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Drivers and homeowners

January 28, 2014

How a $50 car insurance clause saved me over $10,000

Usually, car insurance covers you for the actual, depreciated value of your car — not the replacement cost. But a depreciation waiver can change that.

July 8, 2013, the day of the Great Toronto Flood, was a day I’ll never forget. You may remember the image of the silver Ferrari submerged to its windows in murky floodwater on Lower Simcoe St. However, the image forever burned in my mind’s eye is that of my 2010 Honda Civic EX filled with water on the side of a Mississauga street.

As I rushed through the parking lot at the end of a particularly stressful, 10-hour day, I knew it had been raining; I just had no idea how incredibly much rain had come down, and was still coming down. I drove through the parking lot with ease and as I turned onto the street, things seemed relatively calm. However, as I approached a red light, I came to a dip in the road that was in the process of being flooded by the adjacent, overflowing creek. I accelerated as the light turned green and my air intake swallowed hard, sucking in the rushing water and stopping the car dead. The engine was hydro-locked and I knew two things:

  1. I would not be driving home.
  2. This was going to be expensive.

Or at least it would have been expensive, if not for a clause I had added to my car insurance policy that most people don’t know about until it’s too late: a waiver of depreciation. In my case, a friend in the business had insisted I purchase this coverage.

What’s a waiver of depreciation?

If you purchase or lease a brand-new vehicle and it is stolen or written off as the result of an accident, a depreciation waiver means the insurance company will write you a cheque for the value of a brand-new vehicle (including sales tax), subject to certain conditions. You can’t get a depreciation waiver if you’re insuring a used car, only if you’re the original owner or lessee.

Without the waiver, the most you will get is the depreciated value of your car, leaving you to hunt for an acceptable used car in comparable condition, or dig deep to make up the difference on a cost of a new car. Most insurers offer this coverage for two years from the vehicle purchase date, although some insurers are now offering coverage for up to five years.

How much does it cost?

It varies depending on the vehicle and the insurer, but it’s typically $40 to $60 per year; mine cost $50 a year. In other words, less than you spend on coffee. The cost will increase each year as the value of your car decreases, but the amount will remain nominal.

Who should buy it?

Anyone who drives new vehicles, but especially those who may not have the cash to purchase a new vehicle outright and so decide to lease or finance their vehicles instead.

This is because you are still responsible for repaying your car loan or fulfilling the terms of your lease even if your car is stolen or written off, and the amount outstanding on your loan or lease could potentially exceed the depreciated value of your car. Of the $26,000 I had borrowed to buy my Civic, I still owed $15,000, which was coincidentally also its approximate depreciated value. In the end, my insurance company wrote me a cheque for the full $26,000; after paying off the balance of my loan I was left with a nice down payment for my next brand-new car.

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