When is Your Vehicle a Total Loss?

Image courtesy of [Erin Van Den Brulle] / Getty Images. Image courtesy of [Erin Van Den Brulle] / Getty Images

Has your insurer declared your vehicle a total loss following an auto accident? If so, you may have wondered what factors insurers consider before "totaling" a vehicle. This article will answer that question. It will also explain how insurers assign a value to a damaged auto, and what happens to a vehicle after it has been "totaled."

It Was Only Minor Damage!

Many policyholders are baffled when their insurer decides to "total" a vehicle.

This is especially true when a vehicle has sustained seemingly minor damage. Here is a common scenario.

Fred Ferguson slams down the phone in exasperation. He has just spoken with an adjuster at his firm's commercial auto insurer. Fred owns Ferguson Flowers, a retail flower shop. A van his firm uses for delivering flowers was in an accident last week. A flower shop employee was returning to the shop after making a delivery. Unfortunately, he hit a patch of black ice and the van skidded into a tree. The worker was not injured and the van sustained what Fred considers to be minimal damage. Yet, the insurer has declared the vehicle a total loss! Moreover, the insurer's calculation of the vehicle's actual cash value is less than half of what Fred paid for the truck a few years ago!

Commercial Physical Damage Wording

Fred has insured the truck for physical damage under a commercial auto policy.

He has purchased both Comprehensive and Collision coverages. What are the insurer's obligations?

The Conditions section of the standard commercial auto policy allows the insurer a few options when responding to a loss. One option is to repair or replace the damaged or stolen vehicle. Alternatively, the insurer may take all or any part of the damaged auto as salvage at a value negotiated with the policyholder or determined by an appraisal.

If the vehicle has been stolen, the insurer may return it after repairing any damage. In the event of a total loss, the insurer will calculate the vehicle's actual cash value. Its calculation will include an adjustment for depreciation and the physical condition of the vehicle.

When is a Vehicle a Total Loss?

Generally, a vehicle is deemed a total loss when the cost to repair it exceeds its actual cash value. Insurers consider a variety of factors when calculating a vehicle's value. These include:

  • The vehicle's age
  • Its condition
  • Its odometer reading
  • Its equipment and features
  • Its diminution in value
  • The local vehicle market

The insurer compares the cost to repair the vehicle to its actual cash value. The repair cost divided by the ACV is called the total loss threshold. When this ratio reaches a certain percentage, the insurer will "total" the car.

In some states, the total loss threshold is established by law. The percentage is generally somewhere between 60% and 100%, with 75% being the most common. In states where the threshold is determined by law, an insurer cannot declare a vehicle a total loss unless the state-determined threshold has been reached. In other states each insurer may establish its own total loss threshold.

Once a vehicle has been declared a total loss, the insurer usually files a form with the state indicating that the vehicle has been totaled. A totaled vehicle is no longer drivable in its current condition.

Modern Vehicles Costly to Repair

The complexity of modern cars makes them costly to repair. Many functions are computerized. Diagnosing and fixing problems after an accident can be time-consuming. Repair shops need sophisticated equipment that is expensive to purchase and costly to maintain. Mechanics need extensive training to perform basic tasks.

Repair costs are also affected by the types of materials of which modern cars are made. These materials are lightweight in order to improve fuel economy. They also protect passengers by crumpling in a crash. However, such materials can be difficult, if not impossible, to repair.

Dents in a crumpled panel cannot be hammered out like those in older cars. Instead, the entire panel must be replaced. Costs add up fast so many cars are "totaled" rather than repaired.

Salvage Vehicle

A vehicle that has been declared a total loss may have some salvage value. Typically, the insurer pays the vehicle owner the actual cash value and retains the damaged auto. It then obtains a salvage certificate from the state. A salvage certificate serves as evidence of legal ownership and replaces any previous titles to the vehicle. Once the insurer has the certificate it may sell the vehicle to an auto salvage company.

Generally, you can retain a "totaled" vehicle by paying the insurer the salvage value. A salvage vehicle cannot be driven unless it is repaired and re-registered as a revived salvage vehicle. In order for the vehicle to be re-registered it must pass a thorough inspection by your state inspection authority. If you don't intend to drive the auto but want to retain it for parts, you can obtain a nonrepairable vehicle certificate.