“Your vehicle is a Total Loss.” These words, more often than not, provoke immediate controversy between an insured and his insurance company. The main cause of controversy between an insurance company and an insured as far as total loss is concerned is that most people feel that their vehicle is worth more than it really is.
A vehicle, even if historically not a good investment, is very personal to us. Many of us spend a large amount of time in our vehicles every day and grow attached to our car. Many others “joke” about their cars and intrinsically feel that their modifications increase the value of the car.
I thought it might help some people if they have heard exactly how an insurance company sees this and how they are going to compensate you for your car in case it is determined to be a total. There are typically two main things involved to understand this process: What exactly is a Total Loss and how is the value of a vehicle determined. In this article I will discuss and define a Total Loss from an insurance company perspective.
So, what exactly does it mean when your insurance company considers your vehicle a total loss? In general, there are two types or measures if you want when it comes to making this determination: Total Financial or Economic Loss and an Obvious Total Loss.
Total Financial or Economic Loss
A vehicle is often declared a Total Economic Loss when the cost of repairs exceeds the value of the vehicle, plus the sales tax, less your deductible. I’m sure you’ve heard that there is a percentage used to determine if a car is a Total Economic Loss. You’ve probably heard numbers from 50% to 70%, or more. This is true, however, it is important to know that not all states set an effective percentage and that for states that do not set percentages, it is up to the insurance company to determine what it will be.
Although all insurance companies that are free to set this number are all different, a common number you will hear is 70%. What exactly does it mean? I think a quick illustration might help:
Market Value $ 15,000
Plus tax $ 1,050 (7% used as an example)
Subtotal $ 16,050
Less Deductible $ 500
Total Loss Value $ 15,550
Repair Cost $ 11,662
Repairs are 75% of the value
In the example above, your insurance company could determine that your vehicle is a Total Economic Loss. One thing to remember is that if you are paid the value of your vehicle, the insurance company will keep the salvage or damaged vehicle and then sell it to a seller. Most insurance companies have negotiated contracts with rescue buyers and will use that route to recover a portion of the money paid for the total loss. In the example above, your insurance provider would know that your car had a recovery value of $ 3,000 (example). So, when they make their total loss decision, they have to bill this amount and subtract it from the total amount paid of $ 15,550, bringing their net cost to $ 12,550.
Another brief point to make that is worth noting is that your insurance carrier will also factor in the estimated additional damage if your car has been repaired. From my experience as a regulator and claims manager, there are often additional or additional damages / repairs identified once a vehicle begins the repair process. These damages are often discovered upon “tearing” or after parts of the vehicle have been removed and additional damage is more visible. In many cases it is almost certain that there will be additional damage based on the visible damage, however, a regulator will write only so that they can see and note that additional damage is likely.
Total Evident Loss
An Obvious Total Loss or OTL is where the damage to a vehicle is so extensive in terms of repair and / or endangering the structural integrity of the vehicle with a repair, that the vehicle is determined to be an OTL. Some examples of OTL are:
- Fire Damage
- A theft
- Extensive water damage
- High-impact front-end collision
- T-Bone or hard hit to the side of a vehicle in the center
In most cases, a claims regulator will not have the direct authority to determine whether a vehicle is an OTL. The two insurance companies I worked for have asked for a manager’s consent to make this call. With today’s technology, that can be easily done in the field by simply sending some detailed photos to a Claims Manager or a Property Damage Manager. In this case, there is not necessarily a repair cost but the evaluation process is the same.
We hope this helps you understand what it means when you are told that your car is a total waste. Your insurance claims regulator should explain all this to you, however, having a basic understanding will definitely help you if you find yourself in this situation.