How do car insurance companies determine salvage 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...

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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...

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Reviewed byJoel Ohman
Founder, CFP®

UPDATED: Oct 28, 2016

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Here's what you need to know...

  • Car insurance companies determine a car’s salvage value through a variety of methods
  • When a car is considered a total loss by the insurance adjuster, the cost to repair the car exceeds the value offered by the trade-in value suggested by the Kelley Blue Book
  • Every car insurance company must follow the state-mandated rules for total loss vehicles because the car insurance company wants to make sure that an unsafe vehicle is removed from the highway

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Circumstances Where the Car’s Salvage Value is Calculated

A car insurance agent investigating an accident to make a claim.

For example, if a damaged car has $8,000 in repairs and a trade-in value of about $3,500, the car insurance claims adjuster will declare a total loss.

The car insurance adjuster will most likely take other factors into consideration when declaring the actual cash value (ACV) of the vehicle, including condition of the interior and the market in which the insured lives.

The car insurance company may also use other factors in determining the value of a damaged vehicle, including third-party vendor databases.

The insurance company’s proprietary software system helps the adjuster to calculate the cost of repairs in the local market, including parts and labor. Sometimes, insured drivers believe these information systems don’t provide an accurate projection of costs.

Even if the car can be repaired, and the owner wants to repair the car, most state laws require the car insurance company to declare the car a total loss.

If the car insurance deductible is $1,000 in this example, the insured receives a check for just $2,500. The calculation assumes the car’s actual cash value (the trade-in by market) less the deductible.

In this example, the insured maintained a higher-than-average deductible policy and probably saved money on her car insurance rates!

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Salvage Value Compared to the Depreciated Value

Keep in mind that the car’s repaired trade-in value and salvage value differ.

According to “Kiplinger Personal Finance,” if the car has a five-year life according to the IRS, and is purchased at $30,000, then straight-line depreciation reduces the car’s value by about $5,000 per usage year.

According to this method, the car’s salvage value for accounting purposes is about $5,000 at the end of its useful life.

In reality, the salvage value is realized by the sum total of its parts. Depending upon the condition of the car’s inner operating parts and body, the owner may realize more or less than its depreciated and anticipated salvage value.

A car insurance company usually requires the insured to sign over the car’s title in the event of a total loss.

The insurance company, not the insured, will often decide to sell the car for “junk”, and use the services of a salvage yard to dispose of the vehicle. The salvage company decides what parts may be resold, and these parts are then removed from the car.

When the car is stripped of parts and frame, the salvage company sells the car’s shell for scrap. What’s left of the car is crushed, melted down, and ultimately recycled.

If the salvage company doesn’t decide to strip the car, the car may be provided with a salvage title by the state Department of Motor Vehicles.

A salvage title indicates the vehicle isn’t in present drivable condition. If the company decides to sell the car to a repair shop or auctioneer, the ultimate buyer may decide to bring the car into drivable condition.

At that time, the car is inspected to determine its drivability and safety. In some states, the salvage title is changed to that of a “prior salvage”, “rebuilt“, or similar title. When the car is resold, a new driver may learn that the car was once a salvage vehicle.

How does a driver buy back a car the insurance company sells at salvage value?


Many drivers mourn a favorite car after the insurance company declares a total loss. The insured usually signs over the car title to the insurance company.

After the insurance company disposes of the vehicle, the former owner may seek to repurchase it. The driver may believe he can repair the car at a lower cost than the insurance claims adjuster’s calculations, or he may not care about spending extra money to recover his vehicle.

Depending upon the state in which the driver lives, he may be able to repurchase the car.

State law determines the buy-back age requirement, if any, or specifics about the car’s drivability. If the state allows the driver to repurchase the vehicle, he may need to have the car retitled from drivable to salvage condition.

When the car is repaired, the owner may then retitle the car as a “rebuilt” vehicle.

Each state maintains different laws about when and if the former owner may repurchase a salvage vehicle. Consult with your financial advisor or attorney about the laws in your state.

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