In auto insurance terminology, what does the term "depreciation" indicate?

Depreciation refers to the reduction in a vehicle's value over time due to factors such as wear and tear, age, and usage. As a car gets older, its market value diminishes, which means that when an insurance claim is made for damages or a total loss, the payout will often reflect the depreciated value rather than the original purchase price. This understanding is crucial for both consumers and insurers as it affects how claims are evaluated and settled.

In contrast, the other options describe different concepts: the increase in vehicle value over time is not a typical scenario for personal vehicles, repair costs focus on the expenses incurred to fix damages rather than the vehicle's overall value, and the cost of replacing a vehicle with a new one pertains to replacement cost coverage, which may not consider depreciation. Therefore, understanding depreciation is essential in grasping how auto insurance values vehicles over time.