The Old Valuation Hocus Pocus
Suppose you have a 10-year-old car. It has about 100,000 miles on it, but it runs fine, and it’s reliable. You estimate you could get $6,000 for it in a private party sale or as a trade-in. You’ve seen similar cars for sale listed online in your local area at that price, and you’ve kept yours in excellent condition—you garaged it, changed the oil every 3,000 miles, washed it on weekends, the works. You get into an accident in which the car sustains some front-end damage, and you take the insurance company’s recommendation for an auto body shop. The shop gives you a $4,000 estimate for repairs. That sounds a little high to you, but it’s still worth it. The damage to the car was entirely cosmetic. It still runs fine. You call the insurer and ask them to approve the repairs. Their response: “Declined.” You call the insurance company to find out what’s what, and the adjuster tells you he’s pegged the pre-crash market value of your car at just $3,000 using the insurance company’s proprietary, actuarial auto valuation formula. Because the cost of repair exceeds the amount calculated by the formula, he’s declaring your car a total loss. That means the insurer won’t pay to repair your car. Instead, if you surrender the car to the insurer, you’ll get a check from the insurance company for $2,000, which is the $3,000 pre-crash market value they calculated for your car, less your $1,000 deductible. (Never mind that $2,000 won’t come close to getting you a comparable car!) The adjuster also gives you the option of keeping your damaged car, but you’ll have to get a salvage title issued for it, and your insurance rates will rise. If you choose that option, the insurer will send you a check for $1,000. This is the difference between the company’s calculation of the pre-crash market value of $3,000, minus your $1,000 deductible and the $1,000 the insurance company’s formula estimates as the car’s current salvage title value. Neither option sounds particularly appealing. But you figure you’re better off with $2,000 in hand that you can use to bargain-hunt for a new car instead of $1,000 and a car that needs $4,000 in repairs. You take the $2,000, even though it feels like a rip-off. Spoiler: it was a rip-off. Having paid you your $2,000, the insurance company takes possession of your car and sells it at a salvage auction for $3,000, netting itself a tidy profit on the whole deal. Then, to add insult to injury, six months later, you see your car, fully repaired, listed for sale online by the dealer who bought it at auction for $6,500.
