How Do Car Insurance Companies Value Cars?

After an accident, your insurance company 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 discover everything you need to know about how insurance companies value cars.

how do car insurance companies value cars?

What is Actual Cash Value?

First, the goal of an insurance company is to determine actual cash value (ACV), which is the 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, your car insurance company 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 on the day of your car accident based on actual cash value, then your insurance company will use that valuation for all future repairs and settlement payouts.

Actual Cash Value Versus Replacement Cost

Actual cash value is different than the 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 company for the actual cash value of your vehicle, for example, only to discover that similar cars are priced at $20,000.

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.

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.

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 value of other similar vehicles 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 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, repair costs are required to exceed 100% of the vehicle’s actual cash value before an insurance company can declare it a total loss. In other states, insurance companies can declare a vehicle a total loss once the cost of repairs exceeds 60% to 90% of the vehicle’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 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 vehicle, then ask your insurance company to justify that valuation.

Conclusion

Car insurance companies value cars in different ways. States also have different rules governing how cars are valued, including the amount of losses required before a car is considered totaled. If you disagree with your car insurance company’s determination of actual cash value or replacement value, then consider negotiating for a higher settlement.

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