How does insurance determine the value of a car?

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, on top of working with your insurance company to report the accident.

Whether the accident was your fault or caused by another party, you’ll want your car repaired or replaced as soon as possible. There are so many factors that determine the outcome of an accident: what sort of coverage you had and how extensive the damage was are just two examples.

This is where things can get messy. In the unfortunate event your car is totaled, you are typically at the mercy of the insurance adjuster, who ultimately determines the value of your car.

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.

Plus 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
2.Edmunds
3.Nada Guides

These aren’t companies that only an insurance company can use, any driver who is looking for more information can utilize them as well. 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. That way you can be certain of the price you are being quoted.

What are the four values of 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. (For more information, read our “How are car insurance rates determined?“)

Often times, your opinion on something such as the actual cash value 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.

Why is replacement cost so important?

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 for every single driver they insure. If this were common practice, the price that we would all be paying much higher insurance premiums than we do now.

What is actual cash value (ACV)?

ACV, or 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. Generally, the value of your vehicle goes down over a period of time. You’ve no doubt heard that your car is immediately worth less the moment you drive it off the lot, and that’s not far from the truth.

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 that a driver would 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.

How is market value important? 

Insurers couldn’t 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). Another driver might be convinced depending on your sales pitch. However, insurance companies don’t fall for that.

How is stated value calculated?

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. Whether you use an appraiser or a website, that’s up to you, but it needs to be from a credible source. Auto insurers aren’t going to trust the word of just anybody; a licensed appraiser would be your best bet.

Tip: Keep in mind that if the accident is your fault (read our full article At-Fault Accident: What is it and how is fault determined? for more information), 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.

Make sure you know what your coverage limits are as well. If you only purchase a standard auto policy that isn’t constructed personally for you and your vehicle, you may not have the type of coverage necessary to protect you from all scenarios. In times of an accident, you don’t want to be taken by surprise with having to suddenly pay for the repair costs out of pocket. The cost of repair on a vehicle can be high, so knowing what is your policy limits are will save you a headache.

We tend to become attached to our vehicles; hearing that they’re worth little more than salvage can be rough. Hopefully with this information, you’ll now have a better understanding at how major insurers calculate the value of your vehicle. Even if it doesn’t seem like a fair price at first, once you see all the variables, it tends to make a little more sense.