What’s the difference between market value and agreed value?
When requesting a quote for a comprehensive car insurance policy, you generally have the choice between insuring your vehicle for its market value or for an agreed value. ‘Market value’ refers to what the car would be worth on the market, while ‘agreed value’ is a dollar amount that you and your insurer agree on for the car, irrespective of what its value in the market might be.
The difference between market and agreed value matters, as it determines how much money you’ll receive if the vehicle is written off or stolen and not found. Here’s a deeper breakdown of the two and how they work.
Market value
Market value is a recognised insurance industry term for what your car is worth on the open market at the time of making a claim. It is determined by your insurer and based on a number of factors. It’s important to note that it’s not:
- The trade-in value
- What a particular purchaser would pay for your car
- The cost of replacing your existing car with a brand new one.
An insurer decides the market value of your car at the time you need to make a claim, and you’ll have no say in it. If it's been a few years since you took out an insurance policy, your car’s market value will probably have decreased.
If you’ve made a claim and you’re unhappy with the market value your insurer has assigned to your car, you can contact them to raise a dispute. If you don’t reach a satisfactory resolution, you can escalate the complaint to the Australian Financial Complaints Authority (AFCA).
Agreed value
Agreed value is a recognised insurance industry term for the value that you and your insurer mutually agree that your car is worth when you take out an insurance policy. The agreed value determines the payout amount you’ll be entitled to if your car is written off.
An agreed value car insurance policy can provide you with peace of mind, as you know exactly how much you’ll get if your car is written off or stolen. The tradeoff is that premiums for agreed value car insurance tend to be higher than market value, as agreed value is usually higher than what your car might sell for on the open market.
How do insurers decide on a car’s market value?
You’ve probably heard of depreciation – a new car starts to lose its value as soon as you drive it out of the dealership, thanks to kilometres on the clock, general wear and tear, and the arrival of newer, slicker models.
Insurers will take depreciation into account when determining a vehicle’s market value. They’ll also consider factors like its condition, and how many kilometres it has travelled (its odometer reading).
Generally speaking, to get an accurate estimate of market value, insurers will refer to industry sources like RedBook, which keeps track of pricing and valuation data for new and used vehicles.
How does agreed vs market value affect a car insurance claim?
If you make an insurance claim and the insurer decides to write off your car, the difference between agreed value and market value car insurance affects the value of your claim.
If your car is insured for market value, then you’ll have to wait and find out your insurer’s assessment of its worth. If it’s insured for agreed value, then you’ll have the peace of mind of knowing exactly how much you’re entitled to.
Market vs agreed value: a case study
Andy buys a new car for $60,000, and takes out a comprehensive car insurance policy, because he wants cover in the event that his car is damaged, destroyed or stolen.
A few months later, he is involved in a car accident, and his insurer decides that his vehicle is damaged so badly that it’s not economical to repair, making it a total loss and a write-off.
- With agreed value insurance: If Andy and his insurer agreed upfront that his car was worth $60,000 when he took out the policy, he would be entitled to a payout of $60,000.
- With market value insurance: If Andy took out a market value policy, his insurer might do an assessment and come to the conclusion that the market value of his car is now $10,000 less than when he purchased it. Therefore, Andy would only be entitled to a payout of $50,000.
Is market value or agreed value car insurance better?
The decision between agreed value or market value car insurance may boil down to two things: the car you drive and how much you want to spend on premiums.
If your car is reasonably modern or has custom modifications and you would like to have enough to replace it in the event of an accident, you might choose to take out an agreed value policy.
On the other hand, if your car is closer to retirement age or has lower value and you would rather pay less in premiums, you may opt for market value insurance in return for a lower payout.
Is market value car insurance cheaper than agreed value?
Yes, market value car insurance is generally cheaper than agreed value. This is because, if you insure a vehicle for agreed value, your insurer will have to pay out more if the vehicle is damaged beyond repair or written off. With market value insurance, you may be entitled to a lower payout than you were expecting, but the tradeoff for this is lower premiums.
Can I choose agreed value or market value with third party car insurance?
Of the three levels of car insurance you can purchase in Australia – comprehensive, third party fire and theft and third party property damage – agreed value cover is typically only an option for comprehensive insurance. Comprehensive insurance is the highest level of cover, and offers the most coverage when it comes to repair and replacement of your vehicle.
By contrast, third party fire and theft only covers your car in certain circumstances, and third party property damage, which only covers damage to other drivers’ cars.
While it’s not out of the question that you might find a third party fire and theft policy that offers you the choice of agreed value cover, this kind of cover is typically reserved for comprehensive insurance only.
What happens if your car is written off under finance?
If you’re paying off a car loan and your car is declared to be a total loss after an accident and is written off, your lender will still want their money. So how does this work?
If you have comprehensive car insurance and you’re paying off your car, your Certificate of Insurance will note the name of your lender. In the event of a write-off, assuming your claim is accepted, your insurer will make payment to your lender, based on the outstanding amount you owe on your car loan.
Your insurer will pay the lender out up to the agreed or market value of the vehicle, and any outstanding amount left (if there is any) will be your responsibility. Any left over funds after the loan has been cleared will typically be paid to you.
