Knowing how insurance companies value cars can help you renegotiate for a higher settlement offer when filing a claim because the payout your insurer gives would likely be far below your expectations.
And far below the price you thought your car was, especially if it was totaled in an accident.
That’s why I’ve written a comprehensive answer to the question, “How do insurance companies value cars?” You’ll get a close idea of the metrics they look at in valuation, how they value both regular and classic cars, websites to visit to find out your car’s value, ways to go around little insurance payouts, and how to ask your insurer for more money after you’re given a low reimbursement estimate.
The reason most car owners get frustrated when insurers assess their cars as lower than their perceived value is that the criteria for valuing cars aren’t revealed to the public, they’re closely guarded by insurance companies.
And if they’re closely guarded, you won’t know what to base your counterargument on when challenging the insurer’s estimate and gunning for a higher compensation.
That’s why most drivers experience reverse sticker shock when presented with the amount their insurer is willing to pay for their damaged vehicle.
It doesn’t have to be that way anymore, as I’m sharing with you the key factors that influence how insurance companies value cars, and the first of these is actual cash value.
Related: How Does Car Insurance Work?
How do you explain actual cash value?
Actual cash value can be explained as the fair market value of your car just before it was totaled in an accident…minus depreciation.
Depreciation isn’t the only factor that’s considered when calculating actual cash value. Other factors considered in a car are the age, make, model, year, mileage, the resale value of car parts, mechanical state, and extent of previous damages and repairs.
All of these and the cost of depreciation are subtracted from the current market value of your car to arrive at its actual cash value. The actual cash value is a key component that guides how insurance companies value your car and arrive at payout estimates.
How do insurance companies value cars?
Insurance companies value cars using their actual cash value, not the present market value of the car.
This is the reason why your insurance company pays you a significantly lower amount than what was used in buying your car.
Remember that actual cash value includes the cost of depreciation. And cars depreciate immediately when they’re driven out of the parking lot.
As a matter of fact, cars lose 20% of their initial value a year after it’s bought, and they keep dropping in value as the years go by.
So, let’s say you bought a car for $28,000 and it got caught up in an accident after a year that led your insurer to declare it a total loss.
Your insurer would value your car by checking the current market value of your car and removing over 20% of the cost from it as depreciation.
Coupled with the assessment of the age, mileage, make, year, resale value of body parts, and mechanical condition, you’re likely to receive a rough estimate of $17,200 as a settlement offer.
And your insurer would present that estimate to you as the car’s actual cash value.
Now, insurance companies prioritize different factors that influence the actual cash value more than others, such as mileage, past accidents, the resale value of parts, make, model, state of the car, and depreciation.
No two insurance companies calculate actual cash value the same way. Some weigh the depreciation and resale value of car parts more than others. However they do it, they keep their valuation methodology to themselves, away from public consumption.
Other insurance companies feed all of those factors and car information into third-party software that automatically calculates the actual cash value based on preset formulas.
The good news is that you can always challenge your insurer’s first estimate if you feel it’s too low and renegotiate for a higher payout. I’ll show you how as you read further.
How insurance companies value classic cars
Classic cars are cars usually older than 20 years and are kept and used as antiques because of their historical value. They don’t depreciate as quickly as modern cars. It’s quite the opposite, as the value of some classic cars tends to appreciate over the years.
As a result, insurance companies value them differently using two methods – agreed value and stated value.
In this valuation method, you and your insurer both agree on the value of your classic car beforehand, at the time it’s insured.
That way, when the car gets totaled, you’ll receive the agreed amount as compensation excluding the deductible. Payouts in an agreed value are guaranteed.
If you discover that the current market value of your classic car has appreciated, you can review the agreed amount when renewing your insurance policy.
As the name implies, stated value requires you to state the value of your classic car and support it with relevant documents at the beginning of the policy.
Unlike an agreed value, insurance companies are not obligated to pay you according to your stated value when your classic car is totaled.
They’ll likely pay you the current market value of the car, especially if it’s lower than your agreed value, as most insurance companies usually pay the lesser of the agreed value and stated value.
Related: How Much Car Insurance Do I Need?
How to determine the value of your car online
By manually calculating the actual cash value of your car the same way insurance companies value cars, you can get a faint idea of your car’s value and what your insurer is likely to pay you.
I’ve shown you the process for this above.
Fortunately, there are websites that have free appraisal tools to determine the value of your vehicle simply by entering your license plate, Vehicle Identification Number (VIN), year, make, or model. Let’s take a look at them.
Edmunds shows you your car’s value with its appraisal tool when you choose to enter the license plate, VIN, or the year, make, and model.
The price of the vehicle is determined by actual transactions done by dealers for new and used vehicles.
You get to have a fair idea of how much your car can be sold for, assuming it’s in good working condition.
National Auto Dealers Association (NADA)
NADA is an aggregation of over 16,000 franchised car dealers who came together to share the latest automobile trends and provide a platform where you can compare the prices of cars or search for new vehicles.
After entering your car information, you’ll receive the wholesale price and a realistic market worth of your car as a reliable document to show your insurer when renegotiating for a higher settlement.
Kelley Blue Book (KBB)
KBB has a reliable appraisal tool that efficiently returns the value of your car when you enter your 17-digit VIN, license plate, or the car’s make and model.
With large volumes of automotive information at its disposal, KBB allows you to view cars for sale and peruse the prices of different vehicles.
Dealers often partner with KBB for car sales or trade-ins, so go through the website and get as much value as you can, other than your car’s appraisal.
What do I do if my car insurance offer is too low?
Seeing as you’re likely to receive a drastically lower compensation than your car’s current market value and coupled with the fact that insurance companies are out to make money, there are steps to take if you aren’t satisfied with the payout estimate offered by your insurer.
Take note that this might be a time-consuming process because your insurance company might not want to adjust their appraisal for your sake, but the chances of them agreeing would increase if you follow these steps. Let’s go over them.
Renegotiate the settlement offer
You have the right to renegotiate the payout offer given to you by your insurer. Query the claims adjuster on how the settlement offer came about and request a copy of the valuation report.
After you’ve gotten the valuation report and an explanation of how the payout was calculated, you can begin negotiating for a new settlement amount.
Strengthen your renegotiation by obtaining the receipts and market prices of all features in your car such as a wheelchair lift, toolbox, or any temporary attachments.
Then head over to a dealer to get the estimated retail value of your car. Avoid private sellers of cars because insurance companies only use the prices from dealerships when calculating actual cash value. Let your dealer give you a document for this.
Corroborate the prices from dealerships with estimates from databases like Edmunds, KBB, and NADA.
Submit your renegotiation appeal to your insurer with these documents to add weight to your claim.
Use new car replacement coverage
New car replacement coverage can be a lifesaver in case your renegotiation attempt falls through. A new car replacement coverage compensates you with enough money to get a car of the same make and model as your totaled car.
It doesn’t take into consideration the depreciation of your damaged car, hence the payout received is usually more than the actual cash value. In fact, it’s equal to the current market price, allowing you to replace it with an identical car.
Car insurance companies usually use mileage and age as criteria for cars that qualify for new car replacement coverage. Like all policies, it also comes with a deductible.
Take out your gap insurance
If your car insurance offer is too low and you took out a car loan, it’s likely that after receiving the payout which is calculated with the actual cash value, you’ll still have a loan balance.
Gap insurance pays off the difference between what you owe on your car loan and the payout received from your insurer.
This way, you won’t get stuck paying for a loan when your car is incapable of being used.
Hire a private appraiser
A private appraiser can be brought to fact-check the appraisal done by your insurance company. You’ll have to pay for this out of pocket.
Let your appraiser know about all the upgrades and features installed into your car.
Alternatively, you can get an appraisal from your car dealer. This will bring massive validity to your appeal for a higher settlement.
If the private appraiser comes in with a higher actual cash value for your car, then you can use that in negotiating with your insurer. Otherwise, you’ll have to go with the estimate your insurance company offers.
Also Read: How to Get Lower Car Insurance Rates