How Do Insurance Companies Calculate Actual Cash Value?

5 minute read Published on Jul 6, 2022 by BrokerLink Communications

Actual Cash Value Coverage

Insurance companies use different methods to calculate the amount they will pay for a loss. However, the two most common methods are actual cost value and replacement cost. Understanding these insurance terms is key to choosing a policy that’s right for you. After all, the last thing you want is to encounter a nasty surprise after filing an insurance claim.

Keep reading to learn more about how insurance companies calculate actual cash value vs. replacement cost.

Actual cost value vs. replacement cost

What is actual cost value coverage?

Actual cost value, sometimes referred to as market value or actual cash value, is the value of your car as its worth, in its current condition. It is a measurement of payment that insurance policies use to determine how much a policyholder will receive if your vehicle is stolen or totalled. (Please note that actual cost value coverage doesn’t just apply to car insurance, it can apply to other types of insurance, such as home insurance.)

If your auto insurance policy includes actual cost value coverage, the payment you will receive is based on the value of the vehicle minus any depreciation. A common definition for actual cash value is, “the replacement cost less a deduction that reflects depreciation, age, condition, and obsolescence.”

In essence, it is the price someone would pay for your car if it was sold on eBay or Facebook marketplace today. Each insurance company has its own definition of actual cost value, which should be detailed in your insurance policy.

Generally speaking, actual cost value is the calculation method preferred by insurance companies because it usually results in a smaller payout than replacement cost. It must be noted that since the actual cost value is the cost of your car minus depreciation, you will never receive the full price you paid for the item. Since vehicles depreciate especially fast, it could be worth adding a depreciation waiver to your car insurance policy.

Contact BrokerLink to learn more about how insurance companies calculate and define actual cost value and whether adding a depreciation waiver to your policy is right for you.

What is replacement cost?

Replacement cost is an insurance term that means payment will be made based on the actual cost of replacing your property (in the case of auto insurance, the cost of replacing your car). Replacement cost is generally preferred by policyholders because it means that if your car was stolen or damaged, your insurance company would pay the full cost to replace it with a new car of a similar kind and quality.

In the case of replacement cost, the insurance company does not take into account factors like depreciation or the age and condition of your vehicle. Please note that in the case of replacement cost, the cost of a new car will be fully covered up to the policy limit.

Why choose actual cost value over replacement cost

Now that you understand the key differences between actual cost value and replacement cost, you might be wondering which one is right for you. While replacement cost usually holds more value for the policyholder, replacement cost auto insurance policies are also more expensive.

So if you’re looking to save money on car insurance, choosing a policy with actual cash value is typically more cost-effective.

That said, cars depreciate quickly. And since actual cost value is based on depreciation, as well as other factors like wear and tear, mileage, and accident history, you may get significantly less for your car than you paid if it were stolen or damaged. In contrast, replacement cost might result in a payout that’s worth even more than you originally paid for the item, since the cost of buying a similar car today may have gone up due to inflation.

Therefore, the difference between what you will receive with actual cash value and replacement cost can be significant, but so too can the cost of each type of insurance policy. Get in touch with an insurance broker for help understanding the pros and cons of actual cost value and replacement cost. An insurance advisor from BrokerLink will be pleased to offer their unbiased, objective opinion on the best coverage for you.

How does an insurance company determine actual cash value?

Most insurance companies determine actual cash value with the help of third party vendors, though some use internal proprietary models. Typically, how it works is an insurance company feeds data about the vehicle and any damages into the third party system, and from there, the software aggregates the information to calculate the actual cost value of the car.

Actual cost value depends on many factors, ranging from the year, make, and model of the vehicle to wear and tear, collision history, and mileage. If you want more information on how your insurance company calculates actual cost value, including what software they use and what factors are taken into consideration, contact your insurance provider directly.

Further, if you disagree with an insurance company's estimate of your car’s value, don’t hesitate to negotiate with them. With the right evidence, you may be able to negotiate a higher payout.

Tips for negotiating the actual cash value of a vehicle

If you believe your car is worth more than an insurance adjuster tells you, don’t hesitate to negotiate for a higher payout. BrokerLink’s car insurance experts have put together a list of our top tips for negotiating the actual cash value of a vehicle.

  • Speak to your mechanic. Before entering into a negotiation with your insurance company, ask a trusted mechanic for a professional estimate on the value of your car. You may even take your vehicle around to different auto body shops in your area, gathering as many professional opinions as possible.
  • Get in touch with the appraiser. If an appraiser was involved in determining the actual cash value of your vehicle, contact them directly and make sure they understand everything included in your vehicle (all safety features, amenities, etc.).
  • Hire a private appraiser. If you have reason to believe that your car is worth significantly more than the appraiser is saying (for example, if you did some research into what other similar cars have sold for you in your area), consider hiring a private appraiser. Keep in mind that you will have to pay for this out of pocket.
  • Hire a lawyer. If you don't have the time or ability to negotiate with the insurance adjuster, consider hiring a skilled lawyer to negotiate on your behalf. This might not make sense for small claims but if you are seeking a significant payout, it could be worthwhile.
  • Emphasize the emotional. If you have been suffering without your vehicle (perhaps you’re having trouble getting to work each day or dropping your children off at school), tell the insurance adjuster about it. Provide as much evidence as possible that might sway an adjuster to grant you a higher payout.

Learn more about how insurance companies calculate actual cash value by contacting BrokerLink today

In the event your car is stolen or totalled, it’s important to understand how the insurance company will calculate the loss. Will they account for depreciation or oppositely, for inflation? These are pertinent questions if you want to know how much money you will receive should a major accident occur.

BrokerLink is here to help you understand all there is to know about actual cash value and replacement cost. We can walk you through both terms, explain the advantages and disadvantages of each calculation method, and help you find an auto insurance policy with your preferred coverage type.

Contact the experts at BrokerLink by giving us a call, sending us an email, or visiting us in person at one of our many locations throughout Canada. You can also use our online quote tool to request a free car insurance quote right now. All BrokerLink quotes are accurate, competitive, and 100% obligation-free.