How do Car Insurance Companies Value Cars?

If your car is totaled in an accident, how much you think your car is worth isn’t always what it’s actually worth according to an insurance company. How do insurance companies value cars? Here’s what you need to know.

Basics of collision and comprehensive coverage

An insurance policy is made of several different coverages that help pay for expenses if you get into an accident. Liability coverage will help protect you if you are responsible for injuring someone or damage someone else’s property. Coverage for your own vehicle is provided by collision and comprehensive coverage.

These are optional coverages that help pay to repair or replace your car in the event of an accident. Collision coverage applies if your car hits or is hit by another car or stationary object, while comprehensive coverage applies for damage not related to a collision. This includes damage due to things like fire, theft, vandalism or natural disasters.

Why do insurance companies have methods to value car?

Accurately determining the value of a car is important when it comes to insurance. The insurance company uses a car’s value not only to price premiums, but also to determine how much needs to be paid in the event the car is totaled. This is important to ensure that claimants are paid fairly after a loss.

What is a “totaled” car?

A “totaled” car is one that has been deemed a total loss by the insurance company. This means that the cost to repair the car is close to or more than what the car is worth. Contrary to popular belief, a totaled car is not necessarily damaged beyond repair- it just may not make financial sense to fix. A stolen car that isn’t recovered is also considered a total loss.

What happens when a car is totaled?

After you file a comprehensive or collision claim, an adjuster will review the damages to your car. After your car is appraised, your insurance company will come to you with a settlement offer.

If you accept the settlement offer and the vehicle is damaged to the point of a total loss, you’ll need to transfer your title to the insurance company at time of payment. They will take possession of your totaled car, and you will receive the total loss car insurance settlement.

When going through your own collision or comprehensive coverage, you’ll need to pay your deductible as well.

Understanding actual cash value (ACV)

When it comes to car insurance, a policy will typically cover an insured vehicle for its actual cash value, or ACV. The ACV is basically what you could have reasonably sold your car for right before it was damaged. Car insurance will pay up to the actual cash value and no more.

This value is influenced by depreciation factors such as year, make, model, ownership history, mileage and options. Since most cars depreciate quickly, the actual cash value will often be lower than what you paid for the car.

The actual cash value will be used in the event of a total loss. If the cost to repair a car is close to the car’s ACV, the insurance company handling the claim is likely to declare it a total loss. This repair cost not only considers the price of parts, but also labor prices.

Replacement cost vs ACV

A vehicle’s replacement cost differs from its ACV in a few ways. The replacement cost is how much it would cost to replace the vehicle without accounting for depreciation. In most cases, the replacement cost would be how much it would cost to buy the vehicle new.

Car insurance policies typically do not cover a car’s replacement cost unless an endorsement or additional coverage says otherwise. Car insurance companies will almost always use a car’s actual cash value to determine how much it’s worth and how much to pay in the event of total loss.

How an insurance company calculates ACV

Insurance companies use a variety of methods to determine a car’s actual cash value. An insurance company will look at depreciation factors like age, mileage, condition and repair history to calculate a car’s ACV.

In many cases, an insurance company will use additional adjustments to determine ACV. This may include an insurance adjuster’s inspection findings, third-party appraisal software, and recent sales data for similar vehicles.

What to do when your car value depreciates

Most new cars lose value the second they’re driven off the dealer’s lot. In some cases, this can be thousands of dollars. If you financed your car or leased it, you could owe more than what your car is worth.

This can become financially significant if your new car is damaged beyond repair in a covered accident soon after purchase. Typically, lenders will require payment in full for the loss of your car. Totaling a leased vehicle does not void the lease contract.

Car insurance policies will not cover a car for its replacement cost unless you carry certain optional coverages. If you carry coverage for your vehicle, consider the following coverage to help protect your investment:

Gap insurance

Owing money on a car header to the junkyard is not an enviable position to be in. You can protect your investment with Loan/Lease Gap coverage. This coverage pays for the difference between what your car is worth and what you still owe on it. It can help free you from having to make payments on a car you can no longer drive.

New car replacement coverage

New Car Replacement coverage from Plymouth Rock can also give you peace of mind when you have a new vehicle. We will pay the cost of replacement for the same make, model and year of your car, if available, if you experience a total loss as the original owner and your car was two model years old or less at the time of the accident.

Please note you can’t combine Loan/Lease Gap coverage with New Car Replacement coverage.

Conclusion – How do insurance companies value cars?

An insurance company will typically use the actual cash value (ACV) to determine how much a car is worth. This value is calculated based on various factors like year, make, model, mileage and more. The ACV will be the maximum amount the insurance company will pay up to in the event of a total loss. Gap insurance or new car replacement coverage can help in cases when you owe more money than what the car was worth at the time of the accident.