When your car is totaled, it means that the damage is so huge that it no longer makes sense to repair it. Insurance companies have a defined formula to determine this, using the actual cash value of your vehicle just prior to the accident and then the estimated cost to repair it. If the cost of repairs is nearing that of the actual cash value or exceeding it, your insurance company will probably deem it a total loss.
This article will explain how insurance companies determine a car’s totality, the criteria they consider, and what will happen after you total your leased car.
How Do Insurance Companies Determine That a Car Is Totaled?
Most insurance companies compare the cost of the repairs to the actual cash value of your car, which is what it was worth just before the accident. If repairing your vehicle exceeds a designated percentage of its value, it is totaled.
Consider, for example, that your car’s actual cash value (ACV) is $10,000, and your insurance company is using a total loss threshold of 70%. If repairing the damage exceeds $7,000, you are dealing with a total loss. This threshold varies in all states. The total loss threshold in Alabama, for example, is 75%, which means that if the repairs exceed three-fourths of the vehicle’s value, it is likely to be declared a total loss.
What Factors Are Important In The Decision?
Insurance companies do not consider just the repair cost, but several other items, for example:
- Market Value: What would your vehicle have sold for prior to the accident?
- Salvage Value: What can the insurance company recover by selling the wrecked vehicle?
- Age and Mileage: An older vehicle or one that has been driven a lot draws lower ACVs.
- Extent of Damage: Damage to the frame or airbag usually greatly increases repair costs. Even minor details, such as the condition of the tires and paint of the vehicle, can alter the final value established for it.
What Happens When Your Vehicle Is Declared A Total Loss?
After your vehicle has been declared a total loss by the insurance carrier, you will be offered an acceptable settlement reflecting its ACV. You may accept the insurance offer and turn the title of the vehicle over to the insurance company, or, in some instances, you may elect to retain the car and receive a lower settlement after the salvage value has been deducted. If you are leasing or have other obligations, the insurance check will ordinarily be payable to your lender. This becomes quite important because the value of your vehicle may not adequately cover the remaining loan or lease payments. This is the essence of gap insurance, which provides coverage for the gap between the amount paid by the insurance company and the remaining debt.
Key Takeaways
- A vehicle is declared a total loss when the repair cost exceeds a certain minimum percentage of its pre-accident value.
- The ACV and state laws control when a vehicle is deemed a total loss.
- Age, mileage, and market value impact settlement amounts.
- If financing or leasing, the lender is the recipient of the insurance check.
- Gap insurance is available for any remaining unpaid amount without the destroyed vehicle.
- Gap insurance is highly recommended. It covers the difference between the insurance payout (based on the actual cash value of the totaled car) and the remaining balance owed on the lease.
- The lessee is still responsible for making monthly lease payments until the lease is fully paid off or the insurance payout settles the balance.
Knowing how insurance companies determine a total loss will prepare you financially and help you make better decisions after a serious accident.
(DISCLAIMER: The information in this article does not necessarily reflect the views of The Global Hues. We make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information in this article.)
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