Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insuran...

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Aug 12, 2021

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Here's what you need to know...

When you buy auto insurance, agents stress the importance of selecting the right limits and deductibles. While building the best policy that suits your needs is crucial, it’s also important to gain an understanding of how your coverage works before you ever file a claim.

If you’re familiar with how the coverage works, you can gauge which coverage options you need and which options you don’t.

There’s a limit to how much your insurer will pay for third-party claims and there’s also a limit to how much your insurer will pay for your own repairs.

That’s why you need to assess the value of your vehicle before you purchase full coverage. If you’re not sure how to value your vehicle, here is a guide to how your insurance company does it.

Start comparison shopping by using our FREE tool above. Just enter your zip code to get started!

What is physical damage coverage?

The only time that your own insurance company will estimate the cost of repairs and calculate the value of your car is when you carry physical damage coverage in the form of collision and/or comprehensive coverage. If you carry liability only coverage, it’s only meant to cover the damage you might cause to somebody else’s property.

It’s important to understand what you’re claiming. Unfortunately, there is no physical damage coverage that applies to every situation for your vehicle. Collision coverage is the most common added coverage. It covers you when you’re in a collision generally with another car. If you hit a deer or other animal or if a tree hits you, you might also assume this would be covered by collision coverage.

If you don’t have comprehensive coverage, you might find yourself in a tough spot. Collision is narrowly defined. Comprehensive coverage covers many situations, but getting the true cost is essential to getting the full value out of it.

Examples of comprehensive claims include a fire, a theft, a falling object, or damage sustained in a storm. Collision pays for repairs after an accident.

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Why is physical damage coverage optional?

In most states, you’re only required under state law to buy liability coverage. Liability coverage helps to protect your assets by covering the damage to others’ property and injuries if you cause the accident. State minimums are relatively low. So you may want to increase your liability coverage. If it does not cover the other party’s damages, they could still sue you in many states. 

Since states are only concerned with your ability to pay for damages that you cause to others, there is no requirement saying that you must carry first-party coverage (collision and comprehensive insurance or personal injury protection in most states). 

If you want coverage for your own car, you must add comprehensive and collision to your policy. Without the optional coverage, you are at risk of having a loss that’s not covered by your insurer.

t’s important to remember that you can file a claim for repairs against the other party’s insurance if you’re in a not-at-fault accident.

When are you required to buy comprehensive and collision?

You can’t be penalized for the state for buying a basic auto insurance policy without Physical Damage coverage, but you can be penalized by your lender or lessor. If you are financing or leasing a car, the bank may require you to carry both with reasonable deductibles most people can afford to protect vehicle values. 

If you don’t buy full coverage on a leased or financed vehicle, the lender is free to force-place insurance to protect their interests. In other words, they will sign up for an insurance policy to cover the necessary property damage limits for you. What you might not know is that forced-placed insurance does not protect you in any way. Ironically, it could also cost you more than you’d spend if you got a good policy based on the true market value of your car.

If your car is damaged but still operable, the insurance purchased by the lender won’t pay for your repairs.

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Why is it so important to understand how your car is valued?

If you own your vehicle outright, you can choose whether or not you want to purchase comprehensive insurance or full coverage. Given economic conditions, some people choose not to carry property damage coverage on older cars that aren’t worth as much. Experts still recommend carrying a certain amount of personal injury protection. Unfortunately, health insurance companies often have exclusions for injuries sustained in an auto accident.

Since the average cost per year for a full coverage policy is $841.23 per year, it’s important to make an educated decision as you’re building your policy.

It’s important to base your decision on whether or not you want full coverage on how much your vehicle is worth in the eyes of the insurer and your own financial situation. If you cannot afford to replace your car on your own or secure financing for a new car, you may want to get something out of it. This is assuming your car’s value is significantly above your deductible.

If you’re not familiar with how your car is valued, you might assume that your carrier will pay you more than you’re entitled to when and if you file a damage claim. The best way to make a decision is to value your car first using Kelley Blue Book or other sites that can accurately reflect current market values.

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Is there a limit to how much your auto insurance company will pay?

Your auto insurance company clearly defines your obligations as an insured and their obligations as an insurance provider in the Personal Auto Policy contract.

While the insuring agreement can be difficult to understand, it is the place where you can find out how much the insurer is obligated to pay for your car when it’s damaged.

Part D of your contract explains how much the insurer will pay for coverage to your damaged auto. Under this section, it says that the insurer is only obligated to pay for reasonable repairs that total up to the car’s Actual Cash Value.

Most insurers have a limit as to how much the company will pay for parts and labor charges.

What happens if the repairs cost more than the actual cash value of your car?

If the repairs are estimated to cost more than the car’s value, the insurer will declare the car a total loss.

Some states allow companies to total a vehicle that’s sustained serious damage to declare the car a total loss when the damage exceeds a certain percentage of the car’s value. This percentage is called the Total Loss Threshold.

If your car is totaled, you have the option to sell the car to the insurance company or keep the car. If you sell the car, you will receive a check for the car’s total value plus registration and titling fees.

If you keep your car, the salvage value of your vehicle will be deducted from your payment.

What do claims adjusters use to calculate your car’s value?

Claims adjusters don’t rely on just one resource to determine a car’s value. Since values can change all the time, adjusters use several different reports and listings.

Here are some of the ways that the value is determined after a loss:

  • Look up the value of the car in Kelley Blue Book and other valuation guides
  • Browse the sales listings in the local vicinity
  • Check the sales records for private party listings and dealer listings

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Is the value that’s been calculated negotiable?

Insurance companies aren’t going to volunteer information on how to get a higher value for your car. It’s the company’s goal to settle your damage claim for the lowest possible amount.

That’s why most initial offers are low. Luckily, valuations are negotiable if you know what to do. If you feel like your valuation is low, try these tips:

  • Pull up your own online valuation with Kelley Blue Book to see if the insurer has included all of your vehicle’s features
  • Look for similar cars in local classifieds to see if these figures can bump up your value
  • Inform the agent that your car has a rare trim level that adds to the value
  • Provide receipts for aftermarket additions and maintenance
  • Ask for the agent to use only the top three vehicles when they are pulling up comparable vehicles for sale

If you’re not happy with how your current insurer handled your last claim, it’s time to shop the market for new coverage.

You can use our FREE online rate comparison tool and get instant quotes in a matter of minutes if you have all of your personal information.

Start comparing your rates and go with a reputable insurer that you trust. Just enter your zip code below to get started!