If you have an exotic, modified or classic car, and you are nervous about any potential insurance settlement, chances are you have good reason to be concerned. If a classic car is totalled by the insurance company, will you receive a fair value for it? Is there a way to lock in an answer of "Yes"? Fortunately there is.
There are three different bases that an insurance company can use to value an insured auto. Lets first look at the one that almost everyone has on a typical insurance policy:
Actual Cash Value (ACV)
ACV translated means "What its worth in cash, today (just before you crashed it)." After your accident, an insurance company adjustor will go out to the tow yard and look over your vehicle. After that, using sources of their choosing, they will look up what the typical value should be for your car, and this will be their settlement offer. They may adjust this offer if you object and have some evidence to back up your claim. Or they may not. If the disagreement is strong enough you may need to hire either a lawyer or a mediator. Needless to say this is not an ideal position to be in. You buy insurance so you can be taken care of when suffering through a difficult situation. You don't need to be researching classic car values, making angry phone calls, firing off letters and certainly not hiring - and paying for - attornies.
If ACV is the problem, Agreed Value is the solution. If you have a classic insurance policy - from a dedicated company that only issues this sort of policy - this should be the kind of coverage you have. Instead of the above scenario with ACV, what happens instead is you and the insurance company agree on the vehicle value when you sign up - before the policy is issued and any money changes hands. In the event of a disaster, the insurance company guarantees to pay the value that the two of you agree upon before shaking hands. No ifs, ands or buts.
We said this "should" be the kind of coverage you have. You might not. To find out for sure, look in the physical damage section of your policy. Somewhere in there it will say what is going to happen if your classic car is totalled. The exact statement should be very close to this:
In the event of a total loss we will pay the Agreed Value.
Thats it. Short and sweet. No wiggle room. Agreed Value is a simple idea and if the coverage is what it claims to be it should be written up simply in the policy.
So thats the good news. An Agreed Value guarantees you will get the protection you paid for. We're done, right? Sadly no. We have to cover one more valuation basis. This is the one that spells trouble for the consumer. It masquerades as Agreed Value but it most certainly is not.
Your typical Big Auto Insurance Company sells policies that pay out on an ACV basis. We covered that above. Those same Big Auto Insurance Companies have customers with collectible autos who want something better. Unfortunately, Big Auto Insurance Companies are typically not set up to handle this sort of thing properly (for reasons too complex to go into here). What winds up happening is consumers often get offered a Stated Value by the typical Big Auto Insurance Company.
Remember the short/sweet payout clause for an Agreed Value? This is what Stated Value says about a total loss:
"In the event of a total loss we will pay the Stated Value or the Actual Cash Value,
whichever is less."
Yikes. Stated Value has an escape clause that lets the insurance company fall back to ACV... and its the default action, to boot. Chances are thats not what you had in mind when you paid extra for the Stated Value endorsement.
So is Stated Value designed to rip people off? No. It can be a good thing in some narrow circumstances... the kind that likely will never do you any good.
Stated Value exists to decide how much premium you pay. Not how much you get paid.
Stated Value lets you insure the car for less than what its really worth in exchange for a lower premium.
Clear as mud so far? Thats understandable. This is something that even professionals who do this for a living get wrong fairly often. Lets give an example that should explain how its supposed to work:
You inherit a classic Ferrari from a relative, who bought it new many years ago and never really drove it. Its a masterpiece that is now worth 1 million dollars. It falls to you to insure this classic car, and you have a problem: The insurance for a $1,000,000 classic masterpiece is more than you are willing to pay. The price is livable down around $300,000. So you take out a Stated Value policy for $300,000 on the car. After all, you won't be out of pocket $1 million if the car is stolen, but you certainly want all the protection you can afford.
Now the Stated Value payout clause makes perfect sense. And its completely fair and reasonable. This is Stated Value done right, and its almost never going to be what you want or need. In fact, if you want to limit your recovery and manage your premiums, an Agreed Value policy for a lesser value will do the same thing, except the value you receive is guaranteed.
If you want to guarantee yourself the value you expect on your classic car, refuse to settle for anything less than an Agreed Value on a classic insurance policy.
"Matt Robertson is the Managing Partner at Leland-West, an insurance firm specializing in classic, exotic and muscle cars."