Question: When I purchased my car insurance policy, my agent couldn’t tell me the exact amount I'd receive from either my comprehensive or collision coverages if my car were totaled out. I know with other types of insurance (such as homeowner's and life) the policy tells me how much it will pay out. He said there were a bunch of factors involved, but didn’t tell me what. Can you explain it?
Answer: It’s understandable that you’d want to know how much your car insurance policy would pay out if say you totaled your car tomorrow or even next year, but auto insurance is different from life insurance and homeowner’s insurance policies and doesn’t give exact payout amounts for certain coverages.
Many parts of a car insurance policy do tell you the maximum dollar amount that will be paid out. For instance, your bodily injury liability coverage states the maximum limits that could be paid out per person and per accident.
Your physical damage coverages of comprehensive and collision that cover your own vehicle are a bit different because the most they will pay out is the actual cash value (ACV) of your car, in the condition it was in the second before the accident happened.
While your auto insurance company could determine the ACV of your car on the day that you start your policy, that doesn’t mean your vehicle will be worth that same amount on the day it’s totaled out (if that day comes).
Cars depreciate in value as they get older, are more worn and have more miles on them; a car insurer can’t say that you will get XXX if you total your car in the next year. Instead they determine a car’s worth only after it’s been in an accident.
After an accident, the adjuster will see the actual mileage, the over-all condition, etc. and compare your vehicle to local car sales of the same vehicle in the same condition at that exact period of time to determine the ACV.
The amount is likely to be less than what your car was worth at the inception of your policy, but there is a small chance that the used car market improved for your vehicle, and it could be worth more.
Other factors that, in most states, go into your settlement amount typically include sales tax, title and registration (transfer) fees for your replacement vehicle. The tax and fee amounts can change and may be based upon your car’s ACV, so also can’t be determined until the time of your car’s total loss.
There are agreed-value car insurance policies available. With this type of policy, you and your agent decide together upon the agreed amount the vehicle is worth before the policy is issued. However, this type of policy is usually reserved for antique or classic cars, because they depreciate and are valued differently. (See “Auto insurance for collectible cars.”)