How does a car insurance company determine replacement value?

Car insurance companies determine replacement value of a car by its condition, its features, and its depreciation. The kind of insurance policy you have will also influence how car insurance companies determine replacement value.

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Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 22, 2021

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Here's what you need to know...

  • If you’re the at-fault driver in an accident, you must have collision coverage under your policy for your insurer to pay for crash-related repairs
  • On the declaration’s page that states your coverage limits, it doesn’t specifically say what your limit is when filing a claim for physical damage
  • Instead of having a fixed limit, the company is willing to pay up to the car’s Actual Cash Value to repair or replace your covered auto
  • When you file a value claim for damage to your vehicle, it’s the insurance carrier’s duty to evaluate the property to give the insured a fair amount of money
  • Insurers use several different value guides, sales reports, and other tools on the Internet to determine what your car would have sold for in the fair market in its pre-loss condition
  • The only time that a company will pay the full cost to replace your vehicle is when you have a special replacement cost endorsement on the policy

When you get into an accident, it’d be nice if your insurance company would just cut you a blank check that covers everything you need. Unfortunately, if this were how claims settlements were handled, insurance companies would go out of business really quickly.

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Instead of offering policyholders and claimants a free pass to get unnecessary repairs, insurance companies have a very strict evaluation process that adjusters must follow to determine the insurance value of a car.

The current claims settlement process protects the company and gives the consumer rights as well. Since the adjuster works for the insurance company, it’s their primary duty to settle claims quickly at the lowest amount possible.

It’s easy to rush to sign a settlement offer when you’re not familiar with common valuation methods. Here’s what you need to know before you sign that check:

How does your car insurance coverage dictate what type of settlement you’ll receive?

It’s not always your insurance provider’s job to pay for your damages. When you buy insurance, you have the option to purchase a basic liability-only policy or a more comprehensive policy that includes physical damage protection for your own property.

The type of coverage that you select will dictate which company pays for your claim.

Basic auto insurance policies may protect your assets, but these bare minimum plans aren’t designed to help you pay for your repair expenses or a totaled car. For your covered auto to have any type of damage protection, you need to carry both comprehensive and collision coverage.

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When does your car insurance company assess the value of your vehicle?

After you experience a comprehensive or collision loss, the company will review the circumstances surrounding the event to determine if you’re at fault.

If you’re at fault for the loss and you’re entitled to a physical damage settlement, the adjuster assigned to your claim file will start to assess the condition of your vehicle to determine how much it was worth in its pre-loss condition.

When does the third-party insurer assess value?



If you’re filing a non-fault claim through a third-party insurer, the circumstances are a bit different. You’ll still contact your own insurer to protect your interests, but the decisions regarding settlement will be made by the other driver’s adjuster.

The adjuster will first review their customer’s Property Damage Liability limits and then they will look at valuation reports. This is how the companies determine whether or not there’s enough coverage to pay for all of the damages caused by their customer.

The adjuster might run reports for you and modify errors in the valuation report to drive your payment up.

If you’re not happy with the settlement you’re offered, you can discuss negotiations with your adjuster.

What if the insurance companies aren’t agreeing?

If you have collision coverage and there’s a delay, your insurer may offer you a payment to get your car fixed.

It’s then your company’s job to determine how much you’re entitled to for the repair or replacement of your car. After the companies come to an agreement, the insurer will then go through subrogation to collect the money that they paid.

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Is there a limit to how much my car insurance company will pay?

Cars are valued very differently than other types of property covered under property insurance. Under your home insurance, you have a stated limit showing how much protection you have.

This isn’t the case when you’re filing the average auto insurance claim. Instead, the limit the company will pay fluctuates.

When you buy a standard Personal Auto Policy, or PAP, the policy provisions say that you’re entitled to receive up to the Actual Cash Value of your vehicle when it’s damaged after a covered incident.

Actual Cash Value might also be listed as ACV under the declarations page of your policy.

What does Actual Cash Value mean?


Actual Cash Value is the insurance company’s term for stating that they are obligated to pay up to the car’s fair market value. The company will consider the following:

  • the car’s condition
  • its features
  • its depreciation

You’d like enough money to replace your car, but if you have a standard policy that’s not guaranteed.

Some companies will offer Replacement Cost Value, or RCV, when you have an eligible car. RCV differs from ACV because depreciation isn’t a factor. Instead of subtracting depreciation, the company will pay you based on how much it costs to replace the car.

What do insurance adjusters use to determine value?



There’s not just one method for determining a car’s ACV. Since there’s no guidebook that lists what every car is worth at every age, the company needs to use several different reports and resources to come up with a good figure.

If you’re not happy with the valuation, you can ask for a third-party estimate.

Here are some of the ways that a company might determine how much a totaled car is worth:

  • Using Kelley Blue Book values or other guide valuations
  • Using dealer sales reports
  • Using private party sales reports
  • Using vehicle sales listings to see what the car is selling for in the area
  • Reviewing photos and receipts showing the condition of the vehicle

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How to Negotiate the Amount You’re Offered

You can always negotiate a settlement offer. Make sure that you take a close look at the mileage, pre-loss condition class, and trim features. If there are errors or you’re missing credits, make sure they are corrected.

You can also ask the adjuster to narrow down the comparatives pool or to expand the location or comparatives if you’re in a smaller town.

If you aren’t happy with the way that you’re claim was handled, it’s time to consider moving from the company that you’ve been loyal to.

After comparing carriers, you should do a thorough price comparison. Use an online insurance rate tool to see what the leaders charge and then switch to a company with good claims satisfaction ratings.

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