When is a car totaled?

Your car has just been damaged in a car accident or some other occurrence. The claim is sent to the insurance company who inspects the vehicle. They determine that the car is totaled. Or, they determine that the car is fixable, but you think it should be totaled. So, when is a car totaled.  Simply put, the decision of whether or not a vehicle is a total loss is strictly based on economics. The question to be answered is whether it is economically feasible to repair the car, or would you be better off selling the car for salvage and buying a new car. Let’s take a couple of examples to show how this determination might play out.

Let’s say you are involved in a very serious car accident in which your vehicle sustained major damage. On the day of the accident, the car was worth $10,000. However, after the accident, the car now has a salvage value of $2,000. If the repair estimate, for example, shows that it would cost $9,000 to repair the car, then the car will most likely be deemed a total loss. This is because the repair costs plus the salvage value will be more than the final value of the car:

Pre-Accident Value:  $10,000

Post-Accident Value:  $2,000

Post-Repair Value:  $10,000

Increase in Value:  $8,000

Cost of Repair:  $9,000

It would not be economically feasible to spend $9,000 to repair the car. If you do this, then you would have invested $11,000 just to end up with a car worth $10,000. ($9,000 repair costs, plus $2,000 salvage value). You would have been better off selling the salvage for $2,000 and spending only $8,000 to go out and buy a similar vehicle.

But what if it only costs $7,000 to repair the car? Would you still fix it?  In the previous example, we assumed that the repaired vehicle would have been worth the same as the its pre-accident value. However, that is rarely the case. Most of the time, a repaired vehicle is not worth as much as a factory original vehicle. Therefore, you always have to account for the post-repair value.  For instance, if the car in our previous example would have only had a post-repair value of $8,000, then it still wouldn’t be a smart business decision to spend $7,000 to repair the car:

Pre- Accident Value:  $10,000

Post-Accident Value:  $2,000

Post-Repair Value:  $8,000

Increase in Value:  $6,000

Cost of Repair:  $7,000

Even though the cost of repair is less than the decrease in value, the repairs would not increase the value to justify the repair costs. Likewise, the ultimate question to ask is this: Will the cost of the repair increase the value of the salvage by more than the repair costs? If so, then the car will most likely be repaired. If not, then the car is considered a total loss.

Most insurance companies will follow this logic. But sometimes the the figures are not readily available to make such a detailed determination. Therefore, most insurance companies use a basic threshold formula to determine whether a vehicle is totalled. That is, if the cost of repair exceeds some threshold percentage of the pre-accident value of the car, then the adjuster will likely deem the vehicle a total loss. The threshold may differ from company to company, but it usually based on some ratio, such as 70%, 75%, or some other percentage. This represents a short-cut way that most insurance companies go about making the determination, but is probably based upon some statistical analysis of previous claims.

If you have an issue with the adjuster’s determination, don’t be afraid to ask how they came up with their decision. Most reputable insurance companies will be glad to share that information with you. Then you have the opportunity to make sure the numbers look correct.

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