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Can An Insurance Company Pay Less Than I Owe In A Car Accident?

Car Insurance in Car Accident
For many reasons, an insurance company may pay you less than you owe on your vehicle if you’re in a car accident. For example, you may owe your lender more money than the car is worth, but the insurance company is going to determine how much money it is going to give you after it subtracts the car’s depreciation. Also, if you were hit by another driver, he or she may have only purchased liability insurance up to the limits required by his or her state. These situations could mean that an insurance company will not pay the entire balance on your auto loan. Let’s examine this further so that we can determine what can be done about it.


The simple definition of depreciation states that the value of your vehicle goes down as you drive it over the years. Depreciation is related to the wear and tear that your vehicle is subjected to over the years, the demand for the automobile and whether or not the car becomes obsolete.

The Declining Balance Method

The Declining Balance Method may be used to calculate depreciation for a vehicle because it allows for a higher depreciation rate in the first year. A car depreciates significantly in the first year and then the depreciation rate decreases over time. For example, after the first year, a vehicle will depreciate each year between 15 percent and 20 percent. In the first year, a new car may depreciate as much as 35 percent.

An Example

You purchased a new automobile for $35,000. It has a depreciation rate for the first year of 30 percent. In the next four years, it will depreciate at a rate of 15 percent. After 30 percent depreciation the first year, your new car would have lost $7,500 in monetary value and now has a monetary value of $17,500. After 15 percent depreciation in the second year, it will be worth $14,875. After the third year, it will depreciate another 15 percent and be equal to $12,646.45. In the fourth year, the car depreciates at a rate of 15 percent and has a value of $10,749.48. The car depreciates another 15 percent in the last year and is worth $9,137.06.

In the five years that you have been driving your vehicle, your car lost $15,863 in value.

The Actual Cash Value or ACV

If your car is ever stolen or your insurance company decides to total the vehicle, the insurance company will pay your lender the ACV. The actual cash value is the amount of money that your car was worth right before you were in an accident. Insurance companies determine this amount by subtracting the years of wear and tear, any past accidents you have had and the many years you have driven the vehicle. The actual cash value can end up being thousands of dollars less than the amount you paid for the vehicle as in the example above.

How Insurance Companies Calculate Actual Cash Value

Actual cash values are calculated using formulas. Since you don’t know which formula your particular insurance agent is using, it’s impossible for you to know how much your insurance company is going to offer you for a covered collision. We know that they examine the claims you have made in the past, the accidents you may have had, the mileage, the car’s age and the wear and tear on your vehicle. Insurance companies also look at vehicles similar to yours to determine how much it would be worth if it hadn’t been damaged.

After all this has been done, some people are pleasantly surprised to learn that the amount their insurance companies offered them is comparable to the amount that they believed the car would be worth. In some instances, people have even been paid more than they expected to be paid. In other cases, they believe that the insurance company completely undervalued their vehicles.

An Insurance Company Can Give You Less than You Owe with Collision Coverage

Collision coverage pays to repair your vehicle when it is damaged in a collision with another vehicle. If the cost to repair the vehicle will be more than the amount for which you would be able to sell it, your insurance company will decide to “total” the vehicle. In that case, you will receive the actual cash value for a used car to replace your vehicle.

When you purchase collision coverage, your insurance agent will set a limit on the amount that the company will pay your lender. In this instance, your insurance company would pay you the actual cash value minus any depreciation. After the depreciation has been subtracted, the remaining amount will be lower than the amount that you owe your lender. In that case, you would have to pay your lender the balance on your auto loan on your own.

An Insurance Company Can Give You Less than You Owe with Comprehensive Coverage

Comprehensive coverage pays the actual cash value minus your deductible for your vehicle after it has been stolen or damaged by vandals. After the insurance company subtracts the depreciation and the deductible, the amount of money that you would receive to pay your lender would be less than you owe.

Reasons People Purchase Collision/Comprehensive Coverage

You need collision and comprehensive coverage under the following circumstances:

  • You own a very expensive vehicle, or it would be very costly to repair. This type of coverage would prevent you from having to pay for repairs on your own.
  • You drive long distances each day to and from work. This increases your risk of a collision.
  • You don’t have enough money in your savings account to pay for any necessary repairs. You wouldn’t be able to purchase a new car if it were stolen.
  • You live in an unsafe area, or your job is located in an area that is unsafe. More vehicles may be damaged because of falling branches in this area, or there are more collisions with wildlife.

If you own an expensive vehicle, live very far from your job and don’t have enough in savings to replace a damaged automobile, collision/comprehensive coverage is a good choice for you.

If you are financing your vehicle, this choice may not be yours to make. Many lenders require that you purchase collision/comprehensive coverage before they will agree to approve your auto loan.

The Need for Gap Insurance

As you can see, even though you have collision coverage, you may need gap insurance because an insurance company can give you less than you owe your lender.

What Is Gap Insurance?

On the day that you experience a car accident, your car is worth less than the amount of money that you paid for it as was explained above. The actual cash value will be much lower than the amount you still owe your lender for the car. After the car has been totaled or stolen, your insurance company would give you the actual cash value, but you would be entirely responsible for paying the balance that is left over because of the depreciation.

Gap insurance will cover the amount of money that you would owe your lender if the scenario described above were to occur.

What Is Being Underwater On A Car Loan?

You may have heard of being “underwater” on your mortgage loan, but did you know that you can also be underwater on your car loan?

It means the same thing as with the mortgage loan; you owe more on the auto loan than the automobile is worth. You must have also heard that a new car begins to depreciate immediately after you drive it off of the lot. In addition to that, most vehicles depreciate 20 percent in the first year of ownership, and this continues every year after that.

If the amount that your collision or comprehensive coverage paid for your vehicle did not amount to the sum that you owe the lender, you will still owe your lender money. This is why you also need a gap insurance policy.

An Example:

You were in a car accident, and the bill to repair your vehicle would be higher than the actual cash value that your car is worth. Rather than pay for the repairs, your insurance company decides to total your vehicle. Your car is now worth $15,000, but you still owe your lender $18,000. This means that you are underwater on your car loan. Your collision coverage will pay your lender $15,000, and your gap insurance will cover the additional $3,000. It’s possible that you may not need to pay a deductible.

The Auto Loan

If you do not have gap insurance, you cannot tell your lender that you aren’t going to be making your loan payments any longer because you don’t have the vehicle. Your insurance company would have paid your lender the amount available in your collision or comprehensive coverage, but the lender will expect you to pay the balance. If you don’t have enough in your savings account to pay the remainder of the loan, you may be in financial difficulties. This is unnecessary because gap insurance will pay the remainder of your balance so that you can pick up the pieces of your life again.

If your car is stolen or totaled, you will need another vehicle, but gap insurance doesn’t offer you an amount of money to purchase a new car. In the event that you would need to pay for a new car after yours has been stolen or totaled, you will need new car replacement coverage.

New Car Replacement Coverage

The requirements for this type of coverage may be more strict than those for other types of insurance. For example, some auto insurance companies require your vehicle to be less than two years old to qualify for this insurance. You must also be the first owner of the car. It is an advantageous policy to you because it will pay you more than the actual cash value if your car is totaled. You will be able to purchase a new vehicle in the same make and model if you like.

Buying Gap Insurance

If you don’t have gap insurance but you believe that it is worth the price, you can still purchase it even though you already have your car. This is a very good purchase if you are underwater on your loan, and you would like to ensure that your finances are not in jeopardy if you are ever have a car accident.

You may be able to buy gap insurance from the auto insurance company that you purchased your current policy, but you must seek this type of coverage as soon as possible because you may only be able to purchase this coverage within 30 days of your new car purchase.

If you are not within the time frame of purchasing gap insurance, you have the option of buying loan/lease payoff coverage. You can buy this type of coverage at any time. Loan/lease payoff coverage will only reimburse you for 25 percent of the actual cash value of your vehicle, but this is good enough for most people.

An Example:

Your vehicle may have an actual cash value of $20,000 today. In this instance, your insurance company will give you $5,000 for your loan/lease payoff coverage. This isn’t necessarily something that wouldn’t be worth your while. Many people are pleasantly surprised that when they consult the Kelley Blue Book, they find that $5,000 is more than enough to cover their expenses.

You will find that both gap insurance and loan/lease payoff coverage are relatively inexpensive because these coverages are less risky for insurance companies. In order for the insurance companies to pay under these two policies, your vehicle is required to be a total loss, and this isn’t as likely to happen as other types of mishaps. In addition to that, there isn’t always a huge difference between actual cash value and the amount of money you owe your lender, so it is very likely that you can add this coverage for a nominal price.

Need a car accident lawyer in Huntsville? Contact Haney Paschal & Romoser.