When your automobile is totalled in an accident, your insurance company pays you for the totalled car's value—or, more correctly, what it claims the value to be.
Accepting the vehicle insurance company's appraisal of your car's value is the most frustrating part, according to almost everyone who has gone through it. Almost always, the estimate is smaller than you expected, and the cash you receive is insufficient to acquire an equivalent replacement.
It isn't always enough to cover what they owe on the car.
The fact that most customers don't understand how insurance firms evaluate cars further complicates the situation. Car insurers' appraisal procedures are complicated, based on abstract data that they keep secret. A consumer's ability to challenge a low-ball offer from an auto insurance company is hampered as a result of this.
Knowing the fundamentals of how insurance companies evaluate cars and the jargon they use might help you negotiate more effectively.
Car Insurance Claims Valuations: What You Need to Know
When you notify your insurance provider after an automobile accident, an adjuster will be dispatched to inspect the damage. The first order of business for the adjuster is to determine whether or not the car should be classified as totalled.
Even if the vehicle is repairable, an insurance company may consider it totalled. According to Insure.com, an automobile is considered totalled if the cost of repairing it surpasses a specific percentage of its worth, ranging from 51 per cent to 80 per cent.
The adjuster then conducts an appraisal and gives a value to the vehicle, assuming the vehicle is totalled. The appraisal does not take into account the accident's damage. The adjuster is trying to figure out what a fair cash offer for the vehicle would have been right before the accident.
The insurance company then hires a third-party appraiser to come up with its estimate for the car. This is done to avoid any perception of impropriety or deception, as well as to subject the vehicle to a distinct value system. When making an offer to you, the corporation considers both its own and a third evaluation. party.
Replacement Cost vs Actual Cash Value
The difference between the insurance value of your car as decided by the insurance provider and the price of a suitable replacement is significant. The insurer's offer is based on the current market value of the property (ACV). This is the cost that the business estimates a reasonable person would pay for the car if the accident hadn't occurred.
Depreciation, wear and tear, mechanical problems, cosmetic flaws, and supply and demand in your local area are all factors that go into determining the actual cash value of a vehicle. "We calculate your vehicle's value on its year, make, model, miles, overall condition, and key options—minus your deductible and applicable state taxes and fees," State Farm says in its insurance value car calculator.
Problems with Depreciation
Even if you bought a car brand new and barely drove it for a year before the accident, the ACV will be much lower than the price you paid. According to Edmunds.com, simply driving a new automobile off the lot depreciates it by up to 10%, and by the end of the first year, depreciation has accelerated to 20%.
The ACV offer will almost always be less than the replacement cost—the price of a new vehicle that is equivalent to the one that was destroyed. Your next car will be a step down from your previous one unless you are willing to supplement the insurance payment with your finances.
Insurance for the Replacement Cost
Purchasing car insurance that covers replacement costs is one answer to this dilemma.
This sort of policy follows the same procedure for totalling a vehicle, but instead of paying you the current market rate for a new car in the same class as your destroyed vehicle, it pays you the current market rate for a new automobile in the same class as your wrecked car.
Replacement cost insurance premiums can be far higher than regular automobile insurance prices monthly.
When a Car's Coverage Value Isn't High Enough
If the car is relatively new, the situation can become even worse. The sum offered by the insurance provider for a totalled car may not be enough to cover the amount owing on the vehicle.
If you crash a new car soon after purchasing it, this may happen. When a new car is driven off the lot, the value of the vehicle takes the biggest blow. If an accident occurs within the next year or so, the totalled car will most certainly be worth less than the owner owes on it.
If the buyer took advantage of a special financing offer that reduced or eliminated the down payment, this becomes more likely. While these schemes let you avoid forking over a huge sum of money to buy a car, they almost always result in you driving away with negative equity.
Gap Insurance Solution.
This problem has a remedy, just like the replacement cost issue. Gap insurance can be added to your policy to ensure that you are never left with a balance on a totalled vehicle.
This coverage reimburses you for the cash value of your car as decided by the insurance company, as well as any remaining shortfall balance after you've paid off your loan.