If you find yourself in a motor vehicle accident and file an insurance claim, some of the factors that will be investigated are the value of your vehicle and how much damage has been done to it. There are several terms that your insurance provider will most likely use when evaluating these things including actual cash value, market value, and total loss.
It’s a good idea to familiarize yourself with the definitions of these terms so that you can have a full understanding of the considerations that go into insurance payouts. Below, we’ve defined each of these terms and provided examples.
Actual Cash Value, also called ACV, is one of the ways used to determine how much the insurer will pay in the event of damage such as the kind that can happen as a result of an accident.
There are a few ways insurance companies might choose to calculate ACV. The most common is to calculate the cost of repairing or replacing the damaged property minus depreciation (natural wear and tear that occurs to the vehicle over time). Depreciation is usually calculated by determining a vehicle’s useful life span and seeing what percentage of that life span remains.
For example, let’s say your car will cost $30,000 to replace. The useful life of your car is determined to be 20 years, and it is 5 years old, meaning 75% of its life span remains. The depreciation will then be valued at 25% of the car’s cost. If you bought the car for $30,000, depreciation will be $7,500.
So, in this case, ACV equals $30,000 minus $7,500, coming out to a sum of $22,500.
Market value, or fair market value, is another figure that is taken into account when determining insurance policies and payouts for accidents. It is defined as the price that the vehicle in its current state would be able to be sold for in the current market. To put it simply, if the car were to be sold today (or at the time of making the claim) on the open market, how much would somebody pay for it?
Market value is usually different from ACV. It is determined by the insurer based on a number of factors including age, make, model, miles traveled, the general condition of the car, and how much similar cars are currently selling for in the industry.
Total loss refers to when the damage done to a vehicle exceeds its value. Essentially, this is what happens when the cost to repair a car after an accident is more than the cost to replace it. When people refer to a car being “totaled” in an accident, they are referencing this term.
Most of the time, insurers will decide if there is a total loss by using the total loss threshold formula. The total loss threshold is represented as a percentage and is calculated by dividing the vehicle's repair cost by its ACV.
For example, if it would cost $20,000 to repair your vehicle and its ACV was determined to be $22,000, the total loss threshold would be 91%. The percentage that would be considered to be a total loss will vary depending on the state you’re in. It usually ranges from 60% to 100%, with 75% being very common.