April 29, 2016

You Totaled Your New Car. Can You Afford to Replace It?

Here’s something known to be the bane of many a new car owner: The minute a car leaves the dealer’s lot, it loses value—up to 9 percent of the purchase price, according to Richard Lavey, CMO at The Hanover Insurance Group. What’s more, it loses 19 percent of its value in just the first year, says Lavey. So, what happens when you need to replace the vehicle due to damage or theft soon after your shiny new wheels hit the road? Does your auto insurance policy protect you against this instantaneous depreciation?


The quick and dirty answer is no. A standard auto insurance policy covers the current market value—or actual cash value—of the car. The owner is typically stuck with the bill for the difference between the cash value of the totaled car and the sticker price of the new replacement.

You can see why car owners with totaled vehicles sometimes feel like they’ve been left high and dry by their insurance providers.  

Yet, insurance companies—like every other company out there—are bending to the will of the customer. Perhaps you’ve seen the Liberty Mutual Insurance television commercial that pointedly addresses this conundrum. With the Statue of Liberty in the background, an actor describes driving a car into a tree in an attempt to avoid hitting an animal. The car is completely destroyed, but, he complains, the “totaled new car isn’t totally replaced.” The voiceover: “With new car replacement, we’ll replace the full value of your car plus depreciation. Liberty Mutual Insurance.”

That’s certainly a benefit that cash-strapped car owners can appreciate. Besides Liberty Mutual, other insurance companies now getting in on the act include Allstate and Travelers. How much more does this extra coverage cost the car owner? While Liberty Mutual has made new car replacement a standard feature in all its auto insurance policies, that’s not the case for most providers. Usually, the coverage is an optional add-on for a set fee.  

The auto insurance providers offering new car replacement options have established parameters around the coverage, so compare policies and pricing before signing on the dotted line. For example, Liberty Mutual’s caveats are as follows: Your policy deductible still applies, and coverage is only for cars less than a year old, not previously owned and with fewer than 15,000 miles. But coverage can be extended—up to five years with some providers.

Keep in mind that new-car replacement coverage is available from insurance companies only if you buy collision and comprehensive insurance, which is not required in any state—only by your lender or leasing company. (Only liability insurance, which pays for personal injuries, is mandated in the U.S.)

And for your general knowledge, understand that auto insurance providers generally define “totaled” as 70 to 75 percent of the actual cash value, which is often based on the listed blue book value because other knowledge about the vehicle, such as upkeep and mileage, is unknown.

For the record, insurance providers are not necessarily eager to label a car totaled. Their decisions are based purely on cost—whether repairs, based on repair shop appraisals, are more or less than what a complete loss would come to in cash outlays. This is sometimes a bone of contention for car owners who want their damaged vehicles considered complete losses vs. dealing with major repairs, in fear of possible unseen structural damage and, hence, problems down the road.

Yet if your car is totaled, you’ll likely wish you had protected your mint-condition ride with new-car replacement coverage. After all, the joy of car ownership starts with that new car smell. So, don’t turn your nose up at the chance to protect what you’ve paid for—totally.  

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