Personal Injury

How Do Insurance Companies Decide If a Vehicle Is a Total Loss?

When your car is seriously damaged in an accident, your insurance company could "total" the vehicle or require you to have it repaired. It all comes down to "actual cash value."

Once you get over the shock of a car accident that causes serious damage to your vehicle, you will soon begin to wonder whether the damage is so extensive that the car will be deemed a total loss by your insurance company.

As a general rule, older cars that sustain the same amount of damage as newer cars are more likely to be "totaled" by the insurance company, since the ratio of the repair cost to the car's value is much higher. Generally speaking, the insurance company will total your car if the cost of repair plus the car's salvage value is greater than the car's actual cash value (this is known as "ACV" in insurance company parlance). In addition, depending on which company insures your car and the state in which you live, the insurance company may total the car if the cost of repair plus salvage value meets a certain threshold percentage (typically 75%) of the car's ACV. Let's take a closer look at the process.

Assessing the Damage and Getting a Repair Estimate

The first step in the insurance company's evaluation will be to obtain a complete and accurate assessment of the car's damage, and the cost to repair it. In many cases, the full extent of the damage sustained by a car in an accident is not readily apparent; an example is a bent frame, which might not show itself until inspection of the chassis. So it's in the insurance company's interest to make sure that its estimators are skilled and experienced in assessing all aspects of vehicular damage, including structural integrity, mechanical function, and cosmetic appearance.

Determining Actual Cash Value (ACV)

Once a repair cost estimate is obtained, the insurance company will then consult its resources -- including Kelley Blue Book -- as well as the company's internal processes -- to determine the car's ACV, which roughly represents the amount the car would sell for at retail in an arm's length transaction. This determination will require information as to the car's make, model, model year, mileage, options, add-ons, and overall general condition.

The car's overall general condition is an important factor, because if the car was already damaged prior to the accident, the insurance company will not include the cost of non-accident related repairs in its repair cost estimate. In other words, if the insurance company decides to repair the car rather than total it, you should expect to get the car back with the same dents and dings it had before the accident occurred.

To "Total" Or Not To "Total"

When the insurance company knows the cost to repair the car and its ACV, it will then consult its own protocols and state law to determine whether the car should be repaired or declared a total loss. As we touched on above, some states have laws that require insurance companies to total cars when the ratio of the repair cost plus salvage value, compared to the car's ACV, yields a certain threshold percentage such as 75%. For example, if the repair cost is $5,000, the salvage value is $500 and the ACV is $6,500, the ratio would be 85%, and the car would be declared a total loss. In the absence of such a state law threshold, the insurance company will proceed according to its policies and practices as set forth in your insurance policy.

Your agent should be able to provide you with a full explanation of your rights and of your state's particular laws as they relate to total loss determinations.

The lesson to be learned here is that there are no foregone conclusions when it comes to whether your car will be declared a total loss. Each situation is unique and the insurance company's decision might come as a surprise. Learn more about How Insurance Affects a Car Accident Case and How an Accident Affects Your Car Insurance Rate.

If you've been involved in a car accident within the last three years, please consider taking our car accident survey so that we can include your experience in Martindale-Nolo's 2016 Car Accident Survey. Your participation will help inform others about their situation and options before dealing with their car accident.

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