How Do Car Insurance Companies Determine Rates – If your vehicle is totaled in an accident, your insurance company will pay you for the total value of the vehicle. More precisely, you pay for what it claims to be worth.

Almost everyone who has been through this process can attest that the most frustrating part is accepting the auto insurance company’s valuation of your car. Almost without exception, the estimate comes out lower than expected, and the amount received is not enough to purchase a substitute. Sometimes it’s not even enough to cover what you owe on the car yet.

How Do Car Insurance Companies Determine Rates

How Do Car Insurance Companies Determine Rates

What makes matters confusing is the fact that most customers are unfamiliar with the methodology that insurance companies use to value cars. Auto insurance companies’ evaluation methods are complex, rely on abstract data, and are careful not to disclose specific details. This makes it difficult for consumers to contest low offers from auto insurance companies.

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Knowing the basics of how insurance companies value cars and the terms they use can put you in a stronger position when negotiating.

When you report a traffic accident to an insurance company, the company sends a claims adjuster to assess the amount of damage. The adjuster’s first order of business is to determine whether to total the vehicle.

The insurance company may consider your car a total loss even if it can be fixed. Typically, companies decide to cover the entire vehicle if repair costs exceed a certain percentage (51% to 80%) of the vehicle’s value, according to Some states require or provide guidance on this ratio. Alabama, for example, sets it at 75%.

Once the vehicle is deemed whole, the adjuster will perform an evaluation and assign a value to the vehicle. Damage caused by an accident is not taken into account in the appraisal. What the adjuster is trying to estimate is what a reasonable cash offer would have been for the vehicle immediately before the accident occurred.

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Next, the insurance company hires a third-party appraiser to issue its own estimate for the vehicle. This is done to minimize the appearance of impropriety or secrecy and to apply a different evaluation method to the vehicle. The Company takes into account its own evaluation and third party evaluations when making an offer to you.

If you disagree with the insurance company’s valuation, it may be possible to hire your own appraiser, but doing so may require approval from the insurance company.

There is a big difference between the car insurance value determined by the insurance company and what it actually costs to purchase a suitable replacement. Insurance companies provide offers based on Actual Cash Value (ACV). This is the amount the company has determined someone would reasonably pay for the car, assuming no accident occurred.

How Do Car Insurance Companies Determine Rates

Actual cash value typically takes into account factors such as depreciation, wear and tear, mechanical problems, cosmetic blemishes, and local supply and demand. For example, State Farm explicitly mentions its Insurance Value Car Calculator: “Vehicle value is based on year, make, model, mileage, overall condition and major options, minus deductibles and applicable state taxes and fees.”

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Before purchasing gap insurance, take the time to compare the premiums and costs of the best car insurance companies to make sure you get a reasonable deal.

Even if you bought a new car and only drove it for a year before the accident, its ACV is much lower than what you paid for it. Simply driving your new car off the lot can cause the car to depreciate by 9% to 11%, with depreciation accelerating up to 20% by the end of the first year.

In fact, insurance companies whine to you about everything from the mileage on the odometer to soda stains on the upholstery that build up during the year.

The ACV offer will inevitably be less than the replacement cost, i.e. the cost of purchasing a new vehicle similar to the damaged one. If you’re not willing to top up your insurance premiums with your own funds, your next car will likely be a step below your previous car.

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This type of insurance totals your car using the same method, but then pays the current market rate for a new car of the same class as the damaged car.

If you buy a car and then pay it off in full soon after, you could end up with negative car equity, depending on the financing deal. This means your insurance premium may be less than what you owe on the vehicle.

If your car is relatively new, the situation can be even worse. The amount your insurance company offers for your entire car may not even be enough to cover what you owe for your wrecked car.

How Do Car Insurance Companies Determine Rates

This can happen if you wreck your new car right after you buy it. A new car takes its biggest hit in appreciation when the new owner drives away. If an accident occurs within a year or so, the total vehicle compensation will likely be less than what the owner owes.

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If the lender is able to obtain a court judgment, it may pursue means to collect the deficiency, including garnishing wages or bank accounts.

The likelihood of this happening is even greater if the buyer has taken advantage of special financing offers that minimize or eliminate the down payment. These programs will certainly save you from having to shell out a ton of cash to buy a car, but they almost guarantee you’ll end up leaving the lot with negative equity.

When you are unable to pay off your car loan in full with an insurance check, the remaining amount is called a shortfall balance. Because this is considered an unsecured debt (the collateral securing it has now been destroyed), the lender can aggressively collect on it. This may include seeking a civil judgment against you to force you to pay the amount you owe.

Like the replacement cost problem, there is a solution to this problem. Adding difference insurance to your policy can help you avoid having to deal with the remaining balance of your total vehicle.

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This coverage pays the cash value of your car, as determined by the insurance company, and pays any shortfall remaining after the loan amount is applied to your loan.

Car insurance companies use a variety of factors when valuing a car. These factors may include the make and model of the car, previous accidents, normal wear and tear from use, replacement parts, the car’s mileage, and the car’s general market value.

When paying for a vehicle loss, insurance companies typically utilize the vehicle’s actual cash value (also known as market value), which is the replacement cost minus depreciation. This is the amount you would receive for your vehicle if you sold it on the market today. Replacement cost, on the other hand, is the value it would cost to replace the vehicle with a similar make and model. It does not take into account certain factors such as wear and tear. The replacement cost benefits the vehicle owner, while the actual cash value benefits the insurance company.

How Do Car Insurance Companies Determine Rates

Yes, when negotiating with your insurance company, you can ask for more money if your vehicle is totaled. You should research in advance and provide supporting reasons as to why you should receive more money. It’s a good idea to research your car’s actual cash value, know your state’s total loss threshold, and other information that may be helpful in your situation.

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Dealing with insurance companies can often be difficult, especially when a lot of money is at stake. Valuing a car can be much more onerous than other areas of insurance because it is entirely up to the insurer and valuation methods are rarely disclosed. Doing some research and becoming familiar with the process can help you gain a stronger negotiating position when dealing with car insurance companies.

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