If your car is damaged beyond repair in an accident, most insurance companies will pay you a sum they determine the car to be worth. The insurance company comes up with this value and makes a payment. You can either use the money to buy a new car or pay off your car loan.
It may be worth understanding how insurance companies determine car value to open any possible avenues for negotiation.
The Car Insurance Valuation Process
While each insurer may have a different insurance value calculator for the car, the process generally consists of four main steps.
Step 1: After you report a car accident, your insurance company will send an adjuster to assess the damage. The first step is to determine if your car can be repaired or is totalled. It’s important to note that in some cases your car may be declared totalled even if it can be repaired. This is often if the repair costs exceed a certain percentage of the car’s value. This percentage differs in each state.
Step 2: If the adjuster declares that your car is totalled, they will then conduct an appraisal and assign a value to your car. The damage caused by the accident is not taken into consideration during the appraisal, as the adjuster strives to reach a reasonable value for the car immediately before the accident took place.
Step 3: The insurer will then enlist a third-party appraiser, who will provide their own estimate on the vehicle. This is done to make sure the first valuation is fair and accurate.
Step 4: Lastly, the insurance company will consider the valuation submitted by their adjuster and the third-party appraiser to determine a final value, which is then signed off and offered to you.
Understanding Actual Cash Value vs. Replacement Cost
Most of us would tend to use any paid out funds to buy a new car or close a loan after a car has been totalled.
However, you may find a gap between the insurance totalled car value and the amount needed to pay off your car loan or find a suitable replacement car. This is because most insurance companies base their offer on Actual Cash Value (ACV) instead of the replacement cost. The ACV is essentially the value of the car you’d have gotten if the accident hadn’t taken place. Hence, the value takes into consideration factors like depreciation, wear and tear, mechanical problems and even the supply and demand in your area! So, if you have a stain on your seat or if your key left a small scratch on the door, the price will decrease considerably.
Even if you purchased a brand new car and only drove it for a couple of months before the accident, the ACV will lower significantly compared to what you paid for the car. In fact, the value of your brand new car will depreciate by 10 per cent as soon as you drive it out of the showroom. Some insurance companies might even take the miles on the odometer into consideration while determining the ACV.
So unless you’re willing to chip in some of your own cash on top of the insurance settlement, getting your next car may be challenging.
One way to get around this is to opt for an insurance policy that offers the replacement cost instead of the ACV. Under this type of policy, your car will be appraised in the same process. However, the value offered will be the current market rate of a new vehicle that is in the same class as your wrecked car. To understand how your insurance company calculates car value, you should consider reading through the product disclosure statement (PDS) of your policy.
It’s important to note that the monthly premiums for a replacement cost car insurance could be higher than a car insurance policy that offers you the ACV.
It’s therefore a good idea to compare all your options when looking for a policy and find one that best suits your needs and budget.