The Advantage Of Replacement Cost Insurance

What is replacement cost insurance?  

As soon as you drive your new car off the lot, it looses some of it's value.  The loss is going to vary from vehicle to vehicle.  Within a year, your vehicle could loose as much as 30% of it's value.  Replacement cost will protect you from this loss in value for up to three years from the time you buy the vehicle.  

There are two types of replacement cost insurance.

The first type of replacement cost will protect you for replacement of a new vehicle up to the amount you paid for the original vehicle insured.  If the cost of new vehicle is higher than you paid for the original vehicle, you must pay the difference.  Most of the replacement cost coverage in Alberta is like this.

The other type of replacement cost protection will cover any increase in the price of a new vehicle, due to inflation.   Most of the replacement cost coverage in Saskatchewan provides this coverage for two years from the time you purchased the vehicle, and usually is not found in Alberta policies. 

What does Replacement Coverage Cost?

In Alberta - The average cost for this rider is $25.   

In Saskatchewan - The average cost is $55 for the first $20,000 of value with an additional $1 per $1000 of coverage.  eg $40,000 would cost $75.

The cost is higher in Saskatchewan, but the coverage is also better.  

What is "Actual Cash Value"?  

Actual Cash Value is probably the most difficult term to really understand.  It is more subjective than any other term used in the insurance industry.  No two vehicles are the same and this is creates a major problem.  If your vehicle is in exceptionally good shape and has had major repairs, or been very well maintained you may not be offered the true value of the vehicle.  You will have a hard time agreeing on the value of the vehicle.

If your vehicle is damaged, the insurance company wants to determine if it is cheaper for them to just pay you what the vehicle is worth, or repair it.   The motivation is to pay the least amount of money they can.   If it costs more to fix the vehicle than it is worth, they have the option to pay you the actual cash value.  They do not have to fix it.

When you have replacement cost you do not have to argue with the insurance company as to the value of the vehicle.  If they don't fix it they buy you new one, or pay you what you paid for it originally.   If they decide to replace the vehicle, you get a new vehicle.  No arguments.

What is depreciation?  

In auto insurance, the term depreciation is usually used in relationship to parts used to repair a vehicle.  Normal wear and tear occurs to engines, brakes, ball joints, and so on.   Many times wearable parts are damaged in an accident.  The insurance company can deduct the depreciation on these parts when they were to replace the damaged parts with new parts.  The problem is, you have to pay the difference if you do not have replacement coverage.  With replacement cost insurance they are obligated to use new parts without making you pay for the depreciation.    

Who can purchase Replacement Cost Coverage?
Personal autos, such as trucks, SUVs, cars, and vans usually the vehicles that can have replacement cost insurance.  The vehicle must be new, or a demonstrator and you must add the coverage to your policy shortly after you purchase the vehicle.  


Vehicles which are used for business may or may not be eligible. 


Here are the wordings for those of you who are more analytical.  

Typical Alberta Policy Wording

In consideration of the premium charged and in the event that loss of or damage to the automobile for which indemnity is provided under Section C of this policy exceeds the deductible amount specified in the policy, the Insurer hereby agrees to waive its rights under Statutory Condition 4(5) and in the event of total loss to the automobile the Insurer agrees to waive its rights under Statutory Conditions 4(5) and 4(6).

PROVIDED THAT:

(a) the Insured is the original purchaser of the automobile exclusive of the selling dealer;

(b) the loss or damage occurs within (30 or 36) months of the date on which the automobile was first delivered to the Insured:

(c) this endorsement does not apply with respect to

(i) tires and batteries, nor

(ii) betterment resulting from the repair or replacement of parts having prior unrepaired damage;

(d) in the event of total loss to the automobile the Insurer shall pay the Insured the lesser of the actual purchase price of the automobile and its equipment including taxes at the original date of purchase or the manufacturer’s suggested list price of the automobile and its equipment including taxes at the original date of purchase.

Except as otherwise provided in this endorsement, all limits, terms, conditions, provisions, definitions and exclusions of the policy shall have full force and effect.

Typical Saskatchewan Policy Wording 

E.E.F. 43 - Replacement Cost Coverage

In the event that loss or damage to your "automobile" for which you are insured under Section C exceeds the deductible amount shown on the Coverage Summary page, we agree to waive Statutory Condition 4-(5)

There are two ways to settle a loss:

1. By Repair:

If we decide to repair your "automobile" we will be responsible only for the damage which was caused by the loss. This includes any wear and tear (depreciation) charged on original or new parts.

2. By Replacement:

If you are the owner of the "automobile" and we decide your "automobile" must be replaced because of its loss, settlement will be as follows:

a) If the loss or damage happens within the first 24 months from the date you took delivery of the  automobile" and you choose a brand new "automobile" of the same make and model with similar equipment (color may vary), we will replace your "automobile". If the same model year is not available, we will replace your "automobile" with the next model year available.

b) If the loss or damage happens after the first 24 months from the date you took delivery of the "automobile", and you choose a brand new "automobile" of the same make and model with similar equipment (color may vary), we will pay the lesser of:

      i) our cost to replace the "automobile" with a new "automobile" of the same make and model; or

      ii) the original purchase price (including applicable taxes) plus an inflation factor of 6%.

c) If you choose a different make and model with a value lower than shown on the Coverage Summary page, we will only pay you our cost to replace the "automobile" with a new"automobile" of your choice.

d) If you choose a different make and model with a higher value than shown on the Coverage Summary page, we will only pay you up to the original purchase price of the "automobile" as shown on the Coverage Summary page.

e) If loss or damage happens and we cannot replace the "automobile" covered because the same make and model are no longer produced or manufactured, we will pay you the original purchase price (including applicable taxes). If the loss or damage occurs after the first 24 months from the date you took delivery of the "automobile", we will add an inflation factor of 6%. If you lease the "automobile" and we decide your  automobile" must be replaced because of its loss, we will only pay you up to the value of the leased "automobile" and its equipment as stated in the Leasing Agreement of the specified lessee, or the manufacturer’s suggested list price of the "automobile" and its equipment at the original date of purchase, whichever is the lesser amount.

Standard Statutory Conditions Present Under Most Auto Insurance that are affected by the replacement cost insurance. 
4. This effective Insurer Liable for Cash Value of Automobile
(5) The Insurer shall not be liable for more than the actual cash value of  the automobile at the time any loss or damage occurs, and the loss  or damage shall be ascertained or estimated according to that actual

cash value with proper deduction for depreciation, however caused, and shall not exceed the amount that it would cost to repair or replace  the automobile, or any part thereof, with material of like kind and 

quality; but if any part of the automobile is obsolete and out of stock,  the liability of the Insurer in respect thereof shall be limited to the value of that part at the time of loss or damage not exceeding the 

maker’s latest list price.

4 Repair or Replacement

(6) Except where an appraisal has been made, the Insurer, instead of  making payment, may, within a reasonable time, repair, rebuild or  replace the property damaged or lost with other of like kind  and quality, 

if, within seven days after the receipt of the proof of loss, it gives  written notice of its intention to do so.