you unsure of whether to buy replacement cost car insurance or actual cash value car insurance? The decision is a difficult one, especially since it can have a major impact on the payout you receive if your car suffered extensive damage. To help you make this decision, the experts at BrokerLink have put together a list of factors to consider:


The first consideration when choosing between replacement car insurance and actual cash-value car insurance is your budget. Since replacement car insurance is far more expensive than actual cash-value car insurance, you must be prepared to pay a higher premium. If you are on a tight budget, replacement car insurance may be out of reach.

Risk tolerance

If you are particularly risk-averse, then adding a replacement car insurance endorsement to your policy will likely give you greater peace of mind than adding actual cash value coverage to your policy. This is because you are more likely to receive a payout that is comparable to the value of your car than you would if your policy featured actual cash value coverage. In essence, if you have a low tolerance for risk, then replacement cost coverage is likely the better choice.

The type of car you drive

The type of car you drive can also influence which type of coverage is better for you. If you drive an expensive car, such as a luxury sports car, then replacement coverage might be the smart choice. This is because your car is likely to depreciate in value at a faster rate. In contrast, cars of lower value may not necessitate replacement cost insurance since the difference between the purchase price and the price after depreciation may not be as significant.

Leased vs. owned car

If you lease your vehicle, then replacement car insurance is usually recommended over actual cash value coverage, especially if you made a relatively small down payment. However, if the down payment you made was over 25% of the cost of the car, then replacement car coverage may not be necessary.

The advantages and disadvantages of buying replacement car coverage

If you still aren’t sure if replacement car insurance is right for you, consider the advantages and disadvantages of this type of coverage below:

Advantage: Higher payouts

The main advantage of replacement car coverage is that it will result in a higher insurance payout if you need to file a claim. Since the insurance adjuster will not account for depreciation, you will receive an amount of money that is far more comparable to the market value of your car. Thus, when you have to replace the car that was totalled, you will have to pay little to no money out of pocket.

Disadvantage: More expensive premiums

Oppositely, the main disadvantage of replacement car coverage is that premiums for these types of policies are usually significantly higher. Therefore, all policyholders who add this coverage to their auto insurance plans must be prepared to pay more for their coverage.

Reach out to BrokerLink for more information on replacement car insurance

For further insight into replacement car insurance, contact BrokerLink today. We can be reached by phone, email, or in person at any one of our locations. However you choose to get in touch, one of our licensed insurance brokers can explain how replacement car insurance works, including how to add it to your policy, how it will affect your premium, and which types of policyholders it is best suited for.

As car insurance specialists, BrokerLink can also provide information on other types of car insurance, such as insurance coverage for towing. One of our knowledgeable brokers can also discuss topics like common car accidents, renewing car insurance, and auto insurance discounts. We also offer free quotes to all drivers. Use our online quote tool or give us a call today to find out more.

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FAQs on replacement car insurance

Where can I buy replacement car insurance?

Depending on the type of replacement car insurance you want to buy, you may be able to buy it from an insurance company, an insurance broker, or a car dealership. Typically, replacement cost endorsements can be purchased directly from insurance companies and brokers, whereas replacement car insurance or gap insurance can be purchased from car dealerships.

How much does replacement car insurance cost in Canada?

Replacement car insurance varies in price, depending on many factors. If you buy replacement car insurance from a dealership, you will likely be charged a flat rate that will be added to your payment plan. However, if you buy it from an insurance company, they will determine your premium based on several factors, ranging from age and driving record to claims history and gender.

How long does replacement car insurance last?

Replacement car coverage varies in length, lasting anywhere from one year to eight years.

Can you transfer replacement auto insurance from one car to another?

No. Replacement car insurance cannot be transferred between vehicles. Thus, if you purchase it for your current vehicle but then decide to buy a new one, you will have to purchase new coverage. Replacement car insurance coverage also cannot cover more than one vehicle at the same time, such as two vehicles in the same household.

How do I file a replacement car insurance claim?

You can file a replacement car insurance claim directly through your insurance provider if your insurance company is where you bought coverage from. Otherwise, you may need to file a claim through your leasing company or car dealership if you purchased the replacement insurance through them.

How do I know if my car insurance policy has actual cash value coverage or replacement cost coverage?

The best way to find out if your car insurance plan features actual cash value coverage or replacement cost coverage is to review the terms and conditions of your policy. Actual cash value coverage is the default, so most policyholders will have this type of coverage included with their policies. That said, the type of coverage you have will be clearly stated in your policy terms.

How can I lower replacement car insurance rates?

There are various ways that you can lower your insurance premium in Canada, such as by installing winter tires or a telematics device in your car, bundling insurance policies, or driving less. Qualifying for low mileage car insurance is a surefire way to reduce your rates. Learn how to calculate mileage here. For more information on how you can save money on car insurance or to discover the different car insurance discounts that may be available to you, reach out to a licensed insurance professional in your area.

If you have any questions, contact one of our local branches.