Total Loss: What It Is and How Your Insurance Works After Your Car Is Totaled
Insurance companies deem a damaged car a total loss when the estimated cost of repairing it is more than the vehicle’s actual value.
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If an accident causes significant damage to your vehicle and renders it beyond repair, your insurance provider may deem it a total loss. Insurance companies use a total loss threshold (TLT) or a total loss formula (TLF) to determine if a car is totaled.
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Insurance companies deem a vehicle a total loss when the cost of repairing the car is more than its actual cash value (ACV).
A car can become totaled after an accident, a natural calamity, theft or even failure to change the oil regularly leads to complete engine failure.
Providers use either one of two methods to decide whether your car is totaled: total loss formula (TLF) or total loss threshold (TLT).
What Is Total Loss?
Total loss is a condition where the cost to repair a damaged car is more than the car’s actual worth. Your vehicle may be damaged to this extent after a theft, accident or natural disaster.
The value of your vehicle starts depreciating from the moment it is driven out of the dealer’s lot. Each insurer has its way of calculating a car’s worth when it was damaged; this is known as the car’s actual cash value (ACV).
Insurance companies evaluate multiple factors such as age, mileage, condition and price similar cars sell for in your area to arrive at the ACV value. If you are paying off a loan on a totaled vehicle, gap insurance covers the difference between your vehicle’s actual cash value and the balance you owe to your lender.
What Makes a Car Totaled?
Your car doesn’t have to look destroyed to be classified as totaled. If the insurer determines that it would cost more to repair the car than replace it, the vehicle is considered totaled. A car can be totaled due to multiple reasons, such as:
- An accident
- A natural calamity
- Failure to change the oil regularly, leading to complete engine failure
However, even if your car is totaled due to any of the above reasons, it must meet certain criteria to qualify as a total loss. The final decision rests with your insurer.
Many people assume that just because they wrecked their vehicle, insurance companies will deem it a total loss. Even though this may be true in some cases, insurance companies have a precise definition of the word totaled. The literal meaning of the word is when something is damaged beyond repair.
That doesn’t mean that your car must look as if it’s been destroyed. For insurers to declare a vehicle a total loss, they check whether the cost of repairing the car is more than its ACV.
How Insurance Companies Determine if a Car Is “Totaled”
What constitutes a total loss is not straightforward, and the method used to determine this differs from state to state. There are two methods that insurance companies use to decide whether your car is totaled.
- Total loss formula (TLF)
- Total loss threshold (TLT)
According to the TLT method, if the damage to a vehicle exceeds a certain percentage of the car’s ACV, it’s deemed totaled.
States that use the TLF method evaluate the cost of the repair and the car's salvage value. If the sum of these two costs exceeds the car’s ACV, the vehicle is considered totaled.
Around half of all the states use the TLF method to determine whether a vehicle is totaled. The remaining states use the TLT method to evaluate total loss.
Total Loss Threshold By State
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Thirty states in the U.S. use TLT to decide whether a damaged vehicle is totaled, while 21 states, including Washington, D.C., use TLF. In the states that use the TLT method, the percentage of the car’s ACV varies between 60% and 100%.
The total loss formula (TLF) determines if a vehicle is considered a total loss by adding the cost of repairs and the vehicle's salvage value. If this value is more than the actual cash value, your auto insurer can declare it a total loss.
Cost of Repairs + Salvage Value ≥ Actual Cash Value
For example, if the cost of repairs for a damaged vehicle is $10,000 and the insurance company could get $900 by selling the car to a salvage yard for parts and spares, this would amount to $10,900. If the ACV of the vehicle is less than $10,900, the insurance company will deem the car a total loss.
What Happens to My Car if It’s Deemed a Total Loss?
Once your vehicle is deemed a total loss by your insurance company, two possible scenarios could follow.
Possible Scenarios When Your Car Is Declared a Total Loss
- 1. You agree that your car is a total loss.If you agree with your insurer’s decision declaring your car a total loss, you will be required to remove all personal belongings from the vehicle, including the license plate. You will also need to hand over your car and keys to the insurer and complete the necessary paperwork. Once this process is complete, the vehicle will be declared as salvage.
- 2. You disagree that your car is a total loss.If you disagree with your insurance company’s decision, you can negotiate with your claims adjuster. You’ll need to prove that your car is worth more than what was determined and provide supporting documentation. One way to do this is to highlight any modifications to the vehicle that weren’t considered in its ACV and provide proof of these modifications.
Once your vehicle is declared a total loss, insurance companies have the legal right to sell it and recoup some of their losses. Your insurance company will inform the Department of Motor Vehicles that your car has been totaled when they take your vehicle.
You may disagree with your insurer’s decision if you feel the settlement amount offered is lower than what your car was worth. In this case, you can negotiate to get a better price or take legal recourse, but you will need two types of evidence that can support your claims. This evidence should prove what shape your car was in and substantiate the car's actual value. You can use photos to show the previous condition of the car and showcase significant modifications that could increase its value.
The word salvage means to extract something of value from a damaged item. A car titled a salvage indicates that it is damaged and considered totaled by an insurance company.
What to Expect When Filing a Total Loss Claim
If an insured vehicle is damaged, you will need to contact your insurance company to understand the extent of damage and be compensated as per the terms of your insurance. Filing claims with your insurer involves multiple steps.
File your claim.
Most insurers allow you to file claims over their website or mobile app.
Schedule an inspection.
Schedule an inspection of your damaged car with the insurance adjuster. Insurance companies usually don’t require vehicle owners to be present during an inspection. The insurance adjuster may contact you before the scheduled inspection to get details and answer questions about your car.
Review your quote.
After the vehicle is inspected, the insurance adjuster will give you a quote with your settlement amount. If your insurance provides rental or any other coverage, your insurer will include that in the quote.
Release your car.
At this point, you’ll need to remove your personal belongings from the damaged car and hand the vehicle over to your insurer. If your car is in a storage facility, inform your insurance company that they have your permission to move the vehicle. In most cases, the insurer will take it to a salvage yard.
Your insurer may require you to sign some paperwork in person or electronically to officially give up ownership of your vehicle. Once this process is complete, you’ll receive your settlement amount through the agreed mode, typically by check or a wire transfer.
How Much Will Insurance Pay for My Totaled Car Settlement?
There is no fixed amount that an insurer will pay for a totaled car. How much you receive will depend on your vehicle’s ACV. Each insurer uses a different method to determine the ACV. However, some of the most important aspects that an insurer considers are:
- The age of the vehicle
- The price that similar cars sell for in your area
If you happen to total your car while you’re still financing or leasing it, its value could depreciate lower than its ACV. Having gap insurance as part of your coverage can help cover this difference.
Gap insurance protects you against losses when the amount of compensation received from a total loss does not fully cover the amount you may owe on the vehicle's financing or lease agreement. It is recommended to have gap insurance if you have a car whose value depreciates fast.
Frequently Asked Questions About Total Loss
Many people assume that because their car is wrecked, it will be deemed a total loss. Although this could be true in some cases, insurance companies have the final say in declaring a car a total loss. Some of the most frequently asked questions about total loss are:
MoneyGeek collected information on the total loss determination rules of each state by evaluating MWL Law’s dataset and comparing that with the state law.
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