I totaled a car recently. My insurer has offered a payout that is a bit less than I expected based on my own market research. The tell me that this is because I have a “cash value” policy, as opposed to a “replacement value” policy. The have further informed me that for their purposes:
replacement value = dealer value, and
cash value = replacement value minus depreciation.
Can someone further clarify this distinction? Wouldn’t the dealer/replacement value already have depreciation figured into it?
Sounds like the insurance adjuster is a bit confused. Here’s a decent explanation from an insurance web site:
The replacement cost would be to replace your car with a new version of your car with no depreciation. The cash value would be the current fair market value of your car at the time it was totaled, which would include depreciation.
You normally can’t get replacement coverage on cars after they are a year or two years old. And if you do, your premiums are substantially higher.
The market research I did (kbb, NADA, Edmunds, etc.) involved searching for my exact vehicle (3.5 years old, X miles on it). Does that mean I was indeed researching the cash value, whereas replacement value would be the cost of the current model-year version of my car with 0 miles on it?
Your adjuster provided a general description of cash value but it does not fit your situation. Replacement cost less depreciation is a formula adjusters use to arrive at actual cash value and is effective in most situations involving personal property when there is no market available to replace a damaged item with one just like it. A quick example would be a claim under a homeowners policy toward a 10 years old mattress/box springs. Since there is no market readily available selling used bedding, you take the price of the new items and apply depreciation based on the life expectancy of the damaged item to arrive at value.
Obviously, your situation is different because there is a used vehicle market selling a similar vehicle for X dollars. Present this info to the adjuster explaining the settlement of cash value should be the amount that places you in the same position you were in prior to the loss. Depreciation only applies if there is a betterment associated with the item used to arrive at cash value. An example involves replacing an old car with a new car, meaning you’re better off. However, replacing an older car with the same or similar older car involves no betterment and depreciation will not apply because the sale price of this older car has already factored in depreciation.
Your research (kbb, NADA, Edmunds, etc.) to arrive at cash value is correct. You can further strengthen your argument by researching the asking price of local used car dealers/individual sellers on a similar vehicle. Actual cash value is a loosely defined insurance term that in your case boils down to your out of pocket cost to replace your damaged vehicle with either an exact vehicle or one of like kind and quality.