Most of us have a pretty good understanding of what collision coverage is. It is coverage to help replace/ repair damage to your own vehicle caused in an auto collision. But, do you what happens when the car is deemed a “total loss” and do you understand what sort of pay out your policy will give you?
In the event of a total loss you are entitled to the Actual Cash Value of the vehicle. What does this mean? Well in the simplest explanation it would be what you pay to buy the same vehicle, with similar age, kms, and condition.
That sounds simple enough but how exactly does the adjuster come up with this amount? The best way to figure is to look on Autotrader for vehicles the same as your own, take away the highest valued one and the lowest, and somewhere in the middle is your ACV. You also need to understand that just because a vehicle is listed for $7500.00 it doesn’t mean that it is selling for that amount, so the ACV would be what you might actually pay for that vehicle—perhaps you would offer $6800 and then agree on $7000 even.
So if you are driving a 2003 Honda Civic with 230 000 kms on it, it is safe to say your total loss settlement will not be what you paid for the vehicle 5 years earlier when it had 140,000 kms on it and was only 8 years old instead of 13. Similarly, what happens if you are driving a 1999 Honda Civic that you bought a year ago for 1500, but you have put a custom exhaust system, stereo, light kit etc. on it totaling about $7000 in aftermarket costs?
The hard truth: Unless you have advised your agent/broker of these customizations to the vehicle and increased the value of the vehicle you are insuring, your payout will be that of a basic 1999 Honda civic with the same kms. If this is making you panic inside because this scenario sounds like it is a little too close to home, please call your agent now.
What if you have a brand new vehicle that you are driving off the lot? How can you protect your investment? There is an endorsement you can add to your policy that is called “ limited waiver of depreciation”. This endorsement allows for that traditional depreciation that happens when you drive off the lot, to not apply if you find yourself in a total loss situation and can protect you for up to two years following the purchase.
It is common misconception that since the question is asked on the auto application what you paid for the vehicle, that in the event of a total loss that is what you are being paid out. This is simply not the case. Vehicles are one of the fastest depreciating things we own, and they are almost never worth what paid for them, when a total loss does happen.