It sounds like you had 'collision' coverage. With this coverage, your insurance company will pay you the lessor of getting your vehicle fixed or its 'actual cash value' (and minus your $500 deductible). The vehicle's "actual cash value" takes your vehicle's depreciation into consideration. This probably explains the discrepancy between the insurance company's amount and the Kelly Blue Book Value amount.

Now, your vehicle's "actual cash value" is determined by comparing your vehicle's condition to similar vehicles. This may include input from local auto dealers, private parties or recent sales. Condition, equipment and mileage differences are also taken into consideration. In addition, your insurance company may use a computerized evaluation process to assist them in determining the value of your vehicle. Now, chances are you were given your insurance company's rules about handling claims when you purchased your policy. However, if wish to fight what they are offering, you will need to seek some legal help.