What Surging Car Prices Mean for Auto Insurance

You’ve probably heard that used car prices have spiked to new highs during the pandemic. What you may not know is that today’s overheated car market may also pose a problem for your car insurance coverage in the event you have a major accident.

The latest Consumer Price Index data released this month revealed used car prices are up by an astonishing 45% between this June and last — nearly nine times the 5.4% rise in the cost of all goods and services, and one quarter of the 12% rise in car insurance premiums during the same period.

Experts attribute the spike to factors including a greater demand for vehicles during COVID-19 and a shortage of new cars as manufacturers wrestle with pandemic-driven production difficulties. Whatever the reasons, the numbers are obviously bad news for buyers, who could easily pay four figures more for an average-priced ($20,000) used vehicle this year compared with 2020.

Fortunately, those “highly inflated prices” aren’t being used to help determine (and drive up) insurance premiums at the moment. according to Mark Friedlander, Director of Corporate Communications at the Insurance Information Institute. Brian O’Connell, insurance analyst at InsuranceQuotes.com, concurs, saying that “ insurance prices are rising, but not necessarily due to higher used vehicle prices,”

The bad news, though, is that those high price tags aren’t being used when insurers calculate the offers they make to car owners when cars are declared a total loss, either. That creates a potentially problematic gap between what you’ll receive in an insurance settlement should your car be “totaled” by an accident or other mishap and what it could cost to replace the car in today’s market.

A claims offer could fall short of replacement cost

When it comes to the vehicle value used to help calculate your premium and any claims settlements insurers don’t heed “temporary changes in the market,” such as the current “pandemic-related” spike, Friedlander says, Rather, they use the slower-changing values reflected in industry listings such as the Kelley Blue Book.

As a result, says John Espenschied, who owns the Insurance Brokers Group in Chesterfield, Missouri, it’s more likely than usual now that an insurer’s settlement offer will fall short of the actual cost of replacing the vehicle. And that, he says, makes it all the more important to research the cost of replacing a car that’s been totaled and negotiate with the claims adjuster if the amount that’s offered falls short of that figure.

“If they want to offer the Blue Book value, you need to say: I can’t buy this car again for that price. I need to be made whole.” Such negotiation can be done directly with the adjuster, he says, who may be motivated by the crush of having “one hundred other cases to settle at the same time.” Alternatively, he says, you can ask your agent to negotiate on your behalf.

Either way, he says, the more you research how to buy car insurance, the better your chances of success. “Try to find multiple listings [of comparable vehicles to your own], through sources like Auto Trader and the like, that are as accurate as possible to your market — like within a 10- or 20-mile radius of where you live, if possible.” And be sure that the offer properly reflects any optional extras the vehicle had, such as an upgraded sound system.

Friedlander acknowledges that gaps may exist in this “unprecedented” used-car market, and says they should be motivation to negotiate especially hard for the price of a car. “Do your homework when shopping for a used vehicle and don’t pay above book value if at all possible.” To overpay for a car, he says, is to be “financially vulnerable if you suffer a total loss.”

As an example of the threat from current “highly inflated prices,” Friedlander cites 2007 Camry Toyota Solaras with about 120,000 miles on their odometers. These vehicles have a Blue Book value of about $2,000, he says, but some dealers have been selling this model for $6,000 to $8,000 — or three to four times the official value an insurer would use in settling a claim.