Auto Insurance

How Do Insurance Companies Determine Car Value?

Insurance companies determine the payout you receive based on your vehicle’s actual cash value. Learn how insurance companies value cars, why it matters, and how to negotiate your car’s valuation.

How Do Insurance Companies Determine Car Value

Insurance companies calculate the actual cash value (ACV) of your car by factoring in a number of details, including: the make and model; wear and tear; previous accidents; mileage; and how much your car’s year, make, and model typically sells for. Every insurance company uses these factors in different ways to determine the value of your vehicle.

If you ever need to replace your vehicle due to an accident, it’s important to know how insurance companies value cars. For example, your car’s actual cash value may come into play if you get into an accident and the insurance company has to determine whether it will pay for the repairs or declare the vehicle a total loss.

What is Actual Cash Value?

Actual cash value refers to the sum of money that your insurance company would pay if your car is stolen or totaled in an accident. If the cost of repairs exceeds that actual value, the insurer will consider your car totaled because it would be less expensive for them to replace your car than to fix it.

For instance, if your car’s ACV is $5,000, and it will cost $2,000 to repair it after an accident, the insurance company will likely pay to cover the repairs. On the other hand, if it would cost $6,000 to repair the damage, your insurer will most likely declare the vehicle a total loss and opt to help pay for its replacement instead.

Your insurance company calculates your car’s actual cash value by taking into consideration how much other cars of the same make, model, and condition as yours are selling for on the market. These calculations also take into account specific details of your vehicle, such as:

  • Modifications or aftermarket parts
  • Driving history, including previous accidents
  • Miles driven
  • Wear and tear, such as dings, dents, and rust

For example, if vehicles of the same make and model are currently selling for $8,500 on the open market, but yours has a large dent in the driver’s side door, your insurance company will likely give it a lower ACV than otherwise comparable cars.

Why Does Your Car’s Value Matter?

Your car’s value matters because it determines how much you get from the insurance company after an accident and whether they’ll pay for the repairs or total it.

For example, if your car with an ACV of $5,000 had a front-end collision that damaged multiple critical components of the chassis as well as the engine, the cost of repairing this damage would likely far exceed your ACV of $5,000. In this case, your insurance company would likely declare it a total loss.

But if the damage was relatively minor, then the collision coverage component of your auto insurance policy would likely cover repairs to the vehicle. ACV also comes into play for comprehensive coverage if your vehicle is damaged by non-collision incidents or stolen. 

How Replacing Your Totaled or Stolen Car Works

After you get into an accident, your insurance company will compare the cost of repairing your vehicle to its ACV. The repair costs are based on data gathered by an insurance adjuster who inspects your car to assess all of the damage. Your car’s ACV will depend on its mileage and condition before the accident, factoring in elements such as those mentioned above.

During this process, the insurer may increase or decrease your vehicle’s totaled car value depending on its condition before the accident. For example, if your car is 10 years old but only had 45,000 miles on it, its value may be slightly higher than an otherwise comparable vehicle.

You can expect a phone call within a few days after you filed your claim with the insurer’s decision. Note that you can ask how they determined your car’s ACV and how they estimated the cost to repair it.

It’s important to keep in mind that some states have laws regarding when a vehicle has to be totaled. For example, in North Carolina, the threshold for when a vehicle has to be totaled is set at 75% of its actual cash value. So if the ACV is $20,000, and the cost to repair is over $15,000, it has to be declared a total loss.

Once your car’s ACV has been settled, your insurer typically would either pay you directly if you own the vehicle or pay the lender if you are financing or leasing the vehicle. You could then use that settlement however you see fit, including towards buying a replacement vehicle.

When Your Car’s Value Is Lower Than Expected

It’s fairly common for your car’s value to be lower than expected. Cars depreciate quickly, and you may even still owe more on a loan than what your insurer says the car is worth. However, there are ways you can protect yourself against these types of situations.

You Owe More In Loans Than Your Car’s Actual Cash Value

If you leased or took out an auto loan for your car, you may owe your lender more than the ACV decided by your insurance company. In this case, the amount you get from your insurer may not cover the rest of your payments. 

Unfortunately, even if your car has been stolen or totaled, you still need to pay the remaining balance on it. An option to avoid this situation is to purchase gap insurance on your car, which can offset the difference between what you owe and what the insurance company gives you.

Your Car Will Cost More to Repair Than Its Actual Cash Value

In some cases, the costs to repair your vehicle are higher than the amount your insurance company says it’s worth, or its ACV. Even if you don’t owe anything on a loan, this can cause a problem for you because the insurance payout for your car’s current value may not be enough to secure a car of similar make, model, and condition on the market. If you want to ensure you won’t have to pay more out of pocket to buy a replacement car, you may want to consider replacement cost insurance, which is specifically designed to replace your car with the same make and model if yours is a total loss.

How Gap Insurance or Replacement Cost Insurance Work

A car can be an expensive investment, but depreciation can quickly lower its value. The average rate of depreciation is 40.1% over 5 years, meaning your vehicle can lose an average of 8.02% of its value each year, even if you take good care of your car, drive carefully, and avoid accidents. Because depreciation can happen so quickly, many car owners choose to get gap insurance or replacement cost insurance to protect against if their vehicle gets totaled.

Gap Insurance

If you owe more than the car’s ACV, and your leased or financed vehicle is totaled, gap insurance will help you pay down your loan balance. It’s an optional addition to standard auto insurance policies, but many lenders require it. If you need to use your gap insurance, the funds will be sent directly to your lender to pay off the rest of your loan.

However, gap insurance is not always necessarily a good idea. For example, if you put a big down payment on your vehicle, you may have already reduced the principle so much that your vehicle’s ACV may be enough to pay off your loan balance if your car is totaled.

Replacement Cost Insurance

Replacement value car insurance is different from gap insurance in that it’s designed to replace your vehicle with a new one if it ever gets totaled. After you get into an accident, the cost to repair is compared to the car’s ACV. If the cost to repair is too high, your replacement cost insurance would pay for a new vehicle of the same make and model as the one you insured.

But like gap coverage, it does not always make sense to purchase replacement cost coverage. Because this coverage will replace your totaled vehicle with another version of that same vehicle, it may not be a good idea to pay for this extra coverage if you anticipate needing a different car in the future. For example, if you are buying a small car now but intend to change to a larger vehicle in the coming years to accommodate an expanding family, you likely would not benefit from replacement cost insurance.

How to Negotiate Your Car’s Valuation

Because the insurance company’s calculation is somewhat subjective, it’s possible to negotiate your car’s ACV if you can provide evidence that the company undervalued your vehicle. To do this, be prepared with the following information to argue your case:

  • How much the make and model of your car costs in your area
  • The details, such as trim level and upgrades, that were factored into your insurance company’s valuation
  • An appraisal from a professional
  • Any paperwork you have to fill out to dispute your insurer’s valuation

After you have gathered this information, compare your valuation with that of the insurer. If everything you have collected suggests that your car’s ACV should be higher, contact your insurance company and inform a representative that you’d like to challenge the valuation of your vehicle using the claims dispute process. You will likely have to fill out forms to begin the process. From there, you may need to speak with several people and present the evidence you gathered, highlighting any mistakes the insurance company made and explaining how your evidence supports your calculation.