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Car Written Off? Your Insurance Could Now Leave You Thousands Of Dollars Out Of Pocket

Car owners across Australia could be left thousands of dollars out of pocket on their insurance if their car is written off.

🕵️‍♀️ An Expert Analysis investigation has revealed that rising used car prices means that owners of popular vehicles such as the Hi-Lux could face a shortfall of up to $11,400 if they hold an ‘agreed value policy’.

💲 Agreed value is when you specify the sum insured together with the insurer to theoretically eradicate the risk of any depreciation taken into consideration in the event of a total loss claim.

💵 Agreed value is typically more expensive than a market value car insurance policy, where the insurer pays out the full amount of sum insured as specified on the policy of the at the time of claim in the event of a written off vehicle.

Be aware: Used cars normally lose value over time. But there’s currently a vehicle shortage due to unusual weather events and lack of supply due to getting back to COVID normal in Australia and that’s pushing prices for older models up.

What’s the problem with agreed value car insurance policies in 2022?

Compare Club first spotted this as a problem when we noticed a number of agreed value complaints to AFCA (the Australian Financial Complaints Authority).

• Customers were complaining that their agreed value payout was significantly less than how much they’d have to pay to replace the vehicle in today’s economic environment (the market value).

• In one case to the AFCA, a driver had an agreed value of $33,600 on their written off vehicle but were arguing they couldn’t find a replacement for less than $55,000.

• Our General Manager of Insurance Eayl Machlis told me that this was unusual as agreed value normally offered much more protection than a market value given used cars could drop in value quite quickly.

• Eayl checked his family Subaru and discovered his agreed value policy was for several thousand dollars less than it would cost to replace it. 

📰 My colleague Martine Allars covered this story back in September.  But given Eayl’s experience, we were curious about the size of the problem.

📏 What we found was a big gap in the agreed value amounts insurers were offering on nine out of ten of Australia’s most popular vehicles and the cost of buying a replacement.

The agreed and market value gap on Australia’s most popular cars

🔍 Here’s how we went about our research.

• We picked 10 of Australia’s best selling vehicles in recent years. We selected models from 2018 as more recent models tend to be covered under warranty and will be replaced as new.

• We then got quotes from three different insurers and noted down the agreed value bands insurers were offering – they’ll normally ask you to set an agreed value price within an agreed boundary.

• We then looked at popular secondhand car sites such as carsales.com.au to see how much it would cost to replace like for like – or to the nearest available model.

• We then looked at the lowest and highest prices for replacement vehicles, and what the difference was between the agreed value bands we’d been offered when we took out a quote.

Here’s the difference we found between the agreed value offered and the cost of replacing the same model. 

• We’ve taken the lowest agreed value and highest market value for this table to show the potential difference. 

• Even if you take the highest agreed value there’s no guarantee that you’ll find a replacement at the same price.

• For example, the highest agreed value for a 2018 Hi-Lux was $58,110. An identical make and model was selling for $63,500.

• Only one vehicle – the Mazda CX5 – had an agreed value that was consistently more than the market value.

Why is agreed value now less than market value?

There’s a number of reasons that sit outside of the insurer’s control.

• Covid enforced shutdowns overseas has created an issue with global supply chains for new cars and used car parts.

• There’s an increase in demand for used cars after recent flooding across Australia caused a large number of vehicles to be written off and insurers are struggling to find replacements.

• This has created a very unusual situation where there’s high demand for used cars and that’s pushing prices up.

That’s causing pricing issues for insurers, as Eayl explains:

“Insurers usually have very sophisticated data models on the depreciation in value of vehicles, so this is definitely unusual and really shows how much the used car market has been flipped on its head right now.

“Typically the agreed value price range tends to be a lot narrower. It suggests that insurers are equally uncertain in this current market as to how much vehicles are currently worth.”

💰To be clear, this state of affairs isn’t necessarily the insurer’s fault. But it is causing issues for their customers as prices are jumping about a lot.

Be aware: AFCA’s unlikely to find in your favour if you have an agreed value complaint. Think of it like a contract you’ve signed to agree on a fixed amount to replace your car. Legally, there’s not much that can be done here.

The bottom line

This problem won’t affect everyone. But it does serve as a reminder to check your car insurance policy and research how much it’d cost you to find an exact replacement for your vehicle.

🌧️ It’s set to be another wet summer and flooding could write off many more vehicles over the coming months.

👌 Making sure you policy is up to date could save you a lot of financial stress in the event of a write-off.

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions.