We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

Published: Jul 22, 2021 8 min read
Photograph of a row of used cars for sale.

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 your car purchase, 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.

Consider adjusting your coverage

While there’s no provision in insurance policies that allows you to raise the replacement value of your car in response to the market, several other steps may help protect you at the moment.

If your car is fairly new, consider adding what’s known as “gap coverage.” If the vehicle was bought new and financed, you were probably required to add this policy extra. It protects you from the difference between the current value of the vehicle, as per the industry guides, and the cost of replacing it.

There are caveats to getting such coverage, Friedlander warns. The vehicle typically can’t be more than three years old, he says, and some insurers will only write gap insurance for the original owner. If you are eligible for this coverage, however, it costs only about $50 extra a year from your insurer, Friedlander says. (He warns, though, that car dealers charge far more for it -- $400 to $700 a year.)

For an older car, you might consider keeping the collision component of your coverage, or even restoring it if you have already dropped it from your policy. This optional provision -- which covers you for damage you cause to your own vehicle while at the wheel -- is sometimes discontinued by owners of older vehicles when the cost of its premium (typically a few hundred dollars a year) exceeds a certain percentage of the vehicle’s replacement value -- such as 10%. Owners of aging cars may also drop comprehensive coverage, a separate component that covers theft and such perils as damage from flooding.

So-called “C&C” coverage doesn’t protect you from the gap between a settlement offer and the cost of buying a vehicle, but it ensures you’ll have at least some funds to help you pay for a replacement. Espenschied says he’s “more apt [now] to recommend people hang on to both coverages, because of the fact that if you had to go buy another vehicle, it would cost you that much more money.”

That said, he also urges drivers to look at the specifics for their car and its other coverage, including the impact of your deductible, before dropping or restoring collision and comprehensive. “The math still may not make sense,” especially for a very old vehicle, he says.

O’Connell advises against “cutting or curbing collision from an overall auto policy, unless you’re still at home and not driving at all.” His rationale stems from the changing driving conditions at the moment. “With more people on the road, the risk is just too relatively high of an accident. As the old saying goes, better safe than sorry.”

More on Car Insurance