Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Jan 13, 2016

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Here's what you need to know...

  • If you file a physical damage claim and you have the necessary coverage, companies will either pay to repair or replace the vehicle
  • Companies will estimate damage and then value the covered auto to determine whether repair costs are reasonable
  • In most cases, the car is repaired if the costs to repair the vehicle are lower than its Actual Cash Value (ACV)
  • If the repair costs exceed the ACV, the claims adjuster will total the vehicle and offer a payout for the Actual Cash Value
  • Some states have a Total Loss Threshold, which allows carriers to total vehicles when damages reach a percentage of the vehicle’s value

It’s easy to assume that your vehicle needs to sustain serious visible damage to be totaled in an accident, but that’s not always the case. By its traditional definition, a total loss is one where the cost to repair the damaged property would be higher than what the property is worth at the current time. While some companies still use this definition, others used more complicated industry formulas that make settling a claim more difficult to follow.

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Some vehicles that require expensive parts or specialized labor could easily be totaled as they age. This is why it’s important for all policyholders to understand just how their vehicle will be evaluated by claims adjusters following a loss. Read on, and find out when claims departments will total cars and whether or not it’s wise to carry full coverage on your beloved automobile.

What is a total loss?

In the insurance world, a total loss is a judgement declared by the insurer that says that the covered vehicle has sustained more damage than the car is worth. The company determines this by reviewing the value of the vehicle and then comparing this value to repair estimates that have been recorded by a trained damage estimator.

The company determines this by reviewing the value of the vehicle and then comparing this value to repair estimates that have been recorded by a trained damage estimator.

Since an auto insurance contract states that the policy will only pay up to the fair market value of the vehicle (ACV) at the time of the loss, it’s necessary for the insurer to write-off the property and settle the claim by making a total loss payment instead of paying a repair shop.

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What is the difference between Actual Cash Value and Replacement Cost valuations?

It’s very important that you understand how claims are evaluated before filing a claim for physical damages. In the personal car insurance marketplace where you’re covering a standard private passenger car, cars values are based on their Actual Cash Value and not their Replacement Cost. This is extremely important because of how each is calculated. Here’s the difference between each method of valuation:

  • Actual Cash Value (ACV):

Actual Cash Value is technically the same thing as the car’s fair market value. In technical terms, the ACV valuation is defined as the value of the asset minus depreciation. This is why you won’t get the purchase price for the vehicle when a claim is filed unless you have a special replacement cost rider built in that erases the depreciation that takes place when you drive off the lot.

  • Replacement Cost Value (RCV):

In rare cases, your auto policy may value the covered auto based on its replacement cost. This is most often used when you have a specialty policy for a classic or luxury auto covered for a specific amount of money. RCV valuations offer the policyholder a payment for the amount of money that will be needed to fully replace the car with a similar model. The RCV model doesn’t use depreciation as a factor when paying out benefits.

Understanding the Total Loss Formula (TLF)

Once you understand ACV, it’s fairly easy to understand the traditional Total Loss Formula. The TLT is used to measure which number is greater and how the claim will be settled. Here is how it looks on paper:

Total cost of repairs + Salvage Value of Car > Actual Cash Value

If the repairs and Salvage Value of the car are found to be greater than the depreciated value of the auto, the car is by definition a total loss.

Do the repair costs have to exceed the value for a car to be totaled?

While this is a default formula, more often than not insurers will use a Total Loss Threshold ratio when determining if a car is totaled. This is important because repairs don’t always need to exceed the ACV of the car. If there’s a TLT in the state or established by the carrier, the repair costs could be lower than you’d expect to lead to a write-off. Some states, like Iowa, have damage ratios as low as 50%, but the average TLT ratio used is around 75%.

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Is ACV negotiable when settling a claim?

If damages may exceed the damage ratio or the ACV of the vehicle, it’s important that you review how your vehicle has been valued. You have the option to try and negotiate the value of the car to prevent it from being declared a total loss, but insurers won’t volunteer this information to you. Here are some tips that you should use to negotiate the value of your car to your benefit:

  • Look up Kelley Blue Book and check the fair market value
  • Find local sales ads for similar cars in your area
  • Check dealership sales in the region
  • Provide pictures for proof of condition
  • Provide proof of maintenance or new installations to increase value

Reassess Your Need For Full Coverage

It’s not always wise to carry full coverage on a vehicle. If you’re vehicle isn’t financed and it’s an older model, you’ll need to look up its value before you assume that carrying comprehensive and collision is a must. In some cases, it costs more to pay the rates for physical damage coverage than you’d actually receive if you filed a claim.

The rule of thumb is that you shouldn’t pay more than 10% of the value of the car in physical damage premiums when you have full coverage.

Building the best insurance policy for your needs is crucial. To build a quality policy with adequate limits and options, you need to understand how coverage works. Now that you know how cars are totaled, you can make an informed decision on how much coverage to buy. If you’re not happy with your full coverage rates, it’s time to compare premiums. Use an online auto premiums comparison tool and you can easily get multiple rate quotes so that you can decide if full coverage is practical. Start comparing car insurance rates now by entering your zip code in our FREE tool below!