Why Won't an Insurance Company Pay for the Full Value on a Car Replacement?

Your insurer doesn't owe you for a new car after an accident.

There are few auto insurance claims situations more frustrating than when your car is declared a total loss. Suddenly, your insurer is not willing to pay for repairs and instead offers you a lump sum of money to settle your claim. Once you accept that your car is damaged beyond repair and that you have to replace it, you may wonder why your settlement is not large enough to buy a new car.

Indemnification

Property insurance works around the principle of indemnification. This means that an insurer must pay to restore your property as close to its pre-loss condition as possible. In the event that the property is damaged beyond repair or destroyed, the company pays you the value of the item. Some forms of property insurance, like homeowners insurance, allow you to purchase a replacement cost endorsement. This coverage entitles you to more than indemnity, since you receive enough money to buy a new item even if it costs more than the damaged one. Replacement cost is not available on standard auto insurance.

Actual Cash Value

Because replacement cost is not an option for auto insurance, your total loss claim will be settled according to your vehicle's actual cash value. This means that the insurer will derive the value of your specific vehicle at the time the loss occurred and pay you that amount as a settlement, less any applicable deductible. Theoretically, it should be enough money to buy that exact car again, but it will not be enough money to buy a newer car of the same model. Your insurer does not owe you the replacement cost of your vehicle.

Deductions

You may not receive the full cash value of your vehicle in a total loss claim. If you make a claim against your own insurance company, you must pay the comprehensive or collision deductible you selected when you bought the policy. The insurer will deduct this amount from your settlement. If you have an outstanding balance on a loan for your vehicle, the insurer will pay off the loan before it gives any money to you. In some cases, if you are determined to be partially at fault for an accident, your settlement gets reduced by your percentage of fault.

Actual Cash Value Determination

Your insurance company employs a complex strategy to determine the actual cash value of your car. It evaluates the condition of your car, including its mileage and options package, then compares it to other similar vehicles in your area to determine its value. Even if you attempt to buy another vehicle of the same year, make and model as the one you lost, the purchase price may still not equal your settlement amount. The insurer reached its settlement by averaging the sales prices of vehicles similar to yours. If you try to buy one that is more expensive than the average, you may have to pay the difference out-of-pocket.

References

• Insure: Total Warfare: What to do When Your Auto Insurer Totals Your Car
• Autos: How the Actual Cash Value is Calculated
• Cheap Car Insurance: 12 Secrets Your Auto Insurance Company Won't Tell You
• Car Insurance: How is the "Actual Cash Value" Determined?