CDW- we have always purchased this in Iceland- it brings peace of mind for not much money. Ash damage insurance I would suggest as not required. Avoid the sandurs in nasty windy weather, some of them have warning lights anyway and the worst on the ringroad inc. Myrdalssandur have been stabilised. Going to Snaefellnes you will not really need to worry about the sandurs anyway TBH.
Are you planning any ‘off road’ driving at all? The Icelanders have a very relaxed attitude to what they will drive their cars upon and whilst the vast majority of the roads you may come accross on a daily basis are sealed/ tarmac covered there may well be others that are not. IF the road has an ‘F’ designation your insurance will not cover you to drive there unless you have a 4X4 and appropriate cover. In March the interior roads will still be closed so TBH I wouldn’t bother with a 4×4. Having said that, I managed to bog down the Golf I hired last time, admittedly driving where perhaps I should not have gone.
Do not bother getting roof and underside insurance, you are on holiday, not rallying and I’m assuming not planning any river crossings. All rivers on the vast majority of roads and all main roads are bridged.
Be aware of soft verges and the way that many of the roads are built on embankments to allow the snow the be winnowed away by the wind.
Finally- unless you really, really want a super new and clean shiny car, hire locally, not from the big boys. There are loads of places to chose from.