Insurance Valuation: Your Vehicle's Worth

When it comes to determining the value of your vehicle, insurance companies consider a variety of factors, including its age, mileage, condition, accident history, and depreciation. This value, known as the Actual Cash Value (ACV), plays a crucial role in calculating insurance payouts in the event of a total loss or repairs. The ACV represents the car's worth in its current condition, taking into account factors such as wear and tear, modifications, and resale value. Insurance companies may use proprietary models or third-party vendors to assess a vehicle's ACV. Additionally, factors like location and market trends can influence a car's value. Understanding how insurance companies value vehicles is essential for policyholders to ensure they receive fair compensation in the event of a claim.

Actual Cash Value (ACV)

ACV is not to be confused with replacement cost, which represents the cost of buying a new car of the same or similar model. Replacement cost coverage typically comes with more expensive premiums than ACV policies.

When determining the ACV of a vehicle, insurance companies will take into account multiple factors, including:

• Mileage
• Make
• Model
• Vehicle options
• Accident history
• Age of the car
• Interior and exterior condition
• Location

If you disagree with the ACV of your car in a totaled situation, you may be able to negotiate or appeal your claim with your insurance company. However, you will need to provide detailed records of your car's maintenance to prove that your car is worth more than the determined value.

Replacement Cost

When it comes to insurance, the term "replacement cost" refers to the amount it would take to replace an item or property with a new version of the same or similar make and model, without considering depreciation. This type of insurance coverage is available for various assets, including homes, vehicles, motorcycles, and boats.

In the context of auto insurance, replacement cost coverage is particularly relevant when a vehicle is considered a total loss after an accident. A car is typically declared a total loss when the cost of repairs exceeds a certain percentage of its value, which can range from 51% to 80%, or even higher in some states.

The monthly premiums for replacement cost insurance tend to be significantly higher than those for traditional car insurance. However, it is important to weigh the additional cost against the peace of mind it provides, especially if you have a newer or more expensive vehicle that is more likely to be totalled in an accident.

When considering replacement cost insurance for your vehicle, it is essential to review the eligibility requirements set by the insurer. Some companies may limit this coverage to brand-new cars or impose restrictions on the age and mileage of the vehicle. Additionally, you may be required to purchase comprehensive and collision coverage to qualify for replacement cost insurance.

In summary, replacement cost insurance for vehicles offers valuable protection by ensuring you can replace your car with a new one of similar make and model, without being limited by depreciation or market value considerations. While it comes at a higher premium, it can provide significant financial relief and convenience in the event of a total loss.

Depreciation

How Depreciation Works

On average, a car loses up to 60% of its suggested retail price in the first five years. For example, a car with an MSRP of $24,770 would depreciate as follows:

• $20,906 after the first year ($3,864 depreciation)
• $17,645 after the second year ($7,125 depreciation)
• $14,892 after the third year ($9,878 depreciation)
• $12,569 after the fourth year ($12,201 depreciation)
• $10,608 after the fifth year ($14,162 depreciation)

Factors Affecting Depreciation

In addition to the initial price and age of a car, other factors influencing depreciation include:

• Vehicle type: Alternative-fuel and luxury vehicles tend to have higher depreciation rates than more durable cars like pickup trucks.
• Vehicle colour: Cars with trendy colours may retain less value than those with standard colours like black, white, or silver.
• Vehicle features and modifications
• Initial vehicle cost: Lower-priced cars are usually in higher demand and depreciate at a slower rate.
• Accident history: Major accidents in a vehicle's history will typically lower its market price.
• Mileage: Higher mileage indicates more wear and tear, reducing the car's overall value.
• Make and model: Makes or models with known issues may depreciate faster, while some retain value better than others.
• Overall vehicle condition
• Local selling prices for similar cars

Calculating Depreciation

Insurance companies use depreciation to calculate a car's actual cash value (ACV), which is then used to make decisions about repairs, total loss cases, and claim payouts. The ACV of a car is its worth in its current condition, factoring in depreciation.

To calculate ACV, insurance companies consider multiple factors, including the year, make, model, mileage, overall condition, and major options. They then subtract the deductible and applicable state taxes and fees.

Diminished Value Claims

When a car is involved in an accident, its market value decreases even if it is repaired and restored to its pre-accident condition. This decrease in value is called diminished value, and it is the difference in the car's market value before and after the accident. A diminished value claim can help recover the loss in value when the owner tries to sell or trade in the vehicle.

There are three primary types of diminished value claims:

• Immediate Diminished Value: This refers to the resale value of the vehicle immediately after an accident but before any repairs are made. This type of claim is rarely used since insurance companies typically cover the cost of repairs.
• Repair-Related Diminished Value: This type of claim is relevant when insufficient or improper repairs are made to the vehicle, or when low-quality parts are used. It assumes that the vehicle cannot be restored to its pre-accident condition.
• Inherent Diminished Value: This claim refers to the car's market value after it has been repaired following an accident. Even with excellent repairs, the car's value is likely to be lower due to its accident history, making it the most common type of diminished value claim.

Negotiating an insurance claim

Determine the value of your vehicle

Before negotiating with the insurance company, it is important to independently determine the value of your vehicle. This can be done by considering factors such as the year of manufacturing, the value of similar vehicles for sale online, and using online valuation tools or guides like Kelley Blue Book (KBB) and the National Automobile Dealers Association's (NADA) guide. Getting a written estimate from a qualified mechanic or expert witness can also provide an in-depth assessment of the necessary repairs and their cost.

Negotiate with the insurance adjuster

If you feel that the insurance company's appraisal of your vehicle is too low, you can negotiate with the claims adjuster. It is recommended to get a written estimate from a professional body shop or mechanic, use online tools to determine the ballpark value, and find comparable vehicles for sale in your local area. You can also request your Certified Collateral Corporation (CCC) report, which is an itemized list of your vehicle's features used by the adjuster to determine its market value. Having this evidence will help build a stronger case for negotiating a higher settlement value.

Provide a counter-offer

After researching and determining the value of your vehicle, you can prepare a counter-offer supported by your research and documentation. It is important to keep in mind that insurance companies are businesses aiming to make a profit, so they will want to see compelling evidence to increase their offer. You can calculate a fair settlement amount by considering factors such as any pain and suffering caused by the accident, the cost of medical care and related expenses, loss of income due to injuries, the cost to repair or replace your vehicle, and the cost to repair any other property damaged during the accident.

Consider hiring an attorney or public adjuster

If negotiations with the claims adjuster are unsuccessful, you may consider hiring an attorney or a public adjuster as a last resort. An attorney can guide you through the negotiation process, demand supporting evidence for the insurer's low offer, and pursue bad faith claims if unreasonable conduct is evident. A public adjuster is an independent claims adjuster who works for you rather than the insurance company and can handle all aspects of the claim on your behalf. However, keep in mind that there is a cost associated with hiring an attorney or public adjuster, and there is no guarantee that the settlement amount will increase.

Confirm the agreement in writing

Once you reach a settlement with the insurer, it is important to confirm the terms in writing to ensure that everyone understands their financial obligations and expectations. This can be done by sending a letter to the adjuster outlining the negotiated amount, the date when you expect to receive additional documentation or the settlement amount, and the damages and/or injuries covered by the settlement.

Agreed Value vs. Stated Value

Agreed value insurance is a policy where the insurer and the insured agree on the value of a covered item. The item is then guaranteed to be insured for that fixed amount in the event of a claim. This type of insurance is commonly used for expensive, modified, antique, or classic vehicles, as it provides a high degree of protection against depreciation. Agreed value insurance policies often require an appraisal of the item before coverage can be purchased. In the event of a claim, the insurer pays the agreed-upon value, regardless of depreciation.

Stated value insurance, on the other hand, allows the policyholder to determine the vehicle's value, which helps set the insurance premium. However, in the event of a claim, the insurance company decides whether to pay the stated value or the fair market value, taking into account depreciation. This means the payout amount can be significantly less than the stated value. Stated value insurance is commonly used for classic cars and can help lower premiums, but it may not provide full reimbursement in the event of a total loss.

Key Differences:

The main difference between agreed value and stated value insurance lies in the payout amount. Agreed value insurance guarantees a payout based on the agreed-upon value, providing peace of mind and greater protection against depreciation. In contrast, stated value insurance gives the insurance company the option to pay either the stated value or the actual cash value, whichever is lower, resulting in potential surprises in the payout amount.

The choice between agreed value and stated value insurance depends on the specific situation. Agreed value insurance is ideal for those who want maximum protection for their high-value or unique items and are willing to pay higher premiums. It ensures that the insured receives the full agreed-upon value in the event of a claim. On the other hand, stated value insurance can be a more affordable option for those who cannot afford to cover the total value of the vehicle or who are not concerned about insuring its real value. It offers some coverage at a lower cost but may not provide full reimbursement in the event of a total loss.

Frequently asked questions