“Your vehicle is a Total Loss.” These words, more often than not, cause immediate controversy between an insured and their insurance company. The main cause of controversy between an insurance company and an insured as it relates to total loss is that many people feel that their vehicle is worth more than it really is.
A vehicle, although historically not a good investment, is very personal to us. Most of us spend a lot of time in our vehicles every day and grow attached to our car. Many others ‘trick out’ their cars and intrinsically feel that their modifications improve the value of the car.
I thought it might help some people if they heard exactly how an insurance company considers this and how they go about compensating you for your car if it is determined to be total. Typically there are 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 will discuss and define Total Loss from the perspective of insurance companies.
So, what exactly does it mean when your insurance company considers your vehicle a total loss? In general, there are two types or measurements if you will when it comes to making this determination: Total Financial or Economic Loss and 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 sales tax, less your deductible. I am sure you
have 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 actual percentage and that for states that do not set a percentage, it is up to the insurance company to determine what it will be.
Although all insurance companies are free to set this number themselves they are all different, a common number you will hear is 70%. What exactly does it mean? I thought a quick illustration might help:
Market Value $15,000
Plus tax $1,050 (7% used as an example)
Sub-total $16,050
Less Deductible $500
Total Value of Loss $15,550
Cost of Repairs $11,662
Repairs are 75% of the value
In the example above, your insurance company would likely determine your vehicle as an Economic Total 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 dealer. 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 had a salvage value of $3,000 (example). So, when making their total loss decision, they 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 to note is that your insurance carrier will also consider the estimated supplementary damages if your car were to be repaired. From my experience as an adjuster and claims manager, there are often supplemental or additional damages/repairs identified once a car begins the repair process. These damages are often discovered on a “tear down” or after parts of the vehicle are removed and additional damages are more visible. In many cases it is almost certain that there will be additional damages based on the visible damages, however, he only adjusts writing to what he can see and notes that additional damages are likely.
Obvious Total Loss
An Obvious Total Loss or OTL is in which the damage to a vehicle is so extensive in terms of repair and/or that it puts the structural integrity of the vehicle at risk with repair, that the car is determined to be OTL . Some examples of OTL are:
- Fire Damage
- Flip
- Theft
- Extensive Water Damage
- High impact front crash
- T-Bone or a hard hit to the side of a vehicle at the center point
In most cases, a claims adjuster will not have the direct authority to determine a vehicle to be OTL. Both insurance companies I worked for required manager approval to make this call. With today’s technology, this can easily be done in the field by simply sending some detailed photos to a Claims Manager or Property Damage Manager. In this case, there is no cost of repairs necessarily but the assessment process is the same.
Hopefully this will help you understand what is meant when your car is said to be 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.
