Replacement Insurance: what you need to know to avoid problems
For several years now, drivers have chosen replacement insurance to receive “full replacement” compensation, i.e., an indemnity that does not take into account the depreciation of their vehicle.
Replacement insurance provides for an indemnity to be paid out following the replacement of:
- The described vehicle in case of total loss
- Damaged parts in case of partial loss
For a total loss, the vehicle may be replaced by a new vehicle of equal, lower or higher value. If the replacement vehicle is of higher value, the insured must then pay the difference.
For a partial loss, damaged parts are replaced with new original manufacturer equipment parts only.
As part of a claims settlement, note that what can be repaired is repaired. If this is not possible or if the damage is too severe, the part or vehicle will then be replaced.
However, many consumers are unaware or forget that replacement insurance complements the coverage we all have under the primary insurance contract (Q.P.F. No. 1).
As the owner of a vehicle, you must purchase liability insurance, which is included under the primary auto insurance contract (Section A of the policy). The other coverage under the policy is optional (section B of the policy), more specifically coverage for damage to the vehicle.
And, since replacement insurance complements the primary insurance contract, it covers the same risks as the primary contract. For replacement insurance to come into play, compensation must first have been paid out under the primary insurance contract.
You are involved in a collision for which you are at-fault, but you did not purchase coverage to cover damage to your vehicle. Since you will not be indemnified under your primary insurance contract, you cannot be indemnified under your replacement insurance.
Settlement in a word
When your primary insurance contract covers the damage incurred, you will receive an amount of money that corresponds to the value of the part or the vehicle at the time of the loss. This amount takes wear and tear into account (depreciation).
What your replacement insurance covers after that is the difference between this value on the day of the loss and what it costs to replace your vehicle with a new one, or to have it repaired with new original manufacturer equipment parts.
Your vehicle was in an accident and is declared a total loss. Its value at the time of the accident is $12,000. Replacing it with a new vehicle of the same nature and quality would cost $25,000.
- Reimbursement under primary insurance contract = $12,000 (value on day of the loss)
- Reimbursement under replacement insurance =$13,000 (replacement value of vehicle – indemnity received under primary insurance contract)
How replacement insurance benefits you
- First, you must be indemnified under your primary insurance contract (Q.P.F. No.1) to receive an indemnity from your replacement insurance.
- Removing coverage from your primary insurance contract (Q.P.F. No.1) will have consequences on the coverage under your replacement insurance (Q.P.F. No.5); talk to your insurance broker or agent to make an informed decision.
- To benefit from replacement insurance in case of a total loss, you must replace the vehicle.
- To benefit from replacement insurance in case of a partial loss, the insured vehicle must be a new vehicle or a demonstrator vehicle.
- Replacement insurance also includes coverage that provides for the reimbursement of the deductible and for the lease of a replacement vehicle, as per the limits stated in the policy.