Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates. He has also been featured on sites like UpJourney.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that exis...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Apr 30, 2020

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Things to Remember...

  • Insurers use a Total Loss Formula to determine if repairs are greater than a car’s value
  • Standard Total Loss Formula (TLF): Repair cost + Salvage value > Actual Cash Value
  • Some state officials and insurers regulate ratios and have set a Total Loss Threshold
  • If damaged parts affect the operational safety of the car, it can be totaled out
  • The Actual Cash Value of your vehicle at the time of loss may be negotiated

Anything from a collision to a fender bender can result in a total loss claim. Even what may not appear to be a big issue can lead to a totaled car – minor body damage can hide major mechanical issues.

Finding out your vehicle is a total loss can be shocking if you don’t fully understand how total losses are determined. Each company sets their own criteria when it comes to totaled cars. It’s important to do your research to ensure you get a fair value for your car.

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What is a total loss and the Standard Total Loss Formula?

In some cases, the money needed to restore a vehicle back to pre-loss conditions can exceed the vehicle’s worth. In other words, it would cost the insurer more to fix your car than to just buy a new one. When this happens, the insurer can close the claim of your vehicle as a total loss.

Here’s a breakdown of what the traditional Total Loss Formula looks like:

Total cost of repairs (minus deductible) + Salvage value > Actual Cash Value (ACV)

Traditionally, a company simply deemed a car a total loss when the cost of repairs exceeded the value of the vehicle. The value of a car, including depreciation, is called the Actual Cash Value or ACV.

Actual Cash Value is the exact opposite of Replacement Cost Value, or RCV, which does not factor depreciation. All standard personal car insurance policies use an ACV valuation when claims are filed.

The salvage value, on the other hand, is how much the insurer can sell the car for in its totaled state at the end of its useful life. If you keep your totaled car, the salvage value is subtracted from your claims check. If you give your car to the insurer, the salvage value is added to your claim.

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How do auto insurance adjusters calculate ACV?

Adjusters will use a combination of different information to calculate an ACV. The actual determinants vary from state to state and from company to company.

Here are some of the most common things adjusters look for when making their calculations:

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Is the ACV negotiable?

When the claims adjuster approaches you to settle, they will tell you how much they have valued your car for.

This is why it’s crucial that you review your claims documentation thoroughly to make sure ACV is right.

Don’t just take the company’s word for it – speak up when something doesn’t look right. Adjusters won’t volunteer the information, but ACV’s are negotiable. Do your own research to make sure you are getting a fair value for your car.

You can make sure you are getting a fair deal by using online appraisal tools, visiting dealers, and searching for similar vehicles. Once you’ve done your work, you will be equipped to negotiate a better deal. The higher your ACV, the more money you will receive for your car.

Even if you don’t want to total your car, a higher ACV will help you avoid a future total loss declaration in the future over minor accidents.

What is the difference between a Total Loss Formula and a Total Loss Threshold?

Some states have found it unwise to repair a car when its damages are close to the value of the car. To not run the risk of losing money, some states demand that cars be totaled if the cost of repairs exceeds a certain threshold,

In other words, the Total Loss Threshold (TLT) is the percentage that the total loss ratio of repairs/ACV must exceed before cars are automatically eligible for a salvage title. If a state does not dictate this threshold, a company may dictate it.

Be sure to review the TLT in your state. In other cases, if a vehicle damaged to the point where it is unsafe to drive, repairs may not even be considered.

Do your research before an accident. Understanding how auto companies decide the value of your car ensures you get the best possible deal in the event of an accident.

If you’ve previously filed a claim and you’re not happy with how it was handled, it’s time to shop around for new insurance.

Browse competitive rates from multiple companies at once. Enter your zip code below to get started! 

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When does an insurance company total a car?

Carrying physical damage coverage on your personal auto insurance is optional in the eyes of the state. In the eyes of a lender, on the other hand, you’re required to carry comprehensive and collision coverage that will pay for damages to the collateral on loan.

Unfortunately, some policyholders aren’t familiar with how coverage works and how much coverage pays until they’re in a situation where they must file a claim.

  • Physical damage coverage will pay for repairs up to the fair market value of the car
  • If a vehicle is totaled, you can decide to keep it or receive a check for full value
  • In cases, cars are totaled because of water damage or major structural damage
  • Some states have a Total Loss Threshold that states that the loss must exceed a specific percentage of the vehicle’s value
  • The Total Loss Percentage in some states can be as low as 70 percent of the Actual Cash Value

If you were to look at your auto insurance declarations page right at this moment, you would find all of the coverage that details just what coverage options you carry on each household vehicle.

On the page, it’ll show you liability limits but not a specific limit for physical damage coverage.

This is because vehicle values aren’t fixed and will change from year to year as values depreciate.

Since values of the insured property can change, it can create quite a bit of confusion for policyholders trying to understand why their vehicle is being declared a total loss.

To understand how and why claims adjusters total cars, you have to understand the process of claims valuations. Read this guide to total loss claims, and gain a better understanding of the value of your car and how it’s determined.

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Understanding Actual Cash Value

In your car insurance contract, it specifically states that the policy will only pay up to the Actual Cash Value (ACV) of the car when there’s a covered physical damage loss.

Actual Cash Value, which may also be referred to as fair market value, is the cost to repair or replace the vehicle minus depreciation. This is different from replacement cost valuations, which doesn’t factor in any form of depreciation.

When valuing your vehicle, a policy will not pay more than the market value of the car to repair it.

Market value can be found by assessing the car’s condition prior to the accident and how much similar cars are selling for in the region. If it’s been determined that it costs more than this amount, the policy will not pay for repairs.

Instead, the policy will pay only the ACV of the car so that it can be replaced and declared a total loss.

How much damage must be done for your car to be totaled?

Cars don’t always have to have significant damage to be totaled. In some cases, even what appears to minor damage can lead to a total loss declaration. How much damage must be done to your car depends upon what your vehicle is worth.

If you have a newer vehicle that hasn’t had much time to depreciate or a model that’s notorious for retaining its value, it will take a serious accident or major mechanical/structural issues to lead to a total loss claims decision.

If your vehicle is aged, even damage from a slow speed fender bender could lead to a totaled car.

The vehicle type and age plays a major role in claims valuations, but the company also uses a Total Loss Formula in conjunction with a Total Loss Threshold to determine if cars should be totaled even when damage doesn’t exceed the ACV.

The Total Loss Threshold (TLT) is the percentage of the ACV that needs to be triggered in a loss for the car to be totaled.

This threshold may be regulated by the state or set internally by the insurer in states where thresholds aren’t set. Here’s an example of how the 80% TLT works in the state of Florida:

  • Vehicle has an ACV of $10,000
  • Damage evaluation estimates repairs to be $8200
  • Based on TLT formula, damage must exceed $8000
  • Vehicle is declared a total loss because damages exceeded TLT percentage

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Can ACV be negotiated?

If you have filed a claim and you’ve received notice that the vehicle is totaled, it’s important that you take additional steps to be sure that you’re getting a fair value for your car.

Claims adjusters won’t volunteer the information, but ACV valuations are negotiable.

If you feel like the difference between a damage loss and a total loss is just a few hundred dollars, here’s some steps that you can take to push the value of your car up and the TLT percentage down:

  • Provide bills for maintenance and repairs
  • Hire an independent appraiser for an unbiased assessment of vehicle damage
  • Review the prices of vehicles in your area at dealerships and online
  • Notify your adjuster of aftermarket installations that could raise the value
  • Ask about deductions on value and have errors corrected before settling your claim
  • Show proof of your low mileage if odometer can’t be read

In some rare instances, the value of a car doesn’t have anything to do with declaring a total loss. The most common cause of this is when there’s flood damage. Usually, water and vehicles don’t mesh well together.

Since water can often lead to rust which can break down a car, insurers may choose to automatically total cars for flood claims. If a specific structural element of the car is totaled that makes it unsafe to repair, the car will be totaled out regardless of its value.

What happens if your car is totaled?

If there’s no avoiding a total loss claim, you have the option to either keep your car or sell it to the insurer in exchange for a check for the entire cash value. If you want to keep your car, the salvage value of the car will be subtracted from your check.

Either way, in the end, the car will have a salvage title, making it difficult to insure.

If you’ve inquired about total loss protocol and you’re not happy with the service you’ve received, it might be time to shop around for coverage to find the best auto insurance company. You can find the most affordable rates by using an online insurance rating tool.

Once you’ve compared rates, consider contacting the companies to see how they deal with total losses and then make your choice. Start shopping by using our FREE tool below!

How much will my insurance pay for a totaled car?

What determines how much the insurance company will pay for a totaled vehicle? The total loss threshold can differ by state but building your own total loss car value calculator is pretty easy using the formula on this page. It’s important to note:

  • Replacement value tends to pay out smaller claims
  • Full value will pay a higher price for the totaled vehicle
  • Auto insurance companies rely on external sources — two of those sources are Kelly Blue Book and Edmunds.

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Insurance Values for Totaled Vehicles

Having an accident serious enough to total your car is bad enough – worrying about how much your auto insurance company will pay can just make things worse.

Understanding how insurance policies are structured before you purchase one can alleviate this worry and save you a lot of trouble in the case of an accident. Planning ahead will give you a better idea of what to expect when your insurance check arrives.

Although they go by different names, there are only two types of auto insurance policies (as opposed to many types of auto insurance coverage options) you can purchase.

The first one, which is often called replacement value, tends to pay out smaller claims.

The other type of policy, commonly referred to as full value, will pay a higher price for a totaled vehicle. Keep in mind though, that a full value policy will also carry higher premiums.

To begin comparing rates among insurance providers, enter your ZIP code above!

What types of replacement policies are there?

Think of replacement value as the amount an insurance company needs to pay to provide an exact replica of your current car.

For example, if you drive a 2004 Hyundai, your insurance company would write a check equivalent to what it would cost to purchase the exact same Hyundai in the same condition.

Insurance companies rely on external sources to assess this value — two popular sources are Kelly Blue Book and Edmunds.

Both of these resources are used by the National Auto Dealers Association (NADA) to determine the fair market value of used cars. They consider the production year, average mileage, average wear and tear, and so forth.

What is a full value policy?

A full value policy is one that pays out enough money to cover your car at its full market value regardless of its Kelly Blue Book or Edmunds price.

A replacement value policy doesn’t take those things into consideration while a full value one does.

If this is confusing, think of it in terms of a 1999 Honda Accord. At 12 years of age, the Kelly blue book value of that car might only be $2,500.

Yet, it may be worth a lot more in real terms if you have cared for it meticulously and installed thousands of dollars worth of customized parts.

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In order to make the best use of a full value policy, it’s extremely important to document everything. At the very least, you should be taking digital photos or videos to prove the condition of the car and the money you’ve invested in it.

Take pictures of any customized parts you’ve purchased. In addition, save all the receipts for any parts purchased, as this can be used to prove the true value of your vehicle

Another way to boost the value of your car is to do a comparison study of similar vehicles sold on the open market. Automotive magazines and websites are a great resource.

If you prepare beforehand, you will be able to prove the value of your car to your insurance company in the case of an accident. By providing more supporting evidence, you are more likely to get a check for the full value of your car.

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What if I only have liability insurance?

Unfortunately, a car insurance company will replace a totaled vehicle only if you have purchased collision or comprehensive coverage. If you only have the state mandated minimum liability coverage, a totaled car will be your loss.

That’s why it may be worth purchasing the extra coverage if you have a loan on your vehicle. While if you’re simply driving your parents’ old family sedan, with 150,000 miles on it, it might not be as worth it.

Before you file a claim for a totaled car, you also need to be aware that your insurance rates will go up. For an inexpensive car, it might be better in the long run to pay out of pocket. This will keep your car insurance rates down.

Although it is not the best scenario, with a calculator and the right questions, you can try to maximize your saving.

Don’t wait until you total your car — start comparing auto insurance rates with our FREE tool today!

References:

  1. https://www.edmunds.com/auto-insurance/a-total-loss.html
  2. http://www.insurance.wa.gov/your-insurance/auto-insurance/totaled-car-rights/
  3. http://www.autotrader.com/car-news/crash-course-for-coping-with-a-totaled-car-168401
  4. https://www.irmi.com/online/insurance-glossary/terms/a/actual-cash-value-acv.aspx
  5. https://www.statefarm.com/simple-insights/planning/replacement-cost-vs-market-value
  6. https://www.kbb.com/
  7. http://www.ncsl.org/research/transportation/registration-and-title-fees-by-state.aspx
  8. http://www.badfaithinsurance.org/reference/PC/0027a.htm
  9. http://www.investopedia.com/terms/s/salvagevalue.asp
  10. http://www.claimsjournal.com/news/national/2013/12/05/240841.htm
  11. http://totallossappraisals.com/total-loss-threshold-by-state/