How Do Insurance Companies Value Cars?

To explain how insurance companies value cars, first we need to explain what ACV is.

What Is ACV?

ACV is the amount of money your car is worth today, taking depreciation into account. Essentially, your car depreciates as soon as you drive off the lot, so ACV isn’t the amount you paid for your car; it’s how much you could sell it for today. This will almost always be less than what you paid, even if you bought your car yesterday.

Why is ACV important, you ask? Because it determines how much your insurance provider will pay you in the event that your insurer declares your car “a total loss.” In a nutshell, if the cost to fix damage to your car is higher than a certain percentage of your car’s ACV, it’s declared a total loss. In the event your car is totaled under a covered claim, you’ll get reimbursed for its ACV (minus your deductible).

To determine the value of your car for auto insurance, consult either Kelley Blue Book (KBB) or the National Automobile Dealers Association (NADA).³ They have free resources that offer car valuation estimates. Note that every used car’s value is unique, based on many factors. If your car is totaled, you can decide if you want to buy it from the insurance company and repair it yourself (but the car will now have a branded title) or accept a payment of its ACV to use toward a replacement vehicle.

Since many factors determine ACV, you can negotiate it with your appraiser by using a few tactics:

• Make sure your appraiser has correctly included all your vehicle’s options as well as any aftermarket accessories you’ve installed, as these may increase your car’s value.
• Research recent local sales of the exact year, make, and model of your vehicle, and discuss them with your appraiser.
• If you still can’t agree on an ACV, hire a private appraiser to provide an ACV.
  Use the information you found via KBB or NADA when speaking with your appraiser(s).⁴

Your car’s ACV is a major component when your insurance company is deciding whether to declare your car a total loss, but let’s make sure we know what that term really means.

Definition

A car is a total loss or totaled under any of these conditions:

• Your vehicle can’t be repaired safely.
• Repairing your vehicle will cost more than its estimated value.
• The damage to your vehicle meets your particular state’s total loss guidelines, detailed below. ⁵

How Is Total Loss Determined?

Three factors determine total loss:

• Total loss threshold
• ACV
• Guaranteed asset protection insurance, or gap insurance

Insurance companies compare the ACV to the total loss threshold to determine if a vehicle is a total loss or if it’s worth the cost to repair. In many cases, the replacement cost will be less than the repair cost, so car replacement may be a better option.

What If My Total Loss Payoff Is Less Than What I Owe on My Loan?

If you still have a car loan on your totaled car, you may receive a total loss payoff that’s less than the balance of your loan. Do you still have to pay off of your loan?

Unfortunately, yes, you’ll need to repay the rest of your loan even if the total loss payoff doesn’t cover it. That’s the exact reason why people get gap insurance, which covers the difference between the payoff you receive from the insurance company and the amount you owe on your loan. Gap insurance often includes collision and comprehensive insurance.

What to Do When You Still Owe Money on a Totaled Car

If you still owe money on a totaled car, you may need to look into auto loan refinancing if you can’t afford your monthly payments.⁷ Otherwise, if the accident was the other driver’s fault, you can look into hiring a lawyer.

Read our auto insurance FAQs to learn more about topics such as SR22s, whether you can pay less than Blue Book, and what affects car insurance rates. There are a ton of insurance products, from life insurance to renters insurance, but when it comes to auto insurance, we’re the experts.