What is actual cash value when talking about car insurance?

A vehicle’s actual cash value represents how much it is worth given its current age and condition in today’s market, including depreciation. If you’re in an accident and your car is totaled, your insurer will only reimburse the ACV of your vehicle, not the original price you paid for it.

“Most vehicle insurance policies are written on an actual cash value basis,” says Otto Larson, vice president and partner with Wallace & Turner, an independent insurance agency with offices in Springfield and Urbana, Ohio.

Due to depreciation, an ACV settlement likely will not be enough to purchase an equivalent replacement if you own your vehicle outright. If it’s financed or leased, the ACV settlement may be less than you owe.

Key highlights

• If your car is totaled, your insurer will only reimburse the actual cash value of your vehicle, not the amount you paid when you bought it.
• Actual cash value is based on your car’s pre-crash fair market value, including depreciation.
• Actual cash value differs from replacement cost, the amount you’d need to buy a new vehicle of the same make and model or a reasonable equivalent.
• The actual cash value settlement may be negotiable in the claims process.

How is ACV calculated in car insurance?

There are several factors that car insurance companies use to calculate actual cash value, Larson says. These may include:

• Make and model
• Age
• Mileage
• Condition
• Interior and exterior features
• Location

Combined, all these determine a vehicle's depreciation, that is, how much value it has lost since it was new.

“The ACV is what an insurer will use to determine if your vehicle is a total loss in an accident,” says Alex Burgess, principal industry strategist at Hi Marley, a property and casualty insurance technology company.

“Generally speaking, if the cost to repair the vehicle is more than or even close to the ACV of the vehicle, it’s not worth repairing, and the insurance company will consider it totaled,” he says.

Some factors, such as age and mileage, are apparent, while others can be easily overlooked. For instance, Progressive notes on its website that a car's color can contribute to its depreciation. A custom paint job or unusual color could mean a vehicle is worth less than one in a popular color.

What is the difference between a car’s ACV and its replacement cost?

A vehicle’s replacement value is the amount you would need to buy a new car of the same make and model and with similar features. If your vehicle has been discontinued, the replacement cost would be the price to buy a comparable make and model.

Meanwhile, the actual cash value is often significantly less.

“It’s the opposite of replacement value,” Larson says. “It’s the current value.”

How does actual cash value work?

After you’ve been in an accident, your insurer will send an adjuster to inspect your vehicle, appraise its condition and determine how much it would cost to fix. The insurance company will then compare the repair estimate to the vehicle’s actual cash value.

“Insurers generally use models that look at comparable vehicles that are for sale or recently sold and base the ACV on the sale price of those vehicles,” Burgess says. “The insurer will often send this comp set to the policyholder so they can provide transparency of the basis for their assessment of the vehicle’s ACV.”

If the repair cost exceeds or is similar to the ACV, your insurer may declare your vehicle a total loss. In that case, it would issue a payment for the actual cash value minus any deductible that may apply to your policy.

Bear in mind that you must have comprehensive and collision insurance if you want your vehicle covered in the event of an at-fault accident. Collision insurance covers your car if it is damaged when you strike another vehicle or a stationary object, such as a mailbox. Comprehensive insurance provides similar coverage for non-collision events, such as damage from severe weather, fire, theft, vandalism, or striking an animal while driving. Also, both forms of coverage typically include a deductible, which you must pay before your insurance kicks in.

If you only have liability insurance, which only covers injuries and damage you cause others, you’ll have to pay to repair or replace your vehicle out of pocket.

Can I negotiate my ACV settlement with my insurer?

If you don’t think the ACV assigned by your insurer is correct, you can negotiate that amount as part of the loss adjustment process.

The customer may have additional details about the vehicle that the insurer is unaware of, Larson says. For instance, you may have added aftermarket parts that increase the value.

You may want to do your own research to bolster your case and find examples of recently sold cars closer to your vehicle’s mileage and features. You can send this information to the insurer with justification for why you believe it’s more relevant, Burgess says.

Frequently asked questions

How can I find my vehicle’s actual cash value?

Some insurers, such as Nationwide and State Farm, have depreciation calculators on their websites. These estimate how much value a vehicle can lose over time. You can also find free online calculators that use your vehicle identification number (VIN) to provide a more accurate ACV amount.

What is gap insurance?

Since new vehicles depreciate quickly after they are purchased, owners may find themselves owing more than the car is worth on their lease or loan if it is totaled in an accident. Gap insurance is designed to address this problem.

In essence, gap insurance closes the “gap” between what your insurer will pay to your financing or leasing agency and what you owe on a loan or lease agreement.

“Having gap coverage ensures that the insurance company pays the difference if your outstanding loan amount is higher than the vehicle’s ACV,” Burgess says.

What is new car replacement insurance?

Some insurers, including Allstate, Farmers, American Family and Liberty Mutual, offer optional, extra-cost new car replacement insurance. This coverage will pay to replace your vehicle if it is totaled. Requirements vary by company, but car replacement insurance is typically only available for those with newer vehicles. And it may only cover losses that occur within a specific time.

For instance, Liberty Mutual's new car replacement insurance only covers accidents or thefts within one year and 15,000 miles of purchase.