How Does An Insurance Company Determine Car Value?

The aftermath of a bad car accident can seem like an endless string of disappointing news. You might find out your car is totaled, and to make matters worse, your car valuation could be far less than you expected. It’s like sticker shock in reverse.

Naturally, you’re going to have questions about how the insurance adjuster came up with such a number. You could end up feeling like you’re being low-balled. But there’s a method behind the insurance madness. And you can try to negotiate for a higher settlement price.

How Do Insurance Companies Determine a Car Valuation?

A car insurance company will generally take into account your vehicle’s year, make, model, mileage, condition, accident history and depreciation when determining the value of your vehicle. This is called the actual cash value of your car.

Actual Cash Value (ACV) vs. New Car Replacement Insurance

Whether you have actual cash value (ACV) or new car replacement insurance determines how much you get from the insurance company when you file a comprehensive or collision car insurance claim for your totaled car.

What Is Actual Cash Value (ACV)?

Actual cash value is the value of your car right before it was totaled.

An insurance adjuster will inspect your vehicle after an accident or damage. If it’s declared a total loss, the adjuster will calculate your car’s actual cash value. The definition of the term “actual cash value” can vary by state.

For example, in Florida, ACV means “the cost to replace less depreciation.” In California, ACV refers to the dollar amount that a “knowledgeable buyer” is willing to pay and a “knowledgeable seller” is willing to accept. In New Jersey, ACV for a total loss means the cost to replace a car with a “substantially similar vehicle.”

While the process varies by insurance company, these are common factors used to determine a vehicle’s ACV:

• Depreciation
• Make, model and year
• Mileage at time of loss
• Pre-loss condition of the car
• Resale value of parts and metal (salvage value)
• Sales prices of similar cars in your area

In some states, such as New York, sales tax is required to be a component of the ACV, but New York doesn’t require insurance companies to include title costs.

Insurers may be required to use specific guides to determine the ACV, depending on the state—for example, NADAguides. Insurance companies may be able to use other publicly available sources if they are approved by the state’s insurance department.

You can contact your state’s department of insurance to find out what sources are permitted for determining a car’s ACV.

How Much Does a Vehicle Depreciate?

The average five-year-old vehicle depreciated by 33% in 2022, according to a study by iSeeCars.com, which analyzed more than 3 million car sales of three- and five-year-old vehicles sold in 2022. Vehicle depreciation decreased by 17% compared to 2021, which means cars didn’t lose value as quickly in 2022 as the previous year.

Pandemic-related disruptions to automaker supply chains led to some vehicles retaining more value compared to pre-pandemic years. Some vehicles appreciated in value, according to the iSeeCars.com report.

Even with smaller depreciation losses, luxury vehicles continue to depreciate faster than other types of cars. Some five-year-old luxury cars depreciated by more than 50%, including BMW 7 Series, Maserati Ghibli and Jaguar XF.

What Is New Car Replacement Insurance?

New car replacement insurance provides enough money after a stolen or totaled car claims to buy a new model of the same vehicle. New car replacement coverage doesn’t take into account a vehicle’s depreciation.

New car replacement coverage generally costs more than regular ACV coverage. Insurers that offer this coverage typically set age and mileage limits for vehicles that can qualify for new car replacement insurance. And some companies offer better car replacement coverage, which provides funding to buy a newer or better model of the vehicle if it’s a total loss.

Similar to ACV coverage, new car replacement coverage has a car insurance deductible. A deductible is the amount subtracted from an insurance company’s claim payment. Say you have new car replacement coverage on a vehicle that will cost $40,000 and you have a $1,000 deductible. In that case, the insurance company will cut you a check for $39,000.

Agreed Value vs. Stated Value

If you have an antique, classic, collectible or even a “modern classic” car, you’ll want to look into the best classic car insurance. Classic vehicles don’t always depreciate in value like a regular car. You’ll typically have two different payout options if your classic car is totaled:

• Agreed value. You and your insurance company agree upon the value of your vehicle in advance. If your car is totaled, you’ll be paid that amount (minus your deductible). If your car appreciates in value, you can change the agreed value amount when your policy renews.
• Stated value. You can “state” what your car is worth (along with supporting documentation) and your car will be insured for that exact amount. But if your car is totaled, your insurance company can choose to pay the lesser of the stated value or the actual cash value.

Agreed value is the better choice for classic car owners because it guarantees that you’ll recoup your financial loss if the car is totaled, but it is more expensive than the stated value. Keep in mind, most standard insurance companies don’t offer agreed value coverage unless they partner with a specialty provider such as Hagerty.

Can You Negotiate a Settlement with an Insurance Company?

You can try to negotiate a settlement if you’re not satisfied with the insurance company’s decision. Here’s how to do it.

When the insurance adjuster makes a settlement offer, they should include a written explanation of how they came up with the amount. Ask for a copy of the valuation report if it is not included. If you disagree with the settlement offer, you’ll have the right to reject the offer and negotiate a new settlement figure.

But before you make a counteroffer, it’s a good idea to do your own research ahead of time. Some of the documentation to include to support a counteroffer might include:

• A list of your car’s features. If the adjuster missed any special features, such as leather seats or an entertainment package, make sure to point these out. You may be able to also negotiate the value of permanently attached equipment, such as toolboxes or a wheelchair lift.
• The estimated retail value of the car. You can get this from sources such as J.D. Power.
• Comparable sales of similar cars in your area. You can check online sources such as Autotrader.

The insurance company does not have to accept a counteroffer. If you don’t come to a settlement agreement, you may have other options. For example, in Texas, you have the right to pursue legal remedies including mediation, arbitration or a lawsuit.

When Would I Need Gap Insurance?

You may want gap insurance if your car loan balance is greater than the vehicle’s worth if it’s totaled or stolen. For example, if you owe $25,000 on your car loan but your car is only worth $20,000 due to depreciation, you have a $5,000 “gap” if your car is totaled or stolen.

You may need gap insurance if:

• You are leasing a vehicle.
• You financed most of the car’s value.
• You rolled negative equity from your previous car loan into a new car loan.
• You took out a car loan of five years or more.
• Your vehicle depreciates faster than other vehicles. For instance, luxury vehicles typically depreciate at a faster rate.

You generally don’t need gap insurance if you owe less than your car is worth or if you can afford to pay the difference between the car’s worth and what’s owed on your car loan if your car is totaled or stolen.

How Car Insurance companies Value a Car FAQ