Depreciation waivers: everything you need to know

What is a depreciation waiver?

A depreciation waiver is a car insurance endorsement (an optional policy add-on) available in many provinces. When the waiver is on a car insurance policy, the insurer will not deduct depreciation from a claim settlement for damage to the insured vehicle.

The depreciation waiver endorsement has a different official name in each province. For example:

• Ontario: OPCF 43 or OPCF 43A – Removing Depreciation Deduction
• Quebec: QEF 43 (A to F) – Change to Indemnity Endorsement

Despite different names, they work mostly the same.

How does a depreciation waiver work?

Depreciation is the term for the reduction in value of an asset (like a car) over time. You may pay $25,000 when you buy a new car, but it won’t be worth that much ever again. Its value will drop yearly until it’s worth nothing — this is depreciation.

Vehicles depreciate quickly. A new car loses as much as 10% of its value in the first month after purchase, 20% after one year, and 15% each year after that.¹

Car insurance covers the cost of repairing damage to your car (minus your deductible). But, it will only pay up to the vehicle’s depreciated value immediately before the damage occurred. Depreciated value is also known as actual cash value (ACV). Want another way to think about ACV? It’s what the vehicle would be worth if you sold it on the open market.

If the repairs would cost more than the car’s value right before the damage occurred, it’s known as a total loss. In that case, the insurer will offer a cash settlement for the ACV instead of paying for repairs. The vehicle will also be considered totaled if it’s stolen and never recovered.

When you have a depreciation waiver, however, it means your insurer will not deduct depreciation from any claim settlements. With the waiver in place, your insurer would instead pay the lowest of these amounts:

1. The cost of repairing the vehicle
2. The original purchase price of the vehicle
3. The manufacturer’s suggested retail price of the vehicle
4. The cost of replacing the vehicle with a new, similar vehicle

Sounds great, right? Depreciation waivers are very useful for certain vehicles — but they aren’t available for every car.

Depreciation waiver limitations

Depreciation waiver endorsements are only available for new vehicles. “New” usually means between one and three years old, depending on the insurance provider.

Typically, only the first owner of a vehicle can buy a depreciation waiver. That means that used vehicles, even if they’re only a few months old, are ineligible.

And of course, the waiver doesn’t add any additional coverage to your policy (aside from the waiver itself). You’ll only receive the depreciation-free settlement if your claim would normally be covered by your policy. If you’re responsible for a collision, for example, you still need collision coverage on your policy to cover damage to your vehicle — whether you have a depreciation waiver or not.

Why should you have a depreciation waiver?

Most people don’t buy brand-new vehicles with a full cash payment up front. If you, like most, lease or finance your new car, you may find a depreciation waiver very useful.

If you lease a vehicle, technically, you don’t own it — the lessor does. Given that, they would receive payment in the event of a total loss. Without the depreciation waiver, the settlement for the total loss might be less than the outstanding amount on your lease. In that case, you’d have to pay the difference yourself.

If you finance a vehicle, you’ll need to repay your loan even if the vehicle were to be destroyed. The outstanding loan amount can be higher than the vehicle’s ACV, at least for the first year or two. With a depreciation waiver, you know you’ll have enough coverage to pay it off. If you’d already paid much of the vehicle off, you might have some money left over from the settlement. You can put it towards a new car to replace the totaled vehicle, or whatever you like.

And, of course, if you did pay for your new vehicle in full, a waiver of depreciation is still useful. Your paid-off car will depreciate rapidly in those first couple of years. With the waiver on your car insurance policy, you can rest assured that your big investment is well protected if the worst should happen.

Waivers of depreciation vs. GAP insurance

You may be familiar with the term GAP insurance.

GAP insurance fills a very similar need to depreciation waivers. It’s coverage for new vehicles, but it specifically covers the difference between a total loss settlement and the amount remaining on a loan or lease for the totaled vehicle. If you’re leasing or financing a car, GAP insurance waives your responsibility to pay off the lease or loan if your vehicle is totalled and the settlement is less than what you owe.

Whereas depreciation waivers are endorsements attached to your car insurance policy, GAP insurance is usually a separate product. Though some car insurance providers sell GAP insurance, you can also buy it from a car dealer or financial institution.

There are other differences, too. While depreciation waivers are usually only available for the first one to three years of a vehicle’s life, GAP insurance aligns with the full duration of your lease or loan repayment. Plus, GAP insurance is available for used vehicles, while the depreciation waiver is not.

So, which should you get? Waivers of deprecation tend to cost less, and you can tack them to your existing car insurance policy. However, if you’re unsure, you should discuss your situation with your insurance provider.

Commonly asked questions

What’s the difference between OPCF 43 and 43A?

The only difference between endorsement OPCF 43 and OPCF 43A is that 43A is meant for leased vehicles. With 43, any settlements would be paid to the policyholder, while with 43A the settlement is payable to the company leasing out the vehicle (the lessor).

What’s the difference between QEF 43 and QPF 5?

QEF 43 is the name for the standard depreciation waiver endorsement in Quebec. It’s an optional add-on to car insurance policies that removes the insurer’s right to deduct depreciation from a claim settlement for the insured vehicle.

QPF 5 (Quebec Automobile Insurance Policy Form No. 5) is very similar. However, it’s a separate policy that complements the main car insurance policy. QPF 5 only applies if the insured wishes to replace their vehicle following a total loss. They would receive the cash value of their vehicle from their main policy (QPF 1). Then, their QPF 5 policy would cover the remaining amount they need to replace their vehicle with a similar new one.

While the QEF 43 endorsement is only for new vehicles, QPF 5 is available for used vehicles. It’s also available for certain high-value vehicles that may not meet the underwriting standards for QEF 43.

Sources

1. Popely, Rick. “Car Depreciation: How Much Value Does A Car Lose Per Year?” CARFAX, 3 Feb. 2021, carfax.com/blog/car-depreciation.

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