How Does Insurance Determine the Value of a Car?
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UPDATED: Mar 13, 2020
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If you’ve ever been in a car accident, you know it can be a lot of drama. Aside from any health-related issues, you’ll probably also have to deal with damage to your vehicle.
Whether the accident was your fault or caused by another party, you’ll want your car repaired or replaced as soon as possible.
Insurers use a host of different techniques to determine the value of your vehicle at the time of a loss. Generally, this is done by comparing your vehicle (year, make, model, mileage and location) to similar vehicles.
Insurance adjusters may use recent sales data or consult local auto dealers to figure out what your car is worth.
And nowadays it is becoming much more common for insurers to utilize computer software in their research. Where is the first place you look to see what a car is worth? The Internet!
Which companies are used to determine a car’s value?
This isn’t really an industry secret. There are three main companies an insurance adjuster typically relies upon to determine a vehicle’s value:
1.Kelly Blue Book
You can visit the corresponding websites to get a general idea of your car’s value to compare it to what the insurance adjuster comes up with.
Four Values for Your Car
In reality, there are technically four measurements of value for your car, most of which don’t come into play when dealing with an insurance company. You can expect to see ACV as the loss settlement method of choice on the average car insurance policy.
However, each company uses a slightly different valuation technique. Which is the best? It’s hard to say. But whatever company determines your car’s value to be the highest is likely the company you would agree with.
Often times, your opinion will differ from that of your insurer, and how much money you receive for a totaled vehicle will depend on your policy language. Specifically, the valuation method you agreed to.
Unlike homeowner’s insurance, replacement cost is not an option for every car on an auto policy. On the typical policy, replacement cost is only offered on newer vehicles.
Usually your car can’t be more than two years old, or in some cases, three years old (the latter being rare).
This is basically because a car’s value depreciates quickly. Insurance companies would lose quite a bit of money if they were to agree to replace a three or four year old car with a new one. If this were common practice, we would all be paying much higher insurance premiums than we do now.
Actual Cash Value (ACV)
Actual Cash Value is determined by taking a vehicle’s replacement cost minus depreciation. This is the most common valuation method employed by auto insurance companies.
Insurers will agree to pay the cost to repair or replace your car, or give you its actual cash value, whichever costs them less. This concept explains why some cars may be totaled even though they are not truly destroyed.
This reality is also the reason many people opt for liability only coverage after their car reaches a certain ACV. There simply isn’t any reason to pay for full coverage (comprehensive and collision) when your insurer will not likely pay you very much in the event your vehicle is damaged.
Put another way, would you pay $300 per year for coverage that might net you $700 in the event your car was totaled? We hope not.
Insurers could care less about your car’s market value. This would be the amount of money you “could get” for your car at any given time. Depending on market conditions, this value could fluctuate wildly (think of housing prices between 2005 and 2009). Perhaps you can convince someone to pay MUCH more for your car than it’s worth (its ACV). Great! However, insurance companies don’t fall for that.
Finally, there is stated value physical damage coverage, which is normally reserved for classic cars, RVs, watercraft or any other vehicle whose value may be hard to determine. Ultimately, you and your insurer agree on the vehicle’s value prior to policy inception. You will likely have to produce an appraisal from a reputable source to back up your proposed value.
Tip: Keep in mind that if the accident is your fault, you would need to have physical damage coverage in place to ensure your car is repaired or replaced by the insurance company. That includes both collision and comprehensive coverage, assuming the accident was the result of anything other than a collision.