How Do Auto Insurance Companies Value Cars?

Auto insurance companies value cars by looking at their actual cash value and considering the vehicle's fair market value. Once you drive your new car off the lot, it depreciates in value, which contributes to its actual cash value when it's involved in an accident. When car insurance companies value cars, it can vary widely from company to company. Read this guide and look at your insurance policy to determine how your auto insurance company values your car.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: May 9, 2022

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After an accident, your insurer is responsible for repairing your car to its pre-loss condition. If your car was worth $15,000 before an accident, then your insurance company is required to repair your vehicle or cut you a check for $15,000. But how do insurance companies value cars? Which formula does an insurance company use to calculate the value of a totaled car?

Keep reading to answer: how does insurance determine car value?

What is actual cash value?

First, the goal of an insurer is to determine actual cash value (ACV), which is the cash amount an asset is worth minus any depreciation. It’s the value of your car the moment before the insured incident.

You might have paid $25,000 for your car two years ago. That car, however, is not worth $25,000 today. In fact, it wasn’t worth $25,000 the moment you drove it off the lot. Cars depreciate over time.

When you buy car insurance coverage, your car insurer is agreeing to cover the actual cash value of your vehicle – not the price you paid when you bought your vehicle.

The purpose of car insurance is to make you whole after an unexpected event. If your car was worth $18,682 cash on the day of your car accident based on actual cash value, then your insurer will use that cash valuation for all future repairs and settlement payouts.

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What is the difference between actual cash value versus new car replacement cost?

Actual cash value is different than the new car replacement cost. Replacement cost will be higher than the actual cash value. Replacement or replacement value is defined as “the entire cost of complete repair or replacement of an asset – taking no deductions for depreciation.” This will always give you a higher number than actual cash value.

You might have received a check for $18,682 from your car insurance provider for the actual cash value of your vehicle, for example, only to discover that similar cars are priced at $20,000.

In the auto industry, there are different ways to value a vehicle. While some cars will be priced based upon Kelley Blue Book’s value, others will go by agreed-upon price. This is most common for classics and kit cars.

Unfortunately, this is how car insurance works. The car insurance company is required to cover the value of the asset – nothing more.

What is fair market value?

A term called fair market value can also come into play. Fair market value is defined as what an interested buyer is willing to pay a seller interested in selling. What would it cost to replace your vehicle on the open market?

Fair market value can be easy to determine for common vehicles. If you drive a popular vehicle that was made within the last 15 years, for example, then you should be able to find plenty of replacement options on the open market. It can be trickier to determine fair market value, however, when it comes to unique or unusual objects – like classic cars, collector’s items, or vehicles with other unique value.

Insurance companies are not typically required to provide compensation based on the fair market value of your vehicle, although it plays a role in calculating the actual cash value of your car.

Do valuation formulas vary between states and insurance companies?

There’s no single database an insurance company uses to determine how much your specific vehicle is worth. Valuations vary widely between insurance companies and states.

Insurance companies use their own in-house formulas to determine how much a car is worth.

States also get involved. Some states require insurance companies to prove losses exceed a certain amount before a car can be declared totaled, for example.

For all of these reasons, your vehicle’s valuation can vary based on which company is performing the valuation – and which state you are in. Typically, however, actual cash value calculations are very similar across states and companies for similar vehicles.

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How do car insurance companies determine actual cash value?

After an accident, the insurance company needs to calculate the actual cash value of your vehicle. To do that, the insurance company typically goes through the following two steps:

  • The insurance company will determine the replacement cost of your vehicle, checking the car value of other similar car models on the market
  • The insurance company will then deduct an appropriate amount for the age and wear of the car

As mentioned above, specific formulas vary among insurance companies. You also have the right to negotiate your claim with your insurance company – say, if you disagree with the ruling.

What happens if a car is a total loss?

Approximately 13% of all car insurance claims result in a total loss. That means the insurance company has analyzed vehicle damage with some simple steps and determined that it would cost to repair your vehicle than it’s worth.

Different states have different laws governing total loss. In some states, the repair cost is required to exceed 100% of the car’s actual cash value before an insurance company can declare it a totaled vehicle. In other states, insurance companies can declare a vehicle a total loss once the repair cost or car repair estimate exceeds 60% to 90% of the car’s value.

That’s why accurate car valuation is crucial. Your insurance company might believe your car is only worth $14,000, which makes it easier to declare the motor vehicle a total loss. Based on a different valuation, your car might be worth $15,500, which means your insurance company cannot declare your car to be totaled.

Make sure you understand your insurance company’s total loss valuation process. If you disagree with the valuation assigned to your motor vehicle, then ask your insurance company to justify that valuation.

What’s our conclusion?

To the question of “how does an insurance company value a car”, the answer is car insurance companies value cars in different ways. You have more than one option. States also have different rules governing how cars are valued, including the amount of losses required before a car is considered totaled or given a salvage title. If you disagree with your car insurance company’s determination of the car’s actual cash value (car’s ACV) or replacement value, then consider negotiating for a higher settlement.

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