Renting a car in Iceland means driving in conditions that don't always exist back home, gravel shoulders, sudden crosswinds, and occasionally a river crossing on an F-road. Insurance is the part of the booking that decides who pays if one of those conditions leaves a mark on the car. This guide explains what's actually covered on a Blue Car Rental booking, what the Liability Waiver adds, and what no insurance in Iceland will cover.
Short answer: Every Blue Car Rental booking includes Collision Damage Waiver (CDW), Super CDW (SCDW), Gravel Protection, Theft Protection, and the legally mandatory Third-Party Liability insurance. Tyre damage is only covered if you add the Liability Waiver (LW), which also covers water damage, including legal river crossings, underbody, wind-door, and sand or ash damage. Nothing covers damage from illegal off-road driving or illegal river crossings, regardless of which insurance you've added.
What's included in every Blue Car Rental booking
Every rental from Blue Car Rental comes with a base package of five protections, already built into the price rather than sold as separate add-ons:
- Collision Damage Waiver (CDW), reduces your liability for collision-related damage to the vehicle.
- Super CDW (SCDW), lowers your financial responsibility further on top of standard CDW.
- Gravel Protection, covers damage caused by loose stones and gravel, one of the most frequent sources of paintwork and windscreen damage on Iceland's roads outside the capital.
- Theft Protection, covers you if the car is stolen during the rental period.
- Third-Party Liability, the insurance required by Icelandic law for any vehicle on the road, covering injury to others and damage to third-party property.
This base package is a reasonable starting point for a Ring Road trip in a 2WD car during summer, when the biggest realistic risks are gravel chips and minor scrapes. It's a different calculation once tyres, water, or unpaved F-roads enter the picture, which is where the Liability Waiver comes in.
What the Liability Waiver (LW) adds
The Liability Waiver is the coverage that closes the gaps left by the standard package. It covers water damage, including damage from legal river crossings, along with underbody damage, tyre damage, wind-door damage, and sand or ash damage. None of these are covered under the base CDW/SCDW/Gravel/Theft package.
That distinction matters more in Iceland than in most rental markets, because these are exactly the damage types travellers actually run into:
- Wind-door damage happens when a door is opened into a strong gust and the hinge or panel is forced back. Iceland's coastal and highland winds make this a real, recurring issue, not a rare edge case.
- Tyre damage from sharp gravel or potholed unsealed roads is not covered unless LW is added, tyre cover exists only through the Liability Waiver.
- Sand and ash damage is a specific risk near Iceland's black sand coasts and volcanic areas.
- Water damage from a legal river crossing, meaning a marked, signed ford that's open to traffic, is covered under LW. It is not covered under the base package.
One point worth being precise about: LW covers legal river crossings and everyday water exposure, not damage from driving off-road or fording a river where it isn't permitted. If you're planning a route involving F-roads or river crossings, it's worth reading the F-roads in Iceland guide and checking umferdin.is and safetravel.is before you set out, rather than deciding on the fly whether a crossing looks manageable.
What no insurance covers
Illegal off-road driving and illegal river crossings are not covered by any insurance product, base package or Liability Waiver. This is consistent across Icelandic rental companies, not a Blue-specific restriction, because off-road driving is illegal in Iceland under nature conservation law.
If you're unsure whether a river crossing is safe or permitted, the calm approach is to turn around. Checking current conditions on umferdin.is and safetravel.is before a highland trip, and considering a guided operator for genuinely difficult crossings, is a more reliable strategy than assessing a river yourself at the water's edge. For more on why this line is drawn where it is, see is off-road driving illegal in Iceland?
Coverage comparison at a glance
Terms current as of August 2026, verified against Blue Car Rental's insurance page. Policy wording and third-party availability (such as Costco Travel listings) can change, so it's worth confirming details directly before you book.
| Damage type | Covered by base package (CDW, SCDW, Gravel, Theft, Third-Party) | Covered with Liability Waiver (LW) added |
|---|---|---|
| Collision damage | Yes | Yes |
| Theft | Yes | Yes |
| Gravel chips to bodywork | Yes | Yes |
| Injury/damage to third parties | Yes (mandatory by law) | Yes |
| Tyre damage | No | Yes |
| Underbody damage | No | Yes |
| Water damage, including legal river crossings | No | Yes |
| Wind-door damage | No | Yes |
| Sand and ash damage | No | Yes |
| Illegal off-road driving or illegal river crossing | No | No |
Full policy wording and current terms are set out on the insurance page, it's worth reading before you book, especially if your route includes gravel roads (Route F35, Route F208) or coastal driving where wind and sand are more likely.
Can you waive rental insurance in Iceland?
You can decline optional coverage like LW if your own travel or credit card insurance already covers rental damage, but you cannot waive the Third-Party Liability insurance, it's mandatory by Icelandic law on every rental car. If you do decline optional coverage and something happens, you're responsible for the repair cost directly, then you claim it back from your own insurer, which can take time and isn't guaranteed to match Icelandic repair costs.
Given that repair costs in Iceland tend to run higher than in many home markets, most travellers find it simpler to take the coverage through the rental company at the time of booking rather than relying on an outside policy they haven't tested against a claim.
Do you need a deposit for rental car insurance in Iceland?
No, Blue Car Rental takes a credit card imprint as security, not a deposit. That means no funds are held or blocked on your card at pickup; the imprint is simply there in case of a claim under the rental agreement. This is a different model from some companies that may place an authorization hold on your card for the full excess amount, which can tie up funds for the length of your trip. For more on how this compares to other deposit structures you may encounter, see car rental deposit in Iceland: what are my options?
Does Costco rent cars in Iceland?
Costco does not operate its own car rental fleet in Iceland. Costco Travel, available to members in some markets (mainly the US), works through partner booking platforms for international car hire, and availability, partner operators, and terms for Iceland specifically can vary and change. If you're comparing options, it's worth checking directly with Costco Travel for current Iceland listings, and comparing the coverage and terms against a local Icelandic operator's own policy, since what's bundled into "insurance included" varies significantly between providers.
Mistakes to avoid with rental car insurance in Iceland
A few recurring mistakes account for most of the insurance-related frustration travellers report after their trip:
- Assuming the base package covers tyres. It doesn't, on Blue Car Rental or most Icelandic operators, tyre cover is an LW-only benefit.
- Treating gravel roads as low-risk in a 2WD car. Gravel Protection is included, but it covers damage, not the driving conditions themselves, slow down on loose gravel regardless of coverage.
- Not checking road status before a highland trip. F-roads open on varying dates each season depending on conditions; check umferdin.is rather than assuming a route is passable because it was open last year.
- Opening car doors into strong wind without thinking about it. This is one of the most common, and most preventable, sources of claims in Iceland.
- Skipping the terms because insurance "is all the same everywhere." It isn't, read what's actually excluded before you drive, not after something happens.
For a broader look at what tends to catch first-time renters off guard beyond insurance, see hidden costs of renting a car in Iceland, and if you're still deciding between vehicle types, how to book a car in Iceland: 2WD, 4x4, insurance and pickup walks through how vehicle choice and coverage fit together.
The real question: will you get overcharged for damage?
Most people asking about rental insurance in Iceland aren't really asking about policy names, they're asking whether they'll end up disputing a repair bill after the trip. The way to avoid that isn't to buy every add-on reflexively; it's to match your coverage to your actual route. A short Golden Circle loop in summer carries different risks than a highland trip involving F-roads and river crossings, and the 4x4 vs 2WD guide is a useful starting point if you haven't settled on a vehicle yet. Read the terms before you book through online check-in, ask about anything unclear at pickup, and choose coverage that fits the roads you're actually planning to drive.
PARKING IN REYKJAVÍK: ZONES, PAYMENT, AND WHERE TO LEAVE YOUR CAR
