Hi Cheryl- sounds like this will be a great trip! Here are some thoughts and answers to your questions:
– Skipping the Westfjords sounds like a good idea. Where would you be looking for a boat excursion? There are some boat tours out of Stykkishólmur while you’re on the Snæfellsnes peninsula, like the Viking Sushi tour or kayaking. Or are you thinking of something else?
– Car rental insurance is always a tough call. On average, you expect to lose money on it. But you also don’t want to pay for repairs if you have an accident! The maximum out of pocket cost for a small car at Blue is 90000 ISK, or about $700 US / £525. You may be comfortable “self-insuring” and just paying up to that amount if you have an issue?
If not, you could purchase the zero liability insurance from Blue, or buy third party coverage from a company like Roamright.
I hope that helps!