What is a Total Loss and How is it Determined?
A car is considered “totaled” or a “total loss” when the cost of repairing the vehicle after an accident or incident exceeds a certain percentage of its actual cash value (ACV) or market value. The specific threshold for considering a car totaled varies from one insurance company to another and may also be influenced by local regulations. However, in general, if the cost of repairs exceeds around 70-75% of the car’s ACV, it is likely to be declared a total loss. Here in Indiana, our total loss threshold is 70% of the vehicle’s ACV. For example, if your Honda Civic is worth $12,500 and repair costs are estimated to be $9,000 your vehicle may be deemed a total loss.
When a car is deemed totaled, it means that the insurance company determines it is not economically feasible to repair the vehicle due to the extent of damage or the high cost of repairs. In such cases, the insurance company will typically offer the car owner a settlement amount equal to the ACV of the vehicle before the accident, minus the deductible. Your comprehensive coverage and/ or collision coverage may help you purchase a replacement vehicle. Typically, if your vehicle is financed or leased, you will be required to carry these types of coverage. If you own your vehicle and do not have collision or comprehensive coverage, you may have to pay for your new vehicle out-of-pocket.
Factors that influence whether a car is considered totaled include:
1. Extent of Damage: The severity of the damage plays a significant role in determining whether a car is totaled. If the car has sustained extensive structural damage or damage to critical safety components, it may be more likely to be declared a total loss.
2. Repair Costs: The estimated cost of repairs is compared to the car’s ACV to determine whether it is worth fixing. If the repair costs exceed the predetermined percentage of the ACV, the car may be considered totaled. Your insurance adjuster will inspect the vehicle to determine estimated repair costs.
3. Market Value: The ACV or market value of the car before the accident is an essential factor in the total loss assessment. The insurance company will typically use factors like the car’s age, mileage, condition, and local market trends to determine its ACV.
4. Salvage Value: The potential salvage value of the vehicle is also considered. If the insurance company believes it can recoup some money by selling the damaged car for parts or salvage, it may influence the total loss determination.
5. State Regulations: Some states have specific guidelines and regulations that define when a car is considered totaled, which may vary from the general industry standards. In Indiana, our threshold is 70% of the vehicle’s ACV.
It’s important to note that the process of declaring a car totaled is typically carried out by the insurance company, not the car owner. Once a car is deemed totaled, the owner may accept the settlement offer and relinquish the car to the insurance company, or in some cases, the owner may choose to keep the damaged vehicle and receive a reduced settlement amount. If the owner chooses the latter, they may resell the vehicle for parts or metal.
What Types of Insurance Cover a Totaled Vehicle?
Collision Insurance covers your vehicle in the event that it collides with another object and causes damage. This type of coverage would cover repairs whether you collide with another moving vehicle at a busy intersection or slide into a telephone pole. This type of coverage may be optional, but is highly recommended especially for newer vehicles and vehicles that are being financed or leased.
Uninsured/ Underinsured Motorist Coverage protects you in the event that you are hit by another driver who either does not have insurance or does not have enough to cover damages. This coverage is designed to bridge the gap between the at-fault driver’s insurance limits and the actual costs you incur due to the accident.
GAP Insurance is an optional coverage that can be valuable if you have a car loan or lease. If your vehicle is totaled and you owe more on the loan or lease than the ACV (actual cash value) of the vehicle, gap insurance covers the “gap” between what you owe and what your insurance company pays. This can prevent you from being financially responsible for the difference.