“Your vehicle is a total loss.” These words, in most cases, cause an immediate controversy between an insured and his insurance company. The main cause of controversy between an insurance company and an insured when it comes to total loss is that most people feel that their vehicle is worth more than it is actually worth.
A vehicle, while historically not a good investment, is very personal to us. Many of us spend a lot of time in our vehicles every day and become attached to our car. Many others “cheat” their cars and inherently feel that their modifications increase the value of the car.
I thought it might help some people if they heard exactly how an insurance company views this and how they compensate you for your car if it is determined to be a total. There are usually two main things involved in understanding this process: what exactly is a total loss, and how is the value of a car determined. In this article I am going to discuss and define a total loss from the perspective of the insurance companies.
So what exactly does it mean for your insurance company to consider your vehicle a total loss? Generally, there are two types or measures, if you will, when it comes to making this determination: Total financial or economic loss and Obvious total loss.
Total financial or economic loss
Often times, a vehicle is declared a Total Economic Loss when the cost of the repairs exceeds the value of the vehicle, plus sales tax, less your deductible. I’m sure you’ve heard that there is a percentage that is used to determine if a car is a Total Economic Loss. You have probably heard numbers from 50% to 70% or more. This is true, however, it is important to know that not all states set a true 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 the insurance companies that are free to set this number for themselves are all different, a common number that you will hear is 70%. What does that mean exactly? I thought a quick illustration might help:
Market value $ 15,000
Plus tax $ 1,050 (7% is used as an example)
Subtotal $ 16,050
Less deductible $ 500
Total loss value $ 15,550
Cost of repairs $ 11,662
Repairs are 75% of the value
In the example above, your insurance company would likely 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 hold the recovered or damaged vehicle and then sell it to a supplier. Most insurance companies have negotiated contracts with salvage buyers and will use that avenue to recover some of the money paid for the total loss. In the example above, your insurance provider would know that your car has a salvage value of $ 3,000 (example). So when making their total loss decision, they would take this amount into account and subtract it from the total amount paid of $ 15,550, bringing their net cost to $ 12,550.
Another brief point worth noting is that your insurance company will also take into account estimated supplemental damages in the event your car is repaired. From my experience as an adjuster and claims manager, supplemental or additional damage / repairs are often identified once a car begins the repair process. These damages are often discovered upon “disassembly” or after parts of the vehicle are removed and additional damages are more visible. In many cases there will almost certainly be additional damage based on visible damage, however an adjuster will only write for what they can see and note that additional damage is likely to occur.
Obvious total loss
An obvious total loss or OTL is when the damage to a vehicle is so extensive in terms of repair and / or jeopardizes the structural integrity of the vehicle with a repair, that the car is determined to be an OTL. Some examples of OTL are:
- Fire damage
- Roll over
- In the robbery
- Extensive water damage
- High impact frontal collision
- T-Bone or hard hit to the side of a vehicle in the center point
In most cases, a claims adjuster will not have direct authority to determine that a vehicle is an OTL. The two insurance companies I worked for required a manager’s approval to make this call. With today’s technology, that can be easily done in the field by simply submitting a few detailed photos to a Claims Administrator or Property Damage Administrator. In this case, there is not necessarily a repair cost, but the valuation process is the same.
We hope this helps you understand what it means when you are told that your car is a total loss. Your insurance claims adjuster should explain all of this to you, however having a basic understanding will certainly help you if you find yourself in this situation.