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How Do Insurance Companies Decide to Total a Car?

March 3, 2022Firm News

After an accident, an insurance company may decide to total your car if it costs more to repair it than to replace it. In which case, they will refuse to pay for repairs but will give you money for the car’s actual cash value. Actual cash value refers to a car’s worth immediately before a collision, while salvage value is how much the car is worth in its damaged state. 

How an Insurance Adjuster Will Decide if a Car Is Totaled

To determine whether a car is totaled, an insurance adjuster will first examine the vehicle, and its damage then calculate its actual cash value. To do so, they will compare your car to similar models being sold in the area, as well as consider its condition prior to the accident. The following will typically be factored into their calculation: 

  • The make and model
  • Mileage
  • Prior damage
  • Wear and tear
  • After-market accessories

The better the condition and new the car, the more it will be worth. When the auto insurer is deciding whether your car is repairable or a total loss, they will have their own formula, which can also be affected by state law. For example, in Missouri, if the repair cost is 80 percent of the vehicle’s pre-accident actual cash value or more, it is considered a total loss. Typically, a vehicle with damage below that threshold will be repaired as long as it can be fixed to safely operate once again. As a result, it is important to know your car’s fair market value to ensure the insurance company pays you a fair amount. 

What Happens When Your Car is Totaled? 

If the insurance company decides to total your car, you will file a total loss claim, and you can either accept:

  • A full settlement in which the insurer reimburses you for the car’s fair market value minus your deductible and takes ownership of the vehicle. If you still owe car payments, the settlement check will go to the financial institution that is the lienholder on the vehicle, and any money left over will go to you. If you own the vehicle, you may need to provide proof of lien satisfaction.

OR

  • A partial settlement where you keep the vehicle and receive payment for a portion of the damage. You can then apply for the appropriate salvage or prior salvage title or sell the car for parts to a junking/scrapping company.

However, owing money to a finance company can be a problem if your car is totaled and you owe more than the vehicle is worth. This is referred to as being upside down on your car loan. If you carry gap insurance, this coverage will pay the difference between the amount you still owe on a loan or lease and the vehicle’s cash value. As a result, you will not have to pay any money out of pocket. For example, if you owe $20,000 on a totaled vehicle and the actual cash value is only $15,000, you would still owe $5,000 unless you have gap insurance which will cover the difference. The best choice for you will ultimately depend on your financial situation and the type of insurance policy your claim is filed under.

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