Well, you’ve finally purchased that classic car you’ve dreamed about for years and are getting it ready for the Woodward Dream Cruise. You’ve called your insurance agent and had him add it to your policy. But then the unthinkable happens: you’re in an accident and the car is damaged beyond repair. The insurance adjuster comes out and informs you that book value on your 1960s-era vehicle is only $2,000, even though you paid $50,000 for it just a few weeks ago. Now what? How can you avoid this scenario?
Understanding the types of coverage available is paramount to obtaining an auto insurance policy that is appropriate for your situation. There are three different ways auto insurance policies address valuation. The first one we’ll look at is the one that’s used for policies written on everyday vehicles.
Actual Cash Value (ACV)
If your vehicle is wrecked, the insurance company will send an adjuster out to ascertain the damage and determine the settlement amount using Actual Cash Value (ACV). ACV is, in essence, the amount that it would cost to replace your car with one of like kind and quality and is calculated using sales data based on the year, make, model, options, mileage, location, and condition of your car. If the amount to repair the damage is more than the ACV, the car is considered a total loss (or “totaled”) and a check is issued to you in the amount of the ACV. Since people are usually unaware of the current ACV of their vehicles, the result of this method of valuation is often a feeling of frustration by the customer (this is what happened in the example above). While the ACV valuation can be contested by presenting contrary evidence, the insurance companies are usually quite fair and thorough when presenting their settlements.
So what happens if you have a classic vehicle for which ACV data is not relevant (i.e. your vehicle is worth way more than book value)? The answer would be to purchase an Agreed Value policy. These policies are typically available through specialty companies and are advertised as “classic car insurance”, and almost all of them feature an Agreed Value settlement form. Agreed Value, which is sometimes expressed as “Guaranteed Value”, means that the valuation of the vehicle is determined at the time the policy is written, sometimes using an authorized appraisal obtained by the customer, but often just an amount the customer feels it’s worth and then agreed to by a company underwriter. This amount is subsequently listed on the policy declaration pages, and is the figure on which settlement determination is based. If you are purchasing “classic car” insurance, make sure the Agreed Value settlement form is included in the policy. It’s usually very simple, with the exact form being very similar to this:
In the event of theft or a total loss we will pay the Agreed Value listed in the declarations.
There is one more valuation method to cover, one that is usually confusing to customers and often mistaken as Agreed Value (but most certainly is not).
When writing coverage for older vehicles on a standard policy, insurance companies typically use the Stated Value method of valuation. This is because it is difficult for insurance companies to properly value older vehicles, and this method allows for valuation to ensure the insurance company can collect the appropriate amount of premium. The Stated Value clause usually reads something like this:
In the event of theft or total loss we will pay the lesser of Stated Value or Actual Cash Value.
With this type of policy, the responsibility of determining the proper valuation falls on the customer rather than the insurance company. This value directly determines the amount of premium to be paid. Underestimating the value will save the customer premium dollars, but the settlement will be for less than the vehicle is worth. Overestimating the value allows the insurance company to collect more premium than necessary to cover the settlement. Therefore, it benefits the customer to come as close as possible to an accurate valuation.
As you can see, ensuring you have the right type of policy is very important in determining if you are “covered”. Make sure you know the difference, and if you’re not sure, consult with your insurance agent.
Nicholas Chapekis, Jr., CIC, CRM