How do insurance companies determine your car’s value?

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When your car is severely damaged or totaled in an accident, your auto insurance company uses the value of your vehicle to determine your payout. Depending on the amount of coverage you have, the insurance company may reimburse you for the repairs or declare a total loss and help you pay for a new car. Knowing the actual cash value (ACV) of your car helps you understand what compensation you’re entitled to after an accident.

What is ACV?

ACV stands for actual cash value. It’s the amount of money your insurance provider would give you if your car was totaled in an accident or stolen. Insurance companies consider your vehicle totaled if the cost of repairs is greater than a certain percentage of the car’s total value. Essentially, it’s cheaper for them to help you replace your car then it would be to fix it.

How is ACV determined?

To determine your vehicle’s ACV, your auto insurance company will look at the mileage, the age of your car, signs of wear and tear and its history of accidents. Your ACV is the replacement cost of the vehicle, minus the deductible you pay for collision or comprehensive insurance.

Many people think that the ACV of their car is the amount they paid for it, but that’s not accurate. Cars depreciate over time, so the ACV may be thousands of dollars less than the original price of the car. It helps to take good care of your car and get regular maintenance, but it won’t significantly increase the ACV.

Cash value vs. replacement cost

Most car insurance policies use ACV as the default reimbursement method if your car is totaled or stolen. That’s one way the insurance company can save money and keep premiums low. However, some auto insurance providers allow customers to upgrade to a replacement cost policy, which is an add-on to your car insurance.

Unlike ACV, which factors in deprecation, a replacement cost policy will pay you to replace your totaled vehicle with a new one of the same make and model. This is often called new car replacement coverage.

To determine replacement cost, your car insurance company will look at similar cars on the current market. Replacement cost gives you better coverage and more peace of mind knowing that you are financially covered. However, these policies are pricey.

Gap coverage and new car replacement

If you have a leased car or are financing your car with a loan, having gap insurance can be beneficial if your car gets totaled or stolen. With new car replacement coverage, your insurance company will help you purchase a new vehicle. 

Gap insurance

If your leased car is totaled, gap insurance will help you pay off your loan if you owe more than the car’s ACV. It’s an optional add-on to your insurance policy, and it might be required by your lender. If you have to use gap insurance, the insurance money will go directly to your lender to cover the cost of the remaining payments. You can’t use any of that money to replace your vehicle.

Gap insurance is pretty inexpensive. According to the Insurance Information Institute, adding gap insurance to a policy with collision and comprehensive coverage will only raise your annual premium by about $20.

New car replacement coverage

New car replacement coverage is what it sounds like. If your car gets totaled or stolen, your insurance company will reimburse you to purchase a new version of the same make and model of your old car. New car replacement coverage does not account for depreciation. To determine your payout, the insurance company will look at the current cost of similar cars to the one you used to drive and use that to determine your payout.

New car replacement coverage is beneficial, especially if you have a newer car. New cars start to depreciate the moment you drive off the lot, so even if your car was totaled one month after buying it, the ACV would be significantly lower than what you bought it for. 

Like gap insurance, new car replacement is an add-on to your existing auto policy. However, not every insurance provider offers it. Because you’re getting the biggest payout if your car is totaled, it’s not a cheap endorsement. 

Who should consider this?

Anyone with a new car or would be worried about replacing a car with a regular insurance payout could benefit from new car replacement coverage.

How to dispute the valuation

If your car is totaled and the insurance company says that the ACV is lower than you think, you can dispute it. However, there’s no guarantee that you’ll increase your payout. To dispute your car’s ACV, here are some things you can do:  

  • Determine the insurer’s ACV formula: Every insurance company uses a different formula to calculate ACV. For example, some companies might put more weight on the total mileage, and others may care more about the age of the car. Your insurance company might not give you the exact calculations, but it can give you an idea of what factors go into their equation.
  • Prove the higher value: The most important thing you need to do is prove that your car’s ACV is higher than the insurance company says. You can do this by looking for cars for sale in your city that are similar to yours but not exactly the same make or model. These cars should have roughly the same mileage, accident history and wear and tear your car has. Facebook marketplace and Craigslist are good places to look.
  • Check the KBB value: Kelly Blue Book (KBB) is one of the largest automobile databases that helps consumers and car dealerships determine the value of cars. Check the KBB value of the make, model, year and mileage of your car and compare it to the insurance company’s proposed ACV. If KBB shows a higher value, pull examples and share them with your insurance company.

Things to consider with ACV

All cars depreciate over time. If you have a leased car, depreciation can put you in a tricky situation. Often, the value of your financed car will decrease faster than the balance of your loan. Eventually, you will owe more money to your lender than what the car is worth. 

If your car is totaled or stolen, there’s a chance your auto insurance payout won’t cover the cost of a new car and the remaining balance on your loan. The leftover amount is called a deficiency balance. If you have a deficiency balance, expect your lender to chase you down for the money until they get it. 

Deficiency balances are most common for people who get into an accident quickly after buying a new car. It’s also common if the vehicle depreciates before you can pay down the loan balance, which often occurs with special financing programs that eliminate the down payment. To avoid a potential deficiency balance, get gap insurance.

The takeaway

Actual cash value is an important thing to know about so you can make sure your insurance policy meets your needs.

  • ACV is the amount of money your insurer would give you to replace your car if it was totaled or stolen.
  • Drivers can get new car replacement coverage to replace their totaled vehicle with a new one of the same make and model.
  • For drivers with a financed car, having gap insurance can help you pay off your loan if you owe more than the car’s ACV.
  • If your car is totaled and you disagree with the insurance company’s proposed ACV, there are ways to dispute it.

Cars depreciate much faster than most people think. Because of that, you may be surprised at your car’s ACV. To determine your vehicle’s ACV, your insurance company will consider the age of your car, the mileage, signs of wear and tear and its history of accidents. You probably won’t know your car’s ACV until you need to file a claim. 

To avoid a low payout if your car is totaled or stolen, consider purchasing new car replacement coverage and gap insurance. These coverages will increase your auto insurance premium, but you’ll get more money to replace your car if it’s totaled. If you have a financed car, gap insurance will help you pay off the loan if your car gets totaled.

Elizabeth Rivelli

Elizabeth is an insurance writer for, where she covers insurance providers and reviews policies to help consumers find comprehensive and affordable coverage for every area of their life. She has more than three years of writing experience for top online insurance and finance publications.

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