When your car is so damaged that your insurance provider considers it a total loss — whether you had an accident or it was damaged while you weren’t driving it — your insurance company will pay you for your totaled car.
But, unless you’ve purchased extra coverage, they won’t pay you the same amount you originally paid for your vehicle. Instead, they’ll pay out what’s called the actual cash value, or ACV, of your car.
Actual cash value is a term used frequently in the insurance industry, but when it comes to car insurance, it means the value of your car as determined by your car insurance company. The ACV of your car takes into account usage, general wear and tear and any prior accidents the car has had. Even if you’ve kept your car in pristine condition, the ACV will be lower than what you originally paid for it. That’s because new cars depreciate in value the moment you drive them out of the lot.
If your car was totaled and you’re trying to figure out how much your insurance company will pay you for it, it’s important to have a general understanding of what ACV means and how it’s calculated.
What does ACV mean for auto insurance?
A car is usually declared a total loss by insurance companies when the costs to fix it are above a certain percentage of the car’s overall value.
Some states have laws setting a threshold of damage above which a car must be declared a total loss. For example, in Nevada, the total loss threshold is 65%, meaning that if the costs of repairing a car exceed 65% of its market value, it has to be declared a total loss.
A total loss will be covered by car insurance if you have collision and comprehensive insurance. Collision insurance covers damage to your car after an accident, no matter who was at fault, and comprehensive insurance covers damage to your car when it’s not being driven, like damage from extreme weather, falling objects or even theft. If you don’t have collision or comprehensive insurance, your car insurance probably won’t pay out after a total loss.
But if you do have collision and comp, a total loss will be covered, and you’ll be paid the ACV, minus whatever deductible you’ve set for your collision and comp coverage. (Both collision and comp typically require you pay an out-of-pocket deductible before insurance kicks in to pay out the rest of the claim. Your deductible is typically set at $500 or $1000).
How do you calculate ACV?
Unfortunately for you, the specific calculations that go into determining ACV are somewhat of an industry secret. Most car insurance providers use an industry formula to calculate your car’s ACV, taking into account how long you’ve had your car, how many miles it has on it, its make and model and whether it’s had any parts replaced. They’ll also consider how much comparable vehicles have sold for.
Your car’s ACV may be hundreds or thousands of dollars less than what you actually paid for your car. Because insurers use proprietary formulas to calculate ACV, it’s difficult to predict exactly how much you’ll be offered for a total loss.
That said, if you check with local dealerships and look at comps to figure out the trade-in value of your car before it was damaged, that should give you some idea of what the ACV should be. If your insurer’s offer is significantly lower than you were anticipating, you may be able to negotiate, provided you have plenty of documentation showing why the ACV should be higher.
What is new car replacement?
Comprehensive and collision insurance mean your car will be covered in the event of a total loss, but receiving the ACV of your car may not be enough for you to fully replace it with a similar vehicle. If you total a brand new car, that could mean a loss of thousands of dollars.
That’s why some drivers choose to add on an additional kind of coverage, called new car replacement coverage, which guarantees you’ll be paid out enough to replace a new car with another of the same make and model. Many major carriers, including Allstate, MetLife, Safeco and Travelers, offer new car replacement. But this type of coverage can significantly increase your premiums, and it’s usually only offered for the first year or two after you’ve purchased a new car.