Our car insurance is getting more expensive and we are looking to cut costs. We have a two-year lease on a car but see in our policy that we are paying for new vehicle protection for five years. What does that mean and is that necessary with such a short lease? Could we opt out or choose a shorter timeline? – Jessica, Toronto
Depreciation protection from your insurance company can keep you from owing money if your leased car is written off in a crash – but check that your lease doesn’t already include coverage, an expert said.
“Lease agreements normally [already] come with gap insurance, which protects the purchaser in the event of a serious collision when the vehicle is written off by the insurance company,” said Shari Prymak, a senior consultant with Car Help Canada, a Toronto-based not-for-profit that helps drivers find cars and negotiate purchase agreements. “If the value of the vehicle happens to be lower than the balance of the lease, then the gap insurance is there to make up the difference, so the vehicle owner is not on the hook for it.”
At the risk of over-simplifying, you can buy gap insurance from the manufacturer or dealer, and you buy depreciation protection, also known as new vehicle protection – in Ontario, it’s called OPCF 43, but there are versions in all provinces – from your insurance company.
They both are designed to protect you from depreciation if your car is totalled in a crash or stolen. Without them, your insurance company will pay out what your car is worth at the time of the crash or theft – and typically, that’s a lot less than what you paid for it originally, Prymak said.
So, if you lease or have a car loan, for instance, that means you could owe the finance company the difference.
But gap insurance and depreciation protection guarantee that the payoff will be the amount you paid for your vehicle.
“So, [for a financed vehicle, for example] if the vehicle’s market value is now $25,000, but the owner still owes $30,000 on the loan, it’s on them to pay off the lien to make up that difference if they don’t have gap coverage,” he said.
Mind the gap?
Typically, gap insurance costs around $1,000 and you must buy it when the car is new, Prymak said.
“I’ve seen dealers charge up to $3,000,” he said, adding that financed vehicles don’t automatically come with gap insurance, although you can choose to buy it. “I don’t know if it’s a requirement of leases to have gap, but I don’t believe I’ve seen a lease agreement that doesn’t have it. It’s just common practice.”
We asked a few car companies about whether they include gap insurance in their leases and what it covers. We didn’t get immediate answers.
Depreciation protection through an insurance company is an endorsement you add on to your insurance policy when you buy or lease a brand new vehicle or a demo with less than 5,000 kilometres on it. Like gap insurance, you can’t add it later.
It’s available for between two and five years and typically costs roughly $100 a year, or often less, said Traci Boland, a London, Ont.-based insurance broker and chair of the Insurance Brokers Association of Canada.
“Everybody who buys or leases a new vehicle should have OPCF 43,” she said. “I have it for five years on my Jeep Wrangler and I’m in year three. If my vehicle is stolen, I get the bill of sale price for it.”
Generally, the length of the coverage depends on your insurance company – some companies only offer two-year OPCF 43 coverage, for instance, and others only offer five-year coverage. So, to change from five-year coverage to two-year coverage, for instance, you may have to change insurance companies. The annual cost for OPCF 43 would probably still be similar, she said.
While you can cancel OPCF 43 entirely to save a little money, Boland and other brokers we spoke to don’t recommend it. Instead, they suggest doing the math to see how much you’re saving by skipping it. “On a brand new vehicle, it’s $100 a year,” said Debbie Arnold, a Toronto-based insurance broker. “I would make a client sign in blood if they don’t want to take [OPCF 43] because when there’s a claim settlement, the client is not going to be happy if they don’t get at least the bill of sale value.”
It’s important to understand that OPCF 43 doesn’t pay you the cost to replace your vehicle with a brand new one – it just gives you the amount on the original bill of sale, Arnold said.
But at least one company sells replacement cost coverage, separate from OPCF 43, that will give you the price of a brand new car.
“So if you purchase a 2024 [Hyundai] Tucson and you paid $50,000 for it in 2024,” Arnold said, “if you have replacement cost coverage, then when there’s a total loss in 2026, it’s putting you into a 2026 vehicle [which might cost significantly more].”
While Prymak said you shouldn’t need OPCF 43 if your lease includes gap coverage, Boland recommends checking the wording of the dealer’s gap insurance policy carefully.
But there are also benefits to having both gap insurance and OPCF 43. For instance, if you decide to buy your car at the end of your two-year lease but have OPCF 43 for five years, you would still be covered against depreciation for three more years, the Insurance Bureau of Canada said in an e-mail.
Crash course?
If your lease includes gap insurance or if you have OPCF 43, you walk away from the lease if your car is totalled or stolen, Prymak said.
“So if the vehicle is written off, the insurance company will pay out the lease. That’ll be between your insurance company and the financial company that’s carrying the lease,” he said. “Then you’re essentially back to square one, and you have to purchase or lease a new vehicle.”
But if you made a down payment at the start of the lease so your monthly payments would be lower, you’ll lose it.
“The insurance company is not responsible for compensating you on that down payment. They’re just responsible for paying off your lease,” he said. “So it’s not a good idea to make a large down payment on a lease. It doesn’t benefit you financially in any way.”
A better idea? Many car companies let you put down a security deposit in exchange for a lower interest rate, he said.
“So you get lower payments and then that security deposit is returned to you at the end of the lease when you bring back the vehicle,” he said.
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