If your car is totaled and you file a claim, your insurance company will give you a check for your car's actual cash value (ACV), minus your deductible. While some car insurance companies use their own formulas to figure out your car's ACV, actual cash value is generally just your car's pre-collision value, which includes depreciation and wear and tear over the time you’ve owned it.
That’s why your car's actual cash value is typically less than what you paid for it. If you want to ensure you’ll be paid enough to fully replace your totaled car with a brand new one, add new car replacement to your insurance coverage, which is available for newer vehicles. If you lease or finance your car, gap insurance can make up the difference between your totaled car’s ACV and what you still owe on your lease or loan.
What is the ACV of my car?
The actual cash value (ACV) of your car is the amount your insurance company will pay you after it's stolen, or totaled in an accident.
Your vehicle's actual cash value is different from what you paid for the car when you bought it, which is called its retail value. After your car is totaled, whether you wrapped it around a telephone pole or it was damaged in a flood or by some other incident, you’ll have to submit a claim (assuming you have comprehensive and collision coverage). Then, your insurer will reimburse you for your car's actual cash value, minus your policy's deductible.
Let's say the car you've had for five years is totaled and you have to make a claim for the damage. Your insurance company may determine that over the last five years, your car lost one third of its value through depreciation and wear and tear.
If a similar car costs $21,000 today (regardless of what you paid for it), you could find your car's actual cash value by subtracting one third from the cost to replace it. In this scenario, your insurance company would say that your car's ACV is $14,000, and you’d get a check for that amount, minus your comprehensive or collision deductible.
What is replacement cost vs. actual cash value?
Your car's replacement value is the amount of money that you would have to pay to replace it with a new one after a total loss. Unlike actual cash value, however, replacement value isn't tied to your car's depreciation.
While the actual cash value of your car usually decreases over time as it loses value, its replacement value doesn't necessarily go down as quickly. Instead, if the market for cars is tight and vehicles are expensive, or if your car is a rare model, its replacement value could remain stable or even go up over time.
How do insurance companies determine the ACV of my totaled car?
It’s difficult to determine exactly how your insurer will decide the actual cash value of your car, since companies all use different formulas. But there are a few factors that commonly come in to play when companies calculate ACV, including:
The car’s age
Its total mileage
Its primary use
Any past accidents and damage
Any modifications you’ve added
Its salvage and resale value
Your insurance company may also consider the cost of comparable vehicles for sale in your area, in order to get a sense of how much your car would have been worth before it was totaled or stolen.
It's possible that your car's actual cash value may be hundreds or even thousands of dollars less than what you actually paid for it. Even if your car is only a few months old and doesn't have many miles on it, it still started depreciating as soon as you drove it off the dealership's lot, so it's already worth less than what you paid for it.
What is the difference between actual cash value and fair market value?
Your car's actual cash value and its fair market value are different. While its actual cash value is the amount your insurer will pay you for it if it’s totaled, your car's fair value is what it could reasonably sell for if you put it on the market (before the accident). Depending on the number of potential buyers, there may be a range of prices someone would pay for your vehicle.
After an accident, your car insurance company may use your car's fair market value to find its actual cash value.
Gap insurance and new car replacement coverage
As long as you have comprehensive and collision coverage, you’ll be paid out the ACV of your car if you total it in an accident. But there are some additional coverage options that can offer even more protection, in case just being paid the ACV isn’t enough.
If you're leasing or financing your vehicle, getting gap insurance, also called gap coverage, is a good idea. In fact, your lessor or lender may require you to add it to your policy. Gap insurance just pays off the gap between the ACV of your totaled car and whatever you still owe on your loan or lease.
Let's say that you're financing your vehicle with a $30,000 loan. You still have $20,000 left to pay on your loan when you're in an accident and total your car. Your insurance company determines that the actual cash value of your car is $15,000. Your insurance claim will pay your $15,000, minus your deductible of $1,000. If you had gap insurance, it would cover the remaining $6,000 between your insurance payout and the remainder of your loan.
New car replacement coverage
Another way to avoid paying for your car's lost value after an accident is by getting new car replacement coverage. New car replacement coverage means that, if your car is totaled, you’ll be offered enough to replace your damaged car with a new car of an identical or equal make and model. Some insurance companies even offer coverage that will pay to replace your totaled car with one that’s one or two model years newer.
However new car replacement coverage can be an expensive endorsement, and it’s usually only available to drivers who are the first owner of a car that’s less than two or three years old.
How to dispute your insurance company’s valuation
After your insurance company determines your car's ACV and comes up with a settlement, you have the option of disputing their offer if you think it's too low. To do this, you'll need to show that your car would have been worth more at fair market value than you were offered. The best ways to build a case are by:
Researching the price of cars in your area: Search for cars that are similar to yours, not just in make and model, but in age, use, accident history. To lend your research more credibility, look for cars at dealerships or through independent valuation companies, not cars that are sold over social media marketplaces.
Make sure your insurance company is right about everything: Review your insurance company's evaluation to make sure that the exact trim level and specifications of your car are right. If they left off upgrades like a moonroof, heated seats, and leather trim, you'll have a case for challenging their offer.
Consider getting your car appraised: Getting your car appraised by an independent professional is a great way to get a sense of its value from a reputable source. It may be more expensive than doing your own research, but it could make your case stronger. Obviously it’s easier to get your car appraised before it’s totaled, as a preventative measure, but an appraiser may still be able to help you even after an accident.
Complete your insurer's process for disputing claims: If you decide to dispute a low settlement offer or valuation, make sure to follow your insurer's process for disputes. This may include submitting relevant evidence on time, filling out paperwork that your insurer requires, and submitting to questioning. While these processes may seem complicated, your insurance company may just consider your dispute invalid if you don't follow the proper course of action.
If your research shows that your insurer's valuation is lower than your car's expected market value and depreciation, you may be able to negotiate with your insurance provider for an adjusted settlement. You could consult a lawyer to help you navigate through this process, but it's typically not necessary.