How Does Insurance Determine the FMV of a Totaled Car?
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Kelley Blue Book
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For used cars that are not antiques or specially customized, most insurance companies will simply use the Kelley Blue Book to calculate the vehicle's fair market value. Available as a searchable, online database (see Resources), the Kelley Blue Book lets insurers determine the average price for your car (including model, year, mileage and extras) in your geographic location. According to this logic, the money the insurance company gives you should be enough to buy a near-replica of your totaled car.
Insurers may also use the Kelley Blue Book for new cars, although typically for models under $75,000. Even at this upper price limit, enough sales data exist to reliably determine an average figure a buyer can expect to pay at his local dealership. If insurers used the Manufacturer's Suggested Retail Price (MSRP), they would be overpaying the claimant, as car buyers rarely pay sticker price. If insurers used the Invoice Price (i.e., the price that dealers pay for a vehicle from the manufacturer), they would be short-changing the claimant, forcing her to supply her own money to make up the difference at the dealership.
Newspaper Ads
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If your car is used and over seven years old, insurance companies may occasionally use newspaper ads to arrive at FMV. Likewise, if your area lacks enough dealerships for accurate Kelley Blue Book data on a particular used car, a private transaction will be the most likely way of replacing your vehicle anyway.
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Dealerships
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Let's say that a new Porsche or Lamborghini dealership opens down the street from you. A month after it opens, you buy the newest, most expensive car they sell. Two days later, a meteor blows up your garage, obliterating your sweet ride.
Because both the car and dealership are so new, the Kelley Blue Book price won't exist. Rather than seek an invoice from the dealership and refund what you paid, most insurers will try to broker a deal to buy a replacement car for a lower price (instead of just giving you the FMV in cash).
Private Appraisal Companies
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If your car is a refurbished antique, rare, exotic or a souped-up custom, your insurance company will most likely turn to a private appraisal firm that specializes in automobiles. As part of the process, you'll be asked to produce receipts and invoices for any parts and services performed on the car. The firm will take this information and pool it with auction data (e.g., Barrett-Jackson, estate sales, divorce & bankruptcy liquidation), collectors' community insight, quotes from local auto-body shops and even materials suppliers. In the case of especially rare models, engineers may be called in to determine whether parts of the totaled vehicle can be salvaged.
These appraisal services also give the insurance company perspective on the intrinsic historical value of certain vehicles. For example, the cost to replicate a totaled 1956 Jaguar XKSS is one thing; the cost to replace Steve McQueen's 1956 Jaguar XKSS is quite another.
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