How Do Insurance Companies Estimate Car Values?

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While it might not seem like it at first, it’s helpful to understand how car insurance companies estimate car values. When you make an insurance claim, the estimated value of your vehicle can play a role in how much your insurance company pays. Additionally, it helps the company determine if your car is totaled, which matters.

In many cases, auto insurance companies don’t use the same resources car shoppers and sellers use to get an idea of their vehicles’ values. If you want to know how they actually handle it, here’s a look at how insurance companies estimate car values.

Factors Insurance Companies Consider

When you file an insurance claim, an adjuster looks over your vehicle to assess the damage and the loss of value. Generally, insurance companies are only focused on the actual cash value (ACV) of your car before the accident, which represents its worth in its current condition in your local market.

Determining the ACV is a multi-step process involving several factors. First, there are standard value reductions for normal depreciation. Additionally, wear-and-tear, mileage, cosmetic issues and mechanical malfunctions are all taken into account. There also may be variances depending on the options you have and even the vehicle’s color, as cars with some paint colors sell for higher amounts.

Finally, your local market matters. Cars sell for different prices depending on the city and state where the sale takes place. In some cases, the prices vary by 20 percentage points or more based on your location. Since the assumption is that you’d sell locally, where you live plays a role in your ACV.

Which Factors Matter Most?

Generally speaking, the two factors that make the biggest impact are the mileage and condition. Higher-mileage cars typically have less life in them or may be closer to high-cost repairs, which reduces their value. As a result, a vehicle with 150,000 miles has a lower ACV than another that’s the same make, model and year with 40,000.

Condition can include both functional and aesthetic factors. When a car doesn’t run well, it’s worth less. Similarly, if it’s less attractive due to cosmetic issues, the price is usually dropped. In some cases, lower-mileage vehicles are worth less than their higher-mileage counterparts purely due to condition issues.

The impact location has often depends on the type of vehicle. Sedans and road-focused compact SUVs are almost universally popular, so location may play less of a role. However, specialized vehicles — such as those designed for going offroad — are worth far more in parts of the country where people are more outdoorsy. Similarly, convertibles may have higher values in sunnier, drier parts of the country.

When it comes to options, the impact is usually smaller. While having a desirable feature like all-wheel drive can work in your favor, some may have practically no effect. Whether having an automatic or manual transmission is a benefit or a drawback depends on the type of car. Sports cars do well with manual transmissions, while daily drivers often don’t.

However, missing options that many people view as essential, such as air conditioning or power windows, can work against you. They’re essentially standards in vehicles from the past couple of decades, so selling a car without them is difficult and reduces the value.

Finally, aftermarket personalization can actually hurt the car’s value. Potential buyers might have questions about the quality of the work. So, they often favor vehicles without modifications.Ultimately, insurance companies consider all of the factors above, usually giving the most weight to mileage and condition. Then, they compare the vehicle to prices in the local area, allowing them to estimate what the car is worth based on its condition before the accident.