Glossary
New car replacement coverage, defined
An auto policy endorsement that, after a total loss of a recently bought vehicle, pays the cost of the same make and model from the current model year instead of the depreciated market value. It removes the first years of depreciation from the claim.
In practice
Eligibility is tied to age and ownership: the vehicle usually must be bought new, be within a set number of model years, and have been on the policy since purchase, with the details varying by carrier. It differs from gap coverage, which pays only the shortfall between market value and the loan balance; this pays for a vehicle, which can exceed the loan and is worth more to someone who paid cash or has a small loan. Some carriers offer a lesser version that pays market value plus a percentage. The endorsement is inexpensive relative to what it does in the first two years and worth nothing once the vehicle ages out of it, so it should be removed then. Leased vehicles are often handled differently.
A worked example
Suppose a driver buys a vehicle for $38,000 and it is totalled fourteen months later, when its market value is $29,000. Under actual cash value settlement she receives $29,000 less her deductible. With the endorsement the carrier pays what the same model costs today, say $39,000, less the deductible, which clears the loan and funds the replacement. Hypothetical figures.
Applies to: Auto Insurance