What is Actual Cash Value?

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Contributor, Benzinga
December 21, 2023

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A car is a big investment, so it’s important to know how car insurance companies find the actual cash value of your vehicle. This becomes especially important if you get into an accident or your car is stolen. Knowing how your insurance company values your car will help you make sure you’re getting the right coverage when picking a policy as well as keep you informed in the event you need to make a claim.

Learn how car insurance companies value cars using our guide.

What is Actual Cash Value (ACV) in Car Insurance?

The actual cash value (ACV) of your car is the amount your car insurance provider will pay you after it’s stolen or totaled in an accident. It’s a value placed on a vehicle that the carrier believes someone would reasonably pay if the car had not been damaged in an accident. (Please note that this is not the same as the cash value of a life insurance policy.)

How a Car Insurance Company Decides Actual Cash Value

When the time comes for an insurer to place a value on your vehicle, it will use its own process — all insurance companies have their own valuation processes. The overall process will vary based on how your insurance provider operates, but it should look something like the following:

  • The carrier will look at various factors (make, model, year, mileage, damage, cosmetic blemishes, options, wear and tear).
  • The insurance adjuster will review comparable vehicles for sale in your area to gauge the car’s value had it not been involved in an accident.
  • The adjuster will review prior claims filed against the auto insurance policy for the vehicle in question.

Remember that the actual cash value of the car is not necessarily the same as the replacement cost of the vehicle. Cash value coverage and “agreed value” are quite different, as well, which is generally applied to vintage or priceless automobiles.

Important: Keep Receipts from Vehicle Parts or Repairs

Did you recently make repairs or upgrades to your vehicle before it was totaled in an accident? If so, providing these receipts to your adjuster can help with the ACV and the payout you receive. Installing a new item such as new engine, new tires, a new transmission, new brakes and other repairs can increase the ACV of the vehicle — even if it is an older model.

What is Replacement Cost Value (RCV) vs. Actual Cash Value (ACV) in Car Insurance?

It’s important to note that the ACV will be less than the vehicle’s replacement cost value should someone wish to buy it brand new. This means you will need to purchase a car that is a step down from the totaled vehicle unless you can afford to supplement the ACV funds with your own money. The premium payment will be different, but a replacement cost policy is often worth, depending on your situation.

When is a Car a Total Loss in an Accident or Theft?

When determining ACV, the carrier will consider the following: 

  • Mechanical issues
  • Wear and tear
  • Depreciation
  • Cosmetic blemishes
  • Supply and demand where you live
  • Year, make, model
  • Mileage
  • Overall condition
  • Major options
  • Damage caused in the accident

After factoring in these considerations, car insurance companies will then subtract the deductible on your auto insurance policy and any applicable taxes and fees to reach the final ACV of the vehicle.

Depreciation is the most significant factor in how car insurance companies value cars. The minute a new vehicle is driven off the dealer’s lot, it depreciates by an average of 10%. By the end of the first year of owning the car, the vehicle’s value depreciates by a total of 20%.

Car Replacement Insurance vs. Gap Coverage 

If you have a lease on your car or have financed it with a loan, gap insurance can help if your car gets stolen or totaled in an accident.

Gap insurance makes it easier to pay off the remaining balance of a lease or auto loan if your vehicle is totaled in an accident and the ACV is less than what you owe. Gap insurance is an optional add-on to most car insurance policies. However, some lenders require their clients to have this additional coverage before approving a loan for a vehicle.

The money paid by gap insurance will be sent directly to your lender if a vehicle is totaled or stolen. You will not be able to use any of it to pay for the replacement of your car. The Insurance Information Institute (III) reports that gap insurance will cost on average an extra $20 per year on top of your sports car insurance premium.

Why Car Insurance May Refuse to Pay a Claim

ACV comes into play for all types of vehicles, including sports cars and commercial vehicles. Commercial car insurance companies might not pay you for your claim, even if the adjuster labeled your vehicle as totaled. There are quite a few reasons for a claim being denied.

1: Too Many Accidents

All auto insurers cover their clients based on the assumption that they will practice good driving skills to avoid accidents. An adjuster reviewing your claims history will look for multiple accident claims. If you have too many based on the types of policies available, your claim might get denied.

2: Lapse in Payment

Failing to pay your premium by the due date could cause you to lose your actual cash value coverage. Driving without auto insurance is not only illegal; it can cost you thousands of dollars if your vehicle is totaled in an accident.

3: Expired Registration

If your vehicle’s registration is expired or your driver’s license is revoked, an auto insurer will more than likely deny you payment following an accident. Car insurance can only be active when both of these items are active and in good standing.

4: Taking Too Long to File a Claim

All drivers are expected to immediately call the police when involved in an accident to have a report created and filed. The driver then notifies the carrier within a reasonable amount of time. Some insurance companies set limits on when they need to be informed about an accident to pay a claim. If you missed this deadline, you could be out of luck when it comes to receiving money.

5: Having Inadequate Coverage

Choosing the lowest-priced auto policy because it’s all you can afford can wind up hurting you after an accident. The policies with the lowest premiums will also have the least amount of insurance coverage. This means you won’t receive nearly enough money from the insurance company to buy a new car if your current vehicle is totaled.

6: An Unregistered Driver Caused the Crash

If someone other than you was driving your car and caused the accident that totaled it and that person is not listed as being covered on your auto insurance policy, the car insurance carrier likely will deny the claim.

7: You Broke the Law

No matter how much coverage limit you have, if you broke the law in the accident that left your vehicle totaled, an insurance company is likely to deny your claim. Violations that can lead to a claim being denied include driving without a license, driving while impaired or drag racing.

8: You Broke the Terms of the Policy

All insurance companies include terms in their automotive policies that you must follow. If you broke the insurance policy’s terms, the car insurance company might deny your claim or fail to pay if your vehicle is stolen or totaled.

Best Car Insurance Companies

Now that you understand how car insurance companies value cars, it’s time to find the best car insurance companies in your area. When looking for a new auto insurer, it’s best to review all of the available options before deciding. Take into consideration customer reviews, first-hand testimonials and your driving history. 

Some car insurance companies automatically deny coverage for drivers with specific items on their driving records, including excessive tickets, multiple accidents or DUI convictions. Below, you will find some of the most trusted and best car insurance companies around:

Negotiate Your ACV with Your Car Insurance Company

It’s frustrating being involved in a car accident, and it gets even worse when a car insurance provider doesn’t pay you the value you were expecting for your vehicle. When this happens, the ACV can limit your new vehicle purchase. 

You either have to front the funds to make up the difference or purchase a lesser vehicle than the one stolen or damaged in the accident. Just know that you can negotiate, to an extent, the ACV assigned by your car insurance carrier.

Frequently Asked Questions

Q

What value system do insurance companies use?

A

Car insurance companies use both NADA and KBB to gauge the value of a vehicle. Still, they will ultimately use their valuation process along with insurance industry equations to determine the ACV of a stolen or totaled car.

Q

How do insurance companies determine the actual cash value of a car?

A

Insurance companies determine the actual cash value of a car by considering various factors. They typically take into account the car’s age, mileage, condition, and any previous damage or repairs. They may also consider the market value of similar vehicles in the area, as well as any depreciation that may have occurred. Additionally, insurance companies may utilize valuation tools or databases to assist in determining the actual cash value of a car.

Q

What is the difference between auto stated amount and ACV?

A

The difference between auto stated amount and ACV is that the former is the predetermined value agreed upon by the vehicle owner and insurance company, while the latter is the actual market value of the vehicle at the time of loss or damage, taking into consideration factors like age, condition, mileage, and depreciation.

Related Link: DOES CAR INSURANCE COVER THEFT?