When Is A Loss A Total Loss?

By Richard A. McGrath, CIC, LIA

Evaluating whether a vehicle should be “totaled” after an accident and how much the owner should be reimbursed is not an exact science.

Owners of motor vehicles can benefit from understanding what’s involved and what their rights are, as an accident in which a vehicle is “totaled” can be expensive, especially if the owner owes more money on the vehicle than it is worth.

A vehicle is considered to be a “total loss” when it cannot be fully repaired, is stolen and not recovered, or is damaged to the extent that total repairs plus the salvage value of the vehicle exceed its actual cash value (ACV).  ACV is the vehicle’s market value; that is, what it would sell for, rather than the cost of replacing the vehicle with an amount subtracted for depreciation.

Total losses may also take place when the engine catches fire or when a vehicle is submerged in water to the point where the dashboard is underwater.  In either case, the vehicle may have a higher than usual salvage value, as the body may be relatively undamaged, but the electrical components and wiring typically are damaged to the point where the vehicle cannot be repaired.

The insurer typically would pay the ACV, plus title fees and taxes, after claims representatives and estimators assess the damage.  If the insured owes more money on the car than the car is worth, the difference would be an out-of-pocket expense.  This is often the case when a vehicle is leased.

When a vehicle is totaled, the claim representative should consider potential hidden damage, the time it will take to make the repair and the potential decrease in value of the vehicle.

The time it will take to make a repair is especially important when claims involve liability to a third party, who may have a “loss of use” claim.  “Loss of use” by the first party (the insured) is limited by the insurance policy, but third party claims are limited only by what a jury considers appropriate.

Even if no expense is incurred, the third party may have a legitimate claim.  For example, if a person owns two vehicles and one is damaged in an accident where the third party was not at fault, he or she may have a legitimate reason for not driving the second vehicle, which would result in a “loss of use” finding.

When damage is hidden, the time involved to repair the damage is especially difficult to estimate, as the extent of the damage usually cannot be determined unless the vehicle is completely taken apart.  In such cases, it takes an experienced estimator to make a potential allowance for the potential damage.

In some cases, repairs will not bring a vehicle back to its pre-accident condition, so “diminution of value” claims must also be taken into account.

Establishing the ACV

Establishing the ACV of a vehicle can be difficult, even though there are many tools and resources available to the claims representative to help.

One frequently used resource is the Official Used Car Guide, which is published monthly by the National Automobile Dealers Association (NADA).  Prices, which are based on feedback from many of the country’s largest dealers, tend to be in the upper range of values for vehicles, as they include overhead expenses, such as warranty costs, expenses for minor repairs and other costs associated with preparing a vehicle for sale.

Prices are provided based on geographic regions and cover vehicles up to seven years old.  A second guide, the Older Used Car Guide, is published by NADA three times a year.

Experienced claims representatives never rely on just one source to establish a price.  The most reliable way to establish a fair price is through a survey of used car dealers and private sellers in the local market.  Ads in local newspapers and online sources are also used to establish a fair price.

Based on the combination of sources, and accounting for the condition of the vehicle before it was damaged, the claim representative establishes a fair range of values before beginning settlement discussions with the owner.  The representative is required by law to use a range that is established based on legitimate data.

Of course, even if the range provided is based on legitimate data, the owner may not accept the representative’s settlement offer.  In such cases, a third party can either file suit or seek arbitration, while the insured can demand an appraisal of the vehicle.

When an appraisal is requested, both parties hire appraisers, who then jointly choose a neutral umpire.  The appraisers come to their respective conclusions and seek to reach an agreement.  The umpire is called in, if necessary, to settle any areas of disagreement.  Each party pays for its appraiser and splits the cost of the umpire.

Drivers who lease vehicles may especially be affected in case of a total loss, as the ACV of the vehicle is often less than what is owed on the lease; this is especially likely if no down payment was made on the vehicle.  Factors that drive up the value of the lease may include life insurance included in the financing package, extended warranties and more.  Pre-payment or lease termination penalties are also common.

Individuals who drive leased vehicles can cover these costs by adding a special endorsement to their existing insurance.

If given the choice between two otherwise identical cars, where one has been in an accident, the consensus would be to choose the car that has not been in an accident.  Yet the “diminution of value” after an accident is difficult to prove and is sometimes more perception than reality.

Courts have consistently ruled that loss of value is not payable if the damaged property could be repaired to its pre-accident condition without any loss in value.  In cases where a vehicle cannot be repaired to its previous condition, the owner may accept the cost of repair, an amount for loss of use, plus the value of the vehicle before the accident minus the value after the accident.

Having a vehicle totaled can be disruptive and costly, so ask your insurance representative if you are adequately covered in case of a major accident – and drive safely.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.