How does replacement car insurance work?

Imagine you just bought a new car a year ago, and now you've been in a collision and the vehicle is totalled. But your standard car insurance only covers what it’s worth now, not what you paid for it. With car prices in Canada climbing, thanks in part to steep U.S. tariffs, and how a new car can lose up to 30% of its value in the first year alone (according to the Canadian Black Book), that gap could be significant.

That’s where replacement insurance comes in. It helps protect the full value of your new vehicle, not the depreciated value most standard policies offer. Without the right coverage, you could end up carless and still making payments, or stuck paying out of pocket to get a similar vehicle. Replacement insurance can help you avoid that, and we've broken down the key benefits below.

What is replacement car insurance?

Replacement car insurance, sometimes called new car replacement insurance or a replacement cost endorsement, is an optional add-on to your regular auto insurance policy. It steps in when your car is badly damaged in a collision and declares a total loss (also known as a “write-off”) or if your car is stolen.

Without this coverage, your insurer will typically only pay out the actual cash value of your car, which means its value after depreciation. And since new vehicles lose value fast, that could leave you stuck paying off a loan for a car you no longer have, or scrambling to afford a similar replacement.

Replacement cost coverage helps you get back what your car was originally worth because it does not take into account depreciation, which means a larger payout. Depending on the policy, it might cover the full amount you originally paid, or even the cost of a brand-new version of your car.

How replacement car insurance works

If your car gets written off, replacement car insurance can step in with one of two options: either you’ll get a brand-new vehicle of the same model year (if it’s still available), or you’ll receive a payout for the original purchase price or the manufacturer’s suggested retail price at the time, whichever is lower. The goal is to put you in the same financial position you were in immediately prior to the loss.

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 or theft) to determine its market value. To learn more about market value versus replacement cost, contact BrokerLink.

How replacement car insurance differs from other types of coverage

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

Replacement cost endorsement

A replacement cost endorsement is the first way to add replacement cost insurance to your auto insurance policy. In Ontario, specifically, it is referred to as an OPCF 43, which is also known as a waiver of depreciation. Many provinces have their own version. For example, in Alberta, it's referred to as a SEF 43R.

The endorsement is purchased from an insurance company or through an insurance 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.

The cost of replacement car insurance 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, depending on the province. If 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.

Gap insurance

Gap insurance may sometimes also be referred to as replacement cost car insurance, but it's not the same thing. Gap insurance is a type of coverage typically sold by car dealerships or lenders to drivers who lease or finance their vehicles. It is typically added to and paid for through your lease agreement or payment plan rather than your auto insurance policy.

Gap insurance helps you cover the "gap" between the remaining balance you have on your car loan and the value of the vehicle if it is lost or totalled. Most gap insurance policies last up to two years. This is because, by then, you’ve likely paid off enough of your loan that there’s no longer much of a “gap” between what you owe and what your car is worth after depreciation.

It is important to note that the claims process for replacement car insurance can be a bit more complicated than with an edorsement, as in the event of an accident or theft, you would first need to file a claim with your insurance company and then file a second claim with the provider that sold you the gap insurance coverage (i.e., your car dealership).

Is it worth it to pay for replacement car insurance?

Whether or not it's worth it to you depends on how comfortable you are with risk. As we mentioned earlier, some cars can lose 20% to 30% of their value in just the first year. But the drop doesn’t stop there. Over the next few years, most vehicles continue to depreciate by another 8% to 15% each year, according to the Canadian Black Book. Add it all up, and by year five, your car might only be worth about 40% to 45% of what you originally paid for it.

Depreciated value after one year

According to Auto Trader, for the first quarter of 2025, the average new vehicle price in Canada was $65,564. So, if you buy a brand new vehicle for $65,000, and you factor in depreciation for the first year, after only one year, your car may only be worth somewhere between $52,000 and $45,500.

Depreciated value with a loan

Now, let's say you financed your car for 84 months (the length more than half of new car loans are financed for in Canada, according to the CBC) at 7.08% (the average auto loan interest rate in Canada in February 2025, according to Statistics Canada). After one year, you'd still owe somewhere around $57,000 on your loan.

This means that, without replacement cost coverage, you would still owe $57,000 on your financed car but may only receive an actual cash value payment of somewhere between $52,000 and $45,500 if your car is deemed a total loss. That leaves you with having to cover the remaining $5,000 to $11,500 on your loan (unless you have gap insurance).

Depreciated value with cash purchase

But this isn't just a risk for financed or leased cars. If you happen to purchase your car with cash at $65,000, and you only receive an actual cash value payment of somewhere between $52,000 to $45,500 after a total loss one year later, that leaves you with a $13,000 to $19,500 deficiency when it comes time to buy a replacement car, likely affecting your ability to afford to buy the same or a similar vehicle. But with a replacement cost endorsement, you'd receive the full amount you need to purchase the same model or a similar model.

Who should consider replacement coverage?

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

You're buying a new car

New cars lose value quickly, especially in the first couple of years. Replacement coverage helps protect your investment by covering the cost to replace your car for what it's actually worth and not the depreciated value if it’s written off or stolen.

You're leasing or financing a new car

If you're still making payments, a write-off could leave you owing more than your car is worth (as we explained earlier). Replacement coverage can help cover the full cost of a similar vehicle, so you’re not left paying out of pocket for a car you no longer have.

You're buying a high-end, luxury vehicle

Luxury vehicles often depreciate even faster than regular cars. According to Investopedia, some of the top five fastest-depreciating luxury vehicles can lose over 70% of their value within five years. So if you paid $100,000 for your dream car and totalled it in year five, you might only get a $30,000 payout with standard coverage. That’s a huge financial gap, and one that replacement insurance is designed to help cover.

You're a young driver

Younger drivers often face higher insurance premiums and may have less savings to fall back on in case of a major accident. If you're just starting out, protecting the full value of your vehicle can provide some added financial security while you build your driving history, especially since new or young drivers are at a greater risk of being in an accident, according to MADD Canada.

Replacement car insurance limitations and exclusions

While replacement cost coverage can offer great protection, it’s important to understand what it doesn’t cover and where some limits apply. For starters, most policies only apply to brand-new vehicles and are only available for a set period, typically two to five years from the purchase date. After that, the coverage usually drops off. There are also exclusions, such as:

• Depreciation on tires and batteries

• Other normal wear and tear

• Damage due to poor maintenance

• Damage from illegal use

• Custom modifications

• Mechanical breakdowns

Keep in mind that coverage terms can vary depending on your insurer and your province. It’s always a good idea to review the fine print or talk to your insurance broker to make sure you know exactly what your policy does and doesn't include.

Learn more with BrokerLink

If you want to learn more about replacement car insurance, reach out to BrokerLink. We can advise you on the different endorsements or policies in your province and help you decide whether an endorsement or something like gap insurance is better for your car insurance policy.

And when it comes to car insurance, a BrokerLink advisor is here to help you find a policy that fits your needs. We’ll walk you through your options and explain how different types of coverage work, such as:

• Accident benefits coverage

• Liability car insurance

• Accident forgiveness coverage

• Comprehensive car coverage

• Collision car insurance

• Uninsured automobile insurance

You can reach us by phone, email, or in person at any one of our locations throughout Canada. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive quote in minutes.

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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.