How do insurance companies determine to total a car?

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  • When a vehicle is damaged in a covered loss, the insurance company must send an adjuster to assess the damage and an estimator to estimate the cost of repairs
  • If you carry comprehensive or collision on your policy, there’s not a fixed dollar amount the coverage will pay up to
  • Instead, under car insurance policies, physical damage coverage pays up to the Actual Cash Value of the property at the time of the loss
  • Actual Cash Value (ACV) is also commonly called fair market value
  • When the estimate to repair the car exceeds its ACV, the insurance company will offer a total loss settlement which includes the vehicle’s value, the cost of titling, taxes and registration
  • In some states, there is a Total Loss Threshold which means that damages must only exceed a percentage of the car’s value for the car to be a write-off

When you picture a totaled car, you more than likely see a piece of machinery that looks like it was crushed like a soda can. While accidents can most definitely turn 2-ton automobiles into scrap metal, your car doesn’t even need to have a significant amount of damage to be classified by a company in the insurance world as a “total loss”. Compare car insurance rates now by using our FREE tool above!

There’s a lot more to total loss claims than just how a car looks after it’s been in a wreck. Companies not only look at the cosmetic damage, but also at the pre-loss condition of the vehicle, its actual value, and the total loss declaration rules in the state. As if this wasn’t confusing enough, policyholders who are presented with a total loss offer also need to learn how to negotiate their claim for the best outcome. Read this guide to how and why a car is totaled, and you can prepare yourself for the claims process.

What’s the difference between Actual Cash Value and Replacement Cost?

Before you can really have a full understanding of how companies determine a total loss, you’ll need to learn what types of valuations methods are used in the insurance world and how one method differs from another. For property insurance claims, companies will either value the property with the Actual Cash Value method or the Replacement cost method. You could assume that each method would end in the same result, but that’s not the case. Here’s how the methods work:

  • Actual Cash Value: Actual Cash Value, which is often transcribed as ACV on a policy, can be interpreted to mean different things. In most cases, it’s interpreted to mean that the company will payout up to the fair market value of the damaged or totaled property. The company may also define ACV as the total cost to replace the property that’s in a similar condition minus the depreciation charge. Either way, depreciation is used to come up with the final number.
  • Replacement Cost: Replacement cost value, which might be written as RCV, is the total cost to replace the item of like kind and quality. This might sound similar, but the main difference is that there’s not a deduction for depreciation. In most cases, the company will first pay ACV and then pay the difference after repairs are made or the property is replaced. This is a provision that’s fully defined and described in your policy booklet.

What type of valuation method is used for standard car insurance policies?

While every company offers their own unique auto insurance rate, most standard policies have similar terms, conditions, and provisions. If you’re purchasing a standard policy in the most recent Personal Auto Policy form, the chances are that the company uses the Actual Cash Valuation method to determine what you car’s worth when you have a claim. This means that depreciation will be factored in when claim settlement is being determined.

Are there times where a policy might use Replacement Cost Valuation?

While it’s standard for ACV to be used, there may be some policies that use the more beneficial RCV method. This typically happens when you have a classic car or another type of specialty policy on a valuable or rare car.

It’s also possible to buy replacement cost coverage on a new car with some carriers if you’re willing to pay more for the endorsement.

You should check to see if this option is available so that you’re better able to afford a new car following a serious loss. GAP insurance is another option for vehicle owners with a private passenger car who are worried about getting stuck covering depreciation when they have a loan on the car.

How do you know which method is used on your policy?

If you have your policy documents, you can easily find out how your insurer will value your car by looking at your declaration’s page. If you located the area on the policy that shows your comprehensive and collision deductibles, you can also see the limit that the company will pay. If the policy says ACV minus your deductible, depreciation is accounted for. If the page shows you’ve added Replacement Cost onto the car, depreciation may not be a factor.

How do you know what your car’s worth?

Now that you know the method that’ll be used when your claim is being reviewed by your adjuster, you should familiarize yourself with how companies come to a final number for ACV payouts. After all, the company needs to know what a car’s worth before they can justifiably total it.

You may not be able to calculate the exact offer you’ll get on your own, but you can start to reference some of the resources that insurance adjusters actually use. Here are some methods that are used in the industry today:

  • Reviewing the value through reputable valuation guides
  • Taking a sample of values for multiple similar cars for sale in the area
  • Reviewing the sales records of vehicles sold by private party sellers in the area
  • Reviewing the listed price at dealerships for similar vehicles and subtracting depreciation

Valuing the Cost of Repairs

The next step to determining whether or not the car is a total loss is looking at the estimated repair costs. Typically, the company will send out an estimator who’ll assess the damage and then estimate costs for the company.

If you feel like the estimate is too high or too low, you can take the car to your own mechanic for an estimate or request a third-party estimator to come out.

Then, all of these numbers will be averaged to come to a final figure. The figure is important because it’s compared to the ACV threshold to determine if a total loss settlement is warranted.

When is a total loss settlement typically warranted?

A few calculations need to be made before a company can decide if they’ll pay for repairs or for the car’s value. It’s standard for a company to total a car when the it costs more for the company to repair the car than it would reasonably cost for a replacement. This is the formula that’s used is as follows:

Actual Cash Value < Cost of Repairs + Salvage Value of Vehicle

What is the Total Loss Threshold?

In states where there’s no mandated Total Loss Threshold, the cost of repairs must exceed 100% of the car’s value. In some states, however, there’s a threshold that dictates that the repairs only need to exceed a percentage of the car’s value to total the car. You will need to learn the damage ratio in your state to see if it lowers the amount of damage it’ll take to total your car.

Always remember that the value of your car is negotiable. You are free to run the numbers and try to get more for the car to avoid a total loss settlement. If you’re not happy with your company’s claims process, shop around. Be sure to compare pricing through different insurance carriers so that you have a good basis for your decision. Use an online quote comparison tool and you’ll find affordable coverage in half the time. Enter your zip code in our FREE tool below to start comparing car insurance rates instantly!

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