As careful a driver as you may be, accidents can happen. When they do, you want to get your vehicle repaired as quickly as possible – if it can be repaired, that is. Unfortunately, there’s always the chance that your vehicle is deemed a total loss, which creates a whole different set of circumstances for you from a car insurance standpoint.
What Is a Total Loss in Car Insurance?
Your insurance company will declare your vehicle a “total loss” when the cost to fix it exceeds its actual cash value, or when the car is damaged past the point of repair. Depending on where you live, state law may determine the baseline at which a car can be declared a total loss.
How Is Total Loss of a Vehicle Determined?
A number of factors go into determining if your car is a total loss, including the cost of repair. Your insurer also looks at your vehicle’s cash value based on its mileage, make, model, and what the resale market is like. It will also determine if your car has any salvageable parts that could be resold (this is known as its salvage value).
Some states mandate that a car must be declared a total loss if the cost of repairs exceeds a certain percentage of its actual cash value (ACV). This is known as a total loss threshold (TLT). In other states, declaring a total loss is based on repair cost and salvage value in relation to the vehicle’s ACV. This is known as a total loss formula (TLF).
What Is a Total Loss Threshold (TLT)?
Total loss threshold (TLT) is the point at which a car insurance company must deem a car totaled. This threshold is different for each state that mandates a TLT, and only about half of states do so. In Oklahoma for instance, the TLT is set at 60% of a vehicle’s fair market value, while in neighboring Texas the threshold is 100%.
What Is a Total Loss Formula (TLF)?
In states that don’t mandate a total loss threshold, insurers use what’s known as a total loss formula (TLF) to determine whether a vehicle should be declared a total loss. TLF is calculated by adding the cost of repairing the vehicle to its salvage value. If the total amount exceeds the car’s actual cash value, your insurer will declare the car a total loss.
What Happens if Your Car Is Declared a Total Loss?
In the event that your car is severely damaged, you will need to submit a claim to your insurance company to begin the process of declaring the vehicle a total loss. Because of the steps involved, these types of claims can take longer to process than a standard collision claim.
Once you’ve initiated the claims process by contacting your insurer, you will need to:
- Take your vehicle to an insurer-approved body shop. A mechanic will inspect your vehicle and give your insurance adjuster a full report of its condition and repair costs. The adjuster will use this information to help determine if your vehicle should be declared a total loss or can be repaired.
- Pull your vehicle documents together. This includes your vehicle title and sales receipt. The Department of Motor Vehicles should be able to provide you with a copy of the title if you can’t find yours. If your car is financed or leased, your lender or lessor will have the title.
- Accept or reject your insurance settlement. If you don’t think the amount is fair, you may be able to negotiate or dispute it. But if you’re satisfied with the settlement, you will have to accept it in order to move forward in the process. Remember: If you have an outstanding loan or lease, the settlement money will go to the lienholder.
- Remove all personal items from your car. Don’t forget to look under the seats, in door and seat pockets, and other cubbies and bins, as well as your trunk and glove box.
- Release the vehicle to the insurance company. You will need to surrender your car, including keys and paperwork like the title, if you have it. The insurer will take possession of the vehicle and move it to a storage facility.
- Begin shopping for a replacement vehicle. You will also need to make sure that your new car is properly insured.
What If You Still Owe Money on a Total Loss Vehicle?
In the event that your car is declared a total loss and the vehicle has been leased or financed – as opposed to being owned outright – it is the lending company or leasing agency that holds the vehicle title that will receive the claims settlement. If the settlement amount is more than what you owe, you will receive the difference. If it is less than what is owed, you will be responsible for the remaining debt.
You can avoid such a financial hardship with a gap insurance policy, however. Gap insurance will cover the difference between your vehicle’s current value (that’s what your standard policy will pay your lender) and your remaining balance. Gap insurance is typically required if you lease a vehicle. If you financed the automobile with a down payment of less than 20% or your loan terms are 60 months or longer, your lender may recommend buying gap insurance.
You might be able to purchase gap insurance from your car dealer, through your lender, or from some (but not all) insurance companies. Adding gap insurance to collision and comprehensive coverage is a minimal expense. For many people, it adds approximately $20 a year to an annual premium, according to the Insurance Information Institute.
How Much Will Insurance Pay for a Totaled Car?
Insurers settle claims based on the car’s actual cash value (ACV), the replacement cost minus the vehicle’s depreciation at the time of the total loss. The ACV is what your car could be sold for, which is less than the replacement cost. The vehicle’s wear and tear, mileage and any damage from prior accidents also help determine its ACV. So, if an insurer pays you the ACV for your car, expect it to be less than what you initially paid when you got it.
Can You Negotiate a Total Loss Settlement?
You can always dispute your insurer’s payout. You will have to deliver proof as to why you think the settlement isn’t fair, however. This means using a reliable source such as Kelley Blue Book or consulting local car dealers to find out what cars like yours are selling for in your area. Once you have determined what your vehicle’s worth and determined the settlement is too low, share the information you found with your claims adjuster and see if there’s room to negotiate a higher payout amount.
How Are Total Loss Claims Paid?
If you own your vehicle outright, the settlement payment from your insurer will go directly to you. On the other hand, if you’re still making payments on your vehicle at the time of the accident, those funds will go to your financial or leasing company.
Insurance experts recommend that you continue to make your monthly payments until the settlement is complete, as you’re technically financially responsible for the vehicle until your loan has been paid off.
Can You Keep a Total Loss Vehicle?
Once your car has been declared a total loss and a settlement has been accepted, your insurance company will take possession of the vehicle in most cases. Depending on state law where you reside, you may be able to keep the car or buy it back from your insurer in order to repair it and keep driving it. But before you can do so, the car will have to be inspected, titled, plated, and insured in the state where you live before it will be legally drivable. Talk to your insurer and contact your local Department of Motor Vehicles to find out what requirements you must fulfill in order to buy back your totaled car.
If you just want to keep your totaled car, but not drive it, you could potentially sell the usable parts or use them for another vehicle. You could also sell the damaged vehicle as is to a junkyard or donate it to charity.