Insuring Classic Cars

What is the difference between Actual Cash Value (ACV) and Agreed Value when insuring classic cars?

Actual Cash Value (ACV) is defined as the replacement cost minus depreciation. Depreciation is the decrease in value over a period of time, usually as a result of age or wear and tear. Replacement cost is defined as the cost to replace damaged property with materials of like kind and quality.

For example, assume a vintage car is purchased at $20,000. Five years later the classic car is estimated to have depreciated to a value of $10,000. The classic car is involved in a major accident and the cost to repair the damaged vehicle is estimated at $15,000. If the car is insured for the Actual Cash Value, you will receive $10,000 from your insurance carrier, since that is the current value of the car (replacement cost minus depreciation).

What is Actual Value?

Actual value is calculated as the amount to be paid after loss or damage to the property, factoring in depreciation.

This involves coinsurance, meaning the insurance company will cover a certain amount and you will be liable for the remaining.

Actual Value: Are you “fully” covered?

When you get into an accident and total your vehicle, the insurance company will pay a claim. They do not, however, pay the claim for the amount you paid for the vehicle. They factor in the condition of the vehicle and depreciation to determine the settlement.

Example:

$30,000 (Car Value) – $6,000 (Depreciation) = $24,000 (Actual Value)

Actual Value

Standard Cars
Standard Homes
Appliances

Electronics

Agreed Value means that coverage is provided for a pre-determined amount settled upon by both the insured and the insurance company.

Agreed value is less common for your standard auto insurance policy, but may be used for classic/collector cars, and sometimes boats or motorcycles. To insure an item at an agreed value means that the carrier accepts a value submitted by the insured and the maximum pay out, in the event of total loss or theft, is the agreed upon amount.

When consulting with your insurance provider, it is important to know how the value of your property is determined, and what amount of coverage you have in the event you have to file a claim.

What is Agreed Value?

Agreed value is calculated as the full insured amount of the property with no depreciation. Let us take another look at that car: Did I mention it was a Ferrari? The agreed value will return the total amount the vehicle was worth before any theft or damage.

Example:

$500,000 (Car Value) – $0 (Depreciation) = $500,000 (Agreed Value)

Things to note when insuring at Agreed Value:

Total amount of the purchase, or what you paid for the property
Appraisal Value
Appreciation rate (special riders might have to be considered to include appreciation values in the policy)
The value of any modifications

Agreed Value

Luxury items (cars, homes, etc.)
Fine arts
Antiques (Jewelry, Furniture, etc.)
Collectibles/ Rarities
Wine Cellars
Autographs & other memorabilia

The proof that I need are called “comps,” short for comparable, as in comparable vehicles. They do not have to be exact, but they do have to be similar in the attributes that form the basis for the intrinsic value of the vehicle. For example, a red 1969 Chevrolet Camaro SS with a 396 big block engine and a 4-speed transmission, is not the same as a black 1969 Chevrolet Z28 with a 302 engine and a manual transmission as a “comp.” However, a yellow 1968 Camaro SS with a 396 big block engine and a 4-speed transmission may be used because the intrinsic value lies in that fact that it is a Camaro SS with the same drive-train.

No matter how well we know the value of a vehicle, the research and the methodology that go into substantiating the value is the difference between providing an appraisal and providing an opinion of insuring classic cars. The I.R.S., insurance companies, and courts all want appraisals, not opinions. Most appraisers use a formula consisting of publicly recorded sales, published figures, and their own knowledge of the market to arrive at a value. The percentage of each is their own secret recipe, but rest assured that their own knowledge of the market makes up a small percentage of that formula because it is the most difficult to substantiate.

So, what happens when a customer needs an appraisal on a vehicle for which there is not one single record of a publicly recorded sale, and not one single published figure? Simple. I cannot do the appraisal; at least not in the ordinary manner. This can lead to a problem because it is often the case that the insurance company will not insure it without an appraisal.

It is important to understand that this applies predominantly to vehicles that will have an “agreed value” policy with an insurance company that specializes in collector vehicles. With an “actual cash value” policy, which is the conventional type of policy most of us have on our daily drivers, an appraisal is of little value. The insurance company, not you, determines the value of the vehicle at the time of the loss. In the event of a loss, what you paid for the car, or what it was worth when you bought it, or how much you have invested in it, will often have very little bearing on what you’ll get paid when insuring classic cars.

The insurance companies that specialize in collector vehicles are generally very fair and reasonable. You can be sure that this is not the first time that they have been asked to insure a unique car. If you have a reasonable methodology for assigning a value, they will accept it in most cases. However, if you grossly overpay for a vehicle, or spend three times its value on a restoration, you most likely will not be able to have the insurance cover your investment.

If you are buying a particularly rare car, one that will be difficult to appraise, you might want to check with your insurance company to make sure that you’ll be able to protect your investment should the unforeseen happen. The time to check is before you purchase the car.

What Does It All Mean?

In simple terms, actual value is the everyday norm. It is used to insure everyday items that can be easily replaced.

Let us get back to that car; now a Ferrari cannot be replaced at the tip of a hat. The Ferrari California, the most widely produced model, takes about three weeks to make and currently has a two year long wait list. It is a pricey purchase too, averaging around $192,000.

So, insuring at Actual Value is the best move, right?

It depends. In this instance, Actual value would not be the best option for a Ferrari. Why? Because you do not want to receive just a portion of the hundreds of thousands of dollars back that you paid for this vehicle. You want to get all of that back.

How do you insure your property at Agreed Value?

Anything you own that is rare and irreplaceable, you should definitely consider insuring it at agreed value.

The first step is to contact your local insurance agent. Your agent will then put in a request to the insurance company to agree on a value. From there, an appraisal will most likely be requested.

Insurance companies like to do their homework and will ask you questions to ensure what they are providing coverage for is actually valued at the price stated.

Which is right for me?

Now you know the difference between actual and agreed values, as well as the best way to go about settling on an agreed value when insuring classic cars.