Driving through Iceland is one of the most rewarding ways to experience its otherworldly landscapes—from towering volcanoes and powerful waterfalls to black-sand beaches and glistening glaciers. The freedom of the open road lets you explore hidden corners and dramatic views on your terms. However, that freedom also brings challenges, such as loose gravel, sudden wind gusts, and rapidly changing weather conditions, all of which are part of the journey.
That’s why choosing the right car hire insurance isn’t just a formality. It’s a smart way to protect yourself from unexpected costs and keep your adventure stress-free. Before you start your journey, take a moment to understand the different types of car hire insurance in Iceland and what each one covers. Here's what to know!
Unlike many destinations, Iceland’s natural beauty comes with challenges that can make driving risky if you’re unprepared. The landscape features gravel roads, mountainous routes, highland tracks, and weather patterns that can change rapidly in all seasons. These conditions can easily lead to vehicle damage, even if you’re driving carefully.
What’s more, many rental cars are exposed to environmental hazards such as volcanic ash and blowing sand—risks that are not covered by essential insurance packages. Because of these factors, travellers are advised not to rely on minimum coverage alone. Instead, a well-informed approach to selecting insurance can mean the difference between a minor inconvenience and a major financial burden.
The Collision Damage Waiver (CDW) is usually included in the base rental price and acts as a form of third-party insurance. It reduces your financial responsibility if the vehicle is damaged, but it doesn’t eliminate it. With CDW in place, you’re typically liable for an “excess” or deductible depending on the vehicle category and provider.
CDW only covers damage to the bodywork of the vehicle. It excludes any damage to windscreens, tyres, the undercarriage, and interiors. Additionally, it doesn’t apply in cases of negligence, off-road driving, or damage from natural elements like ash or sand. This makes CDW suitable only for those driving in well-maintained urban areas—though even then, you may find the risk of unexpected damage is higher than you think.
To reduce the high excess associated with CDW, most rental agencies offer a Super Collision Damage Waiver (SCDW). This is an upgraded version of the basic CDW and significantly lowers your out-of-pocket expense in an accident. SCDW is recommended for those travelling outside of Reykjavík or venturing onto Iceland’s Ring Road.
It doesn’t necessarily cover more types of damage than CDW, but it does mean that you won’t be faced with a bill for thousands of euros if your car sustains a dent or scrape. Bear in mind, however, that even with SCDW, exclusions remain in place for gravel, sand, tyres, and windscreens unless you purchase additional protection.
One of the most common types of damage in Iceland stems from gravel. Even if you stay on paved roads, it’s inevitable that you’ll drive on gravel sections, especially in rural areas. Loose stones can fly up from your tyres or other vehicles, chipping the paintwork or cracking windows.
Gravel Protection (GP) covers damage to the car’s paint, headlights, and windscreens caused by gravel. While it’s offered as an optional extra, for anyone planning to leave urban areas, GP is essential. Replacing a cracked windscreen or repainting bodywork can be costly, and without GP, you’ll be responsible for these costs even if the damage wasn’t your fault.
Windscreens are particularly vulnerable in Iceland. Sudden changes in temperature, high winds, and flying debris can easily cause chips or cracks. Even a small chip can expand quickly, requiring a full replacement. Windscreen Protection covers any glass damage to the front, side, or rear windows of the vehicle. While some premium insurance bundles include this automatically, others list it as a standalone option. If you opt not to take Windscreen Protection, keep in mind that even a minor chip could cost you several hundred euros.
Iceland’s volcanoes attract many visitors, but they also pose a risk to rental cars. In the south and central regions, sandstorms and ash can damage paint, windows, and engine parts. These damages are not covered by CDW or SCDW and can be expensive to repair. Sand and Ash Protection (SAAP) covers these types of environmental damage. This coverage is essential if you plan to drive near volcanic areas such as the south coast, the Highlands, or active volcanic zones. Even on a calm day, the wind can shift suddenly and carry abrasive ash particles across your route.
Iceland has one of the lowest crime rates in the world, and vehicle theft is extremely rare. However, Theft Protection (TP) can still be valuable, especially if your rental agreement includes high excess fees. TP covers damage or loss related to car theft or break-ins. While this isn’t the most critical insurance to purchase in Iceland, some travellers prefer the added security, particularly when visiting more remote areas or staying in less-populated regions.
Tyre damage and undercarriage damage are not typically included in CDW or SCDW policies, yet they are common issues on Icelandic roads. Potholes, gravel tracks, and hidden obstacles can easily damage the underside of a vehicle, especially smaller cars not built for rugged terrain. Some insurance packages include specific protection for tyres and undercarriages, or you may need to add it separately. If you’re renting a 2WD and planning to explore outside of Reykjavík or the Golden Circle, this added coverage could save you from hefty repair fees.
Personal Accident Insurance (PAI) provides coverage for the driver and passengers if they are injured or killed in a car accident. It includes costs like medical treatment, ambulance services, and, in some cases, repatriation (returning someone to their home country). Before adding PAI through your car rental company, check whether your existing travel insurance already includes personal accident cover—many do. If you don’t have health insurance or you're unsure about what your policy covers, choosing PAI can offer extra peace of mind during your trip.
When arranging your rental car, you’ll also come across optional charges like fees for additional drivers and young driver surcharges. Adding an extra driver allows multiple people to share the driving responsibilities, but often comes with a daily fee. Drivers under 25 may also face higher rates due to increased risk. While not strictly part of the insurance offering, these charges can add up, so it’s worth calculating your total rental cost in advance—including all optional cover and surcharges.
Final Rentals offers a car hire experience designed for travellers who want reliability and flexibility while exploring Iceland's stunning landscapes. Whether you're planning a quick city break or an epic road trip through remote regions, rent a car with Final Rentals to make the most of your journey with ease and confidence.
To help you feel even more prepared before setting off, take a moment to read What You Need to Know Before Hitting the Road in Iceland for practical travel tips and local insights.
Not every insurance package suits every traveller. If you’re sticking to urban areas or doing a quick Golden Circle trip, a basic CDW with optional windscreen protection might suffice. However, for longer stays or rural exploration, particularly in the south or Highlands, a more comprehensive plan including Gravel Protection, SAAP, and Tyre Cover is highly recommended.
Always consider what kind of driving you’ll be doing, the season of your visit (winter tyres are mandatory between November and April), and your comfort level with potential excess charges. While full coverage may seem costly at first, it can save you hundreds—or even thousands—if something goes wrong.
A rental car opens the door to incredible freedom and unforgettable views—but unpredictable weather and rugged roads mean the right insurance matters. With a bit of planning and the right coverage, you can protect yourself from surprise costs and focus on the experience, not the risks. When you rent a car in Iceland with Final Rentals, you get clear, flexible insurance options and reliable service that keeps you covered wherever the road takes you. Start your adventure with confidence, knowing you're prepared for whatever Iceland has in store!
