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Informing Policyholders About Replacement Cost Coverage and Replacement Insurance

Replacement cost coverage and replacement insurance are popular with policyholders. These types of coverage means that the settlement of a claim does not have to take depreciation into account when calculating the value of the vehicle at the time of the loss.

In order to help the policyholders understand the amount of their claim, it is important to explain the factors that can impact the indemnity. For example, the policyholder still has a loan on the vehicle or the same type of vehicle is not available and other options have to be considered for the replacement.

Two types of coverage

There are two types of coverage under which the payment received does not take into account vehicle depreciation:

  1. The Q.E.F. No. 43 (A to F) endorsement – Change to indemnity
  2. The Q.P.F. No. 5 policy – Replacement insurance

These two types of coverage specify how the claim is to be settled when the vehicle is declared a total loss.

A settlement not always understood

A policyholder may not understand the amount of their settlement and consider it to be insufficient, as they had taken replacement cost coverage or replacement insurance. It is best to explain the calculation process used to determine the indemnity under the policy or endorsement, as applicable.

Vehicle declared a total loss

For a claim settlement, it should be noted that the vehicle will be repaired if the damage appraisal determines that the vehicle can be repaired safely, with no depreciation. If this is not possible or the damage is too severe, option 43E for replacement cost in the event of a total loss or replacement insurance will then apply.

For a total loss, the policyholder’s vehicle may be replaced with a vehicle equivalent to the one previously owned. If the policyholder selects a vehicle with a higher value, he or she will have to pay the additional cost.

Factors that can affect the payment calculation

A policyholder who receives a replacement cost settlement may feel that the indemnity is insufficient. The factors that can have an impact on the calculation and final payment should be explained, such as an outstanding amount payable to the creditor or the concept of real value of the vehicle.

There are two main reasons why the indemnity, even though it is fair, is lower than that expected by the policyholder:

  1. The dealer’s posted vehicle price may include credit charges in the case of reduced interest financing (such as a 0% interest rate). The Q.E.F. No. 43 endorsement does not cover these financing costs.
  2. The policyholder took out a loan when they bought the vehicle that has since been damaged, and they still owe money on it.

Regardless of the financing method, only the real value of the vehicle is reimbursed. The intent is to provide fair compensation to policyholders—to policyholders who paid the vehicle cost in full at the time of purchase, and to policyholders who financed their purchase. The balance of an auto loan has not been taken into account in this case.

Limited inventory of replacement vehicles and extended delivery times

Should a damaged vehicle be declared a total loss, replacement cost coverage is provided to replace it with a new model with the same features, equipment and accessories. A replacement vehicle must be available, however!

Availability of vehicles and options

If the policyholder does not want to replace their vehicle with an equivalent model or this cannot be done within a time that is reasonable for the policyholder and for the insurer, discuss the other options indicated in their policy and how they impact the indemnity. A different vehicle make or model, but of equal value, could be the answer


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