Hansy Mannil Jul 10, 2023

Whether you're after insurance for a new business vehicle, are replacing the family car, or simply reviewing your insurance position for best value and cover, you probably know that selecting the right car insurance is not always as simple as it seems.

One of the key decisions you need to make is whether you want comprehensive car insurance for an agreed value or market value. Unfortunately there is no right or wrong answer. Rather, there are advantages and disadvantages to each, depending on the type of car you're insuring and what level of risk vs. cost you are comfortable with.

So how do you decide which valuation method suits you? Read on for more information.

What is market value car insurance?

Market value is an insurance industry term for the price your car would be expected to command on the open market in its current state. This is not the same as the trade-in value or the price that a particular buyer, such as a collector, would pay for your car.

Why choose market value?

Market value is the most common method chosen by car owners for determining the sum that their vehicle is insured for. The market value of your car is determined by your insurer using industry guides. The valuation is one factor used to determine the premium on your policy. Other factors include your residential postcode, whether the car is garaged or parked on the street, and any vehicle security features. Market value car insurance is almost always less expensive than agreed value car insurance.

If your car is declared a total loss by your insurance company due to it being stolen and unrecovered or written off, your insurer will reimburse you the market value of the vehicle at the time that the loss occurred. The exact amount is determined at that time using industry guidelines, with allowances made for the condition of your vehicle and any approved modifications or additions made.

This amount may be significantly different from the "market value" detailed on your insurance policy, as most vehicles depreciate in value as time goes by. In other words, "market value" is a floating value based on current market conditions and industry guidelines. As well as the actual condition of your vehicle, the factors that determine "market value" for insurance purposes are closely related to the factors that determine the resale value of your vehicle on the open market - for more information, see Protecting your car's resale value.

Although the market value of your vehicle may be less at the time of loss than the figure specified on your insurance policy, because you are purchasing a replacement car in the same market conditions that have been used to determine the payout you receive, it should be possible to purchase a similar vehicle of a similar standard and condition with the amount your receive from your insurer.

Market value valuations are particularly suitable for older cars in average condition and standard vehicles without custom modifications. If you have a new or highly modified car you may wish to consider agreed value for greater certainty of the actual dollar-figure that your car is insured for in the case of a total loss.

What is agreed value car insurance?

Agreed value is a sum insured that is fixed by agreement between the insurer and the vehicle owner.

Why choose agreed value?

Agreed value involves the car owner and their insurer agreeing on a specific value for the insured vehicle when the policy is taken out. If the car isn't new then this agreed value is generally negotiated based on industry guidelines.

In the event of a claim being made as a result of the car being declared a total loss, your insurance company will reimburse you the agreed amount.

Traditionally, vehicle owners with new cars or cars with custom modifications have potentially had the most to gain from this option. Agreed value policies allow you to include the cost of extras that may not be considered in the standard market value, and ensure that a vehicle that is new (or close to new) is replaced with the same, despite the depreciation that inevitably occurs when you drive a new car out of the dealership.

Today, many insurers offer "new-for-old" new car replacement on market value policies - offsetting one of the benefits of agreed value policies on new vehicles. New car replacement conditions differ between insurers, but essentially the vehicle lost is replaced with a brand new car in the event of a total loss of a "new" vehicle - with "new" being defined by specified vehicle age, mileage and ownership factors.

Which option should I choose?

Unfortunately there is no easy answer to this question. Deciding between agreed value and market value comprehensive car insurance is a personal decision. Like other financial decisions, it may be affected by your financial position, risk profile and other personal factors. The type of vehicle you are insuring and whether it is under finance or not may also play a part in your decision.

An insurance policy using an agreed value will likely have higher premiums than one using market value, however non-standard vehicles and vehicle owners looking for a greater level of certainty may benefit from the extra cost.

In the event of a total loss: A practical example

The difference between market value and agreed value is something you may have experienced if you've ever had a total vehicle loss - where your vehicle is "written off", or stolen and unrecovered.

For example: You purchase a two-year-old car for $50,000 and select an agreed value insurance policy for the purchase price of the car ($50,000). Six months later your car is stolen, and the insurance company declares it to be a total loss.

Your insurance company has a "new-for-old" replacement policy on vehicles less than two years old, but your two-and-a-half year old vehicle is outside the terms of this policy. Therefore, the insurer pays out an amount of $50,000 for vehicle, which is the agreed value of your insurance policy.

If you had insured the exact same car for market value under the same conditions, the insurer would most likely pay out less than the purchase price of $50,000. This is because the market value of your car has depreciated in the six months since you purchased it, and the car is no longer worth (that is, the market will no longer pay) the original $50,000 purchase price. Instead, the insurance company will use industry guidelines to determine the market value of your vehicle at the time that the total loss occurred, and will pay out that amount to you instead.

Consider replacement cost and finance commitments

Considering market value insurance cover in the above example, one of the key considerations is whether the depreciation-affected, reduced payout amount would be sufficient to replace your lost vehicle. Keep in mind that you are purchasing the replacement vehicle in the same market conditions that have been used to determine the value of the lost vehicle.

In theory, a vehicle of similar age and condition should be available in the same price range as the market value figure. You have probably also made a saving on your annual insurance premium by choosing a market value policy. Bear in mind, however, that the market value payout figure will not include other costs associated with purchasing a replacement vehicle, such as stamp duty, dealer delivery charges and finance fees. Although the dollar figure may be less than the purchase price you paid, market value is intended to be a fair evaluation of your current position, as opposed to agreed value's "past position" guarantee.

If your car is under finance, however, there is also a chance of incurring a financial loss with market value insurance. If your car is declared a total loss and your insurance policy's market value reimbursement is less than the amount still owing on the finance you will be left with a shortfall (or "gap") that you will have to cover out of your own pocket. A shortfall can occur for a variety of reasons, such as your car's market value decreasing faster than the finance on the car is paid back, or if you borrowed more than the initial purchase price of your car. You can protect yourself from this potential financial loss with Gap Insurance - to find out more, see Understanding Gap Insurance.

How stratton's insurance team can help

stratton's expert insurance team help you protect your personal and business future and make sure you're properly covered - from comprehensive car insurance to a range of loan protection insurances, home and contents insurance and more.

For assistance selecting the right comprehensive car insurance for your business vehicle or family car please complete a call 1300 STRATTON (1300 787 288) or contact your stratton Consultant.

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