The difference between market-value and agreed-value insurance

Unless you’ve worked for an insurance company, getting your insurance sussed can be a bit of a mystery. When you start chucking around terms like ‘market value’, ‘sum insured’, and ‘agreed value’, the process can seem pretty daunting. Owning a modified car doesn’t help the cause either. So, to help you out, we’re getting the rundown on insurance from the team at NAC Insurance and passing that golden knowledge on to you to make it all a bit easier.

This month, we’re looking at how an insurer settles a total loss (aka ‘write-off’). All insurance policies will have something that sets out what they will pay if you need to claim. The part we’re interested in is the piece that talks about if the car is unable to be repaired or is uneconomic to repair. There will usually be a reference to paying either the ‘market value’ or the ‘agreed value’.

For both market value and agreed value, a ‘sum insured’ is required. The sum insured should be, or as close as possible to, the current value that the vehicle would sell for through a licensed motor-vehicle dealer at the time that the policy is set up. How the sum insured is used differs between policy types.

Agreed value policies

This means the value of the insured vehicle that is agreed on when you take out the policy is what the insurer will pay out right up to the end of the period that the policy covers. When the policy renews, the sum insured is reduced to reflect the depreciation that will have occurred over the previous year. The new sum insured will then become the agreed value for the next year.

For example, if the sum insured was agreed at $15K for a 1989 Nissan Skyline GTST coupe, then, regardless of the current market value of the car, the insurer will pay out $15K in the event of total loss.

This form of cover is best suited to standard, unmodified vehicles, as insurers are able to track changes in their values in a reasonably uniform manner from year to year.

Market value policies

With a market-value policy, if the the car becomes a total loss, the amount paid to you will reflect the actual value of the vehicle immediately before the loss occurred. This value will take into account the condition and depreciation that will have occurred to the vehicle since the policy began. The ‘sum insured’ in this case is the maximum that the insurer will pay.

For example, if the vehicle’s sum insured was $10K, and, immediately before the loss occurred, the market value had dropped to $9K, then the insurer would pay out $9K. However, if the market value had appreciated to $12K, the insurer would pay out the sum-insured amount of $10K.

This form of cover is better suited to modified or bespoke vehicles, as the value of these vehicles will change in a different way to that of standard, unmodified vehicles. Additionally, the value of the car may be difficult to determine at the start of a policy — an estimate will be sufficient. Note that the sum-insured value will be reassessed at the start of each new policy period, the same as with agreed-value policies.

For either form of insurance, it’s important to get a reasonably accurate assessment of your car’s value so that you can insure it for what it’s really worth and get the right level of cover. NAC recommends that you obtain a valuation from a licensed motor-vehicle dealer or a car valuer.

Also, you don’t have to wait for your policy to renew if the value of your car changes; you can ring your insurer at any stage throughout the term of the policy to make a change. However, if you want to increase the sum insured, you may be asked to provide a valuation report in support of your request.

At the same time, remember to update your insurer with any changes that might have occurred to you or the car since you last had contact with them. Things like modifications or convictions may affect the cover you have. It’s best to tell your insurer upfront so that you both know where you stand with each other, rather than finding out that the changes mean that you have no cover right when you need it most.

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