When is Your Vehicle a Total Loss?

Drawing of man in a red car following an accident

If a company-owned vehicle has been damaged in an auto accident, the firm's auto insurer may declare it a total loss. The insurer may opt to "total" a vehicle that appears to have sustained only minor damage. This frustrates many business owners. Here is a typical scenario.

It Was Only Minor Damage!

Fred Ferguson has just finished a phone conversation with an insurance adjuster and he isn't happy. Fred owns Ferguson Flowers, a retail flower shop. A van his firm uses for delivering flowers was damaged in an accident last week. An employee of Fred's was driving back to the shop after making a delivery when he hit a patch of black ice. The driver lost control of the truck and the van slammed into a tree. Fortunately, the worker was not injured.

Fred has insured the van under the standard business auto policy. He has purchased both comprehensive and collision coverages. The van sustained only minimal damage (in Fred's view anyway), but the insurer has declared it a total loss. Fred is annoyed at this as he believes the van could be repaired. He is also unhappy with the insurer's calculation of the vehicle's actual cash value. According to his insurer, Fred's van is worth less than half the amount he paid for it a few years ago!

Insurer's Loss Settlement Options

The Conditions section of the standard commercial auto policy allows the insurer a few options when responding to a physical damage loss. The insurer may choose to repair or replace the damaged or stolen vehicle. Alternatively, it may take all or any part of the damaged auto as salvage at a value it has negotiated with the policyholder or determined by an appraisal.

If the vehicle has been stolen, the insurer may repair any damage it has sustained and then return it to the policyholder. If the insurer declares the vehicle a total loss, it will calculate the vehicle's actual cash value. The insurer's calculation will include an adjustment for depreciation and the physical condition of the auto.

When is a Vehicle a Total Loss?

Generally, a vehicle is deemed a total loss when the cost to repair it exceeds its actual cash value. Insurers consider a variety of factors when calculating a vehicle's value. These include its:

  • Age
  • Condition
  • Odometer reading
  • Equipment and features
  • Diminution in value
  • Worth in the local vehicle market

The insurer compares the vehicle's repair cost to its actual cash value by dividing the former by the latter. The result is called the total loss threshold and is expressed as a percentage. For example, suppose a vehicle will cost $8,000 to repair and its ACV is $10,000. The total loss threshold for the vehicle is 80 percent (8,000 / 10,000). When the threshold reaches a certain percentage, the insurer will "total" the car.

In some states, the total loss threshold is established by law. The statutory percentage is generally somewhere between 60% and 100%, with 75% being the most common. In states where the threshold is determined by law, an insurer cannot declare a vehicle a total loss unless the state-determined threshold has been reached. Other states allow each insurer to establish its own total loss threshold.

Once a vehicle has been declared a total loss, the insurer completes a form and sends it to the state vehicle licensing authority. The form notifies the authority that the vehicle has been totaled. A totaled vehicle cannot be driven in its current condition.

Modern Vehicles Are Costly to Repair

Modern cars are more likely to be totaled than older vehicles. This is because modern vehicles are complex, and their complexity makes them costly to repair. Many of their internal functions are computerized. If a system component is damaged in an accident, the damage can be difficult to identify and repair.

Nowadays, auto repair shops need sophisticated equipment that is expensive to purchase and costly to maintain. Mechanics need extensive training to perform basic tasks. The costs of equipment and training are passed on to customers.

Another factor that affects repair costs is the materials from which modern cars are made. These materials are lightweight so that cars use less fuel. Lightweight materials also protect passengers by crumpling in a crash. Yet, these materials can be difficult, if not impossible, to repair. Dents in a crumpled panel cannot be hammered out like those in older cars. Instead, the entire panel must be replaced. Costs add up quickly so many cars are "totaled" rather than repaired.

Salvage Vehicle

A vehicle that has been declared a total loss typically has some salvage value. The insurer usually pays the vehicle owner the actual cash value of the auto and retains the damaged auto as salvage. The insurer must obtain a salvage certificate from the state. A salvage certificate serves as evidence of legal ownership, and it replaces any previous titles to the vehicle. Once the insurer has the certificate it normally sells the vehicle to an auto salvage company.

In some states, you can retain a "totaled" vehicle by paying the insurer the salvage value. A salvage auto cannot be driven unless it is repaired and re-registered as a revived salvage vehicle. In order for the vehicle to be re-registered, it must pass a thorough inspection by your state inspection authority. If you don't intend to drive the auto but want to retain it for parts, you can obtain a nonrepairable vehicle certificate.