How To Value Insurance Companies – When your vehicle is destroyed in an accident, your insurance company pays you the totaled value of the car, or more precisely, pays you what it claims is the value.
Almost everyone who has been through this process can attest that the most frustrating part is accepting the auto insurance company’s assessment of the value of your car. Almost invariably, the estimate comes out lower than expected and the amount you receive is not enough to purchase an apples-to-apples replacement. Sometimes it’s not even enough to cover your remaining car debt.
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Confounding the issue is the fact that most customers are not familiar with the methodology used by insurance companies to value cars. Car insurers’ valuation methods are esoteric and rely on abstract data, the details of which they are careful not to reveal. This makes it difficult for a consumer to dispute a low-level offer from an auto insurance company.
How Does An Insurance Company Determine The Value Of A Totaled Car?
Knowing the basics about how insurance companies value cars and the terminology they use can put you in a stronger position to negotiate from.
When you report a car accident to your insurance company, the company sends an adjuster to assess the damage. The appraiser’s first order of business is to decide whether to classify the vehicle as totaled.
An insurance company may consider the car dismantled even if it can be repaired. In general, according to Insure.com, the company decides to repair a car if the cost to repair it exceeds a certain percentage of its value, i.e. between 51% and 80%. Some states mandate or provide guidelines for this percentage: Alabama, for example, sets it at 75%.
Assuming the vehicle is totaled, the appraiser then performs an appraisal and assigns a value to the vehicle. The damage resulting from the accident is not considered in the appraisal. What the appraiser 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 on the vehicle. This is done to minimize any appearance of impropriety or deviousness and to subject the vehicle to a different evaluation methodology. The company takes its own evaluation and that of third parties into account when presenting its offer to you.
It may be possible to hire an appraiser if you disagree with your insurance company’s assessment, although you may need approval from your insurer to do so.
There is a big distinction between the insured value of your car as determined by the insurance company and the amount it actually costs to purchase a suitable replacement. The insurance company bases its offer on the actual cash value (ACV). This is the amount the company says someone would reasonably pay for the car, assuming the accident didn’t happen.
The actual cash value usually takes into consideration factors including depreciation, wear and tear, mechanical issues, cosmetic imperfections, and supply and demand in your area. For example, State Farm explicitly refers to its car insurance value calculator: “We base the value of your vehicle on the year, make, model, mileage, overall condition and major options, minus taxes and deductible and applicable state fees”.
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Before purchasing gap insurance, take time to compare the premiums and costs of the best auto insurance companies to ensure you get a reasonable deal.
Even if you bought a new car and only drove it for a year before the accident, its ACV will be significantly less than what you paid. Simply taking a new car off the lot devalues it by 9% to 11%, and depreciation accelerates to 20% by the end of the first year.
In fact, the insurance company blames you for everything from the miles on the odometer to the soda stains on the upholstery accumulated during that year.
The amount of the ACV offer will inevitably be less than the replacement cost, which is the amount it costs you to buy a new vehicle similar to the one destroyed. Unless you’re willing to supplement the insurance payment with your own funds, your next car will be a step down from your old one.
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This type of policy uses the same methodology to total a vehicle but subsequently pays you the current market rate for a new car in the same class as your wrecked car.
If you total your car shortly after purchasing it, you could end up with negative equity in the car, depending on your financing agreement. That is, your insurance payment may be less than what you owe on the vehicle.
The situation can get worse if the car is relatively new. The amount offered by the insurance company for the wrecked car may not even be enough to cover what you owe on the wrecked car.
This can happen if you wreck a new car shortly after purchasing it. A new car suffers its biggest drop in valuation when its new owner drives it off the lot. If an accident occurs within a year or so, the total car payout will likely be less than what the owner owes.
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If a creditor is able to obtain a court judgment, he can then pursue means to collect the deficit balance, including garnishment of wages or bank accounts.
This becomes more likely if the buyer took advantage of a special financing offer that minimized or eliminated the down payment. While these programs certainly prevent you from having to part with a large sum of money to purchase a car, they almost guarantee that you will walk away from the lot with negative net worth.
When your insurance check fails to repay your auto loan in full, the remaining amount is known as the deficit balance. Because this is considered unsecured debt – the collateral that secured it is now destroyed – the creditor can be aggressive in collecting it. This may include seeking a civil judgment against you to force you to pay what you owe.
Like the replacement cost problem, this problem also has a solution. You can add gap insurance to your policy to ensure you never have to deal with an remaining balance on a totaled car.
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This coverage pays the cash value of your car as determined by the insurance company and pays any deficient balance left after applying the proceeds to your loan.
Car insurance companies use many factors when evaluating a car. These factors may include the make and model of the car, previous accidents, normal wear and tear from use, any part replacements, the car’s mileage, and the car’s overall market value.
When paying for vehicle loss, insurance companies generally use actual cash value, also known as market value, which takes into consideration the vehicle’s replacement cost minus depreciation. This is what you would receive for the vehicle if you sold it on the market today. The replacement cost, on the other hand, is the value of replacing your vehicle with one of a similar make and model. It does not take into account specific factors, such as wear and tear. The replacement cost is beneficial to the vehicle owner while the actual cash value is beneficial to the insurance company.
Yes, you can ask for more money when your car is totaled during negotiations with your insurance company. You will need to do some research beforehand and provide a reason with support as to why you should receive more money. It is recommended that you research the actual cash value of your car, know your state’s total loss threshold, and any other information that may help your case.
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Dealing with insurance companies can often be difficult, especially when a lot of money is at stake. Assessing the value of a car can be even more onerous than other areas of insurance as the assessment is completely dependent on the insurance company and their methods are rarely disclosed. Doing some research and familiarizing yourself with the process can help you gain a stronger negotiating position when dealing with your auto insurance company.
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