No matter how careful you are as a driver, accidents can happen. When they do, you want your vehicle repaired as quickly as possible – if it can be repaired, that is. Unfortunately, there is always the possibility of your vehicle being deemed a total loss, which creates a whole different set of circumstances for you from a car insurance perspective.
Your insurance company will declare your vehicle a “total loss” when the repair cost exceeds its actual cash value or when the car is damaged beyond the point of repair. Depending on where you live, state law may determine the basis on which a car can be declared a total loss.
A number of factors go into determining whether your car is a total loss, including the cost of repairs. Your insurer also looks at the cash value of your vehicle based on its mileage, make, model and the state of the resale market. It will also determine if your car has any salvageable parts that could be resold (this is called its salvage value).
Some states require a car to be written off if the cost of repairs exceeds a certain percentage of its actual cash value (ACV). This is called a Total Loss Threshold (TLT). In other states, the declaration of a total loss is based on the cost of repair and the salvage value compared to the ACV of the vehicle. This is called a Total Loss Formula (TLF).
The Total Loss Threshold (TLT) is the point at which an auto insurance company should consider a car to be totaled. This threshold is different for each state that mandates a TLT, and only about half of the states do so. In Oklahoma, for example, the TLT is set at 60% of a vehicle’s fair market value, while in neighboring Texas the threshold is 100%.
In states that do not have a total loss threshold, insurers use what is called a total loss formula (TLF) to determine whether a vehicle should be declared a total loss. The TLF is calculated by adding the cost of repairing the vehicle to its salvage value. If the total amount exceeds the actual value of the car, your insurer will declare the car as a total loss.
In the event that your car is badly damaged, you will need to submit a claim to your insurance company to begin the process of declaring a total vehicle loss. Due to the steps involved, these types of claims may take longer to process than a standard collision claim.
Once you have initiated the claims process by contacting your insurer, you will need to:
- Entrust your vehicle to a bodybuilder approved by your insurer. A mechanic will inspect your vehicle and provide your adjuster with a full report of its condition and repair costs. The adjuster will use this information to determine if your vehicle should be declared a total loss or if it can be repaired.
- Gather your vehicle papers. This includes your vehicle title and sales receipt. The Department of Motor Vehicles should be able to provide you with a copy of the title if you cannot find yours. If your car is financed or leased, your lender or lessor will have title.
- Accept or decline your insurance settlement. If you think the amount is not fair, you may be able to negotiate or dispute it. But if you’re happy with the settlement, you’ll need to accept it in order to move forward in the process. Remember: if you have an outstanding loan or lease, the settlement money will go to the lien holder.
- Remove all personal items from your car. Don’t forget to look under seats, in door and seat map pockets, and other lockers and bins, as well as in your trunk and glove box.
- Return the vehicle to the insurance company. You will need to return your car, including keys and documents such as title, if you have it. The insurer will take possession of the vehicle and move it to a storage location.
- Start shopping for a replacement vehicle. You will also need to ensure that your new car is properly insured.
In the event that your car is declared a total loss and the vehicle has been leased or financed – as opposed to outright ownership – it is the loan company or leasing agency that holds title to the vehicle. who will receive the claims payment. If the settlement amount is more than you owe, you will receive the difference. If it’s less than what’s owed, you’ll be responsible for the remaining debt.
You can, however, avoid such financial hardship with a gap insurance policy. Gap insurance will cover the difference between the current value of your vehicle (this is what your standard policy will pay to your lender) and your remaining balance. Gap insurance is generally required if you are renting a vehicle. If you financed the car with a down payment of less than 20% or if the term of your loan is 60 months or more, your lender may recommend that you purchase gap insurance.
You may be able to purchase gap insurance from your car dealership, through your lender, or from some (but not all) insurance companies. Adding collision and comprehensive coverage gap insurance is a minimal expense. For many people, that adds about $20 a year to an annual premium, according to the Insurance Information Institute.
Insurers settle claims based on the actual cash value (ACV) of the car, which is the replacement cost minus the depreciation of the vehicle at the time of the total loss. The ACV is the price your car could be sold for, which is less than the replacement cost. Vehicle wear, mileage, and any damage from previous accidents also help determine its ACV. So if an insurer pays you the AGV for your car, expect it to be less than what you originally paid when you got it.
You can always contest the reimbursement from your insurer. However, you will need to provide proof of why you believe the settlement is unfair. This means using a reliable source such as Kelley Blue Book or checking local car dealerships to find out what prices cars like yours are selling for in your area. Once you have determined the value of your vehicle and determined that the settlement is too low, share the information you find with your adjuster and see if it is possible to negotiate a higher payment amount.
If you own your vehicle, the settlement payment from your insurer will be paid directly to you. On the other hand, if you are still making payments on your vehicle at the time of the accident, those funds will go to your finance or leasing company.
Insurance experts recommend that you continue to make your monthly payments until the settlement is complete, as you are technically financially responsible for the vehicle until your loan is paid off.
Once your car has been declared a total loss and a settlement has been agreed, your insurance company will take possession of the vehicle in most cases. Depending on the law of the state where you live, you may be able to keep the car or buy it back from your insurer in order to fix it and continue driving it. But before you can do that, the car will need to be inspected, registered, plated and insured in the state you live in before it can be legally driven. Talk to your insurer and contact your local Department of Motor Vehicles to find out what requirements you must meet in order to redeem your totaled car.
If you just want to keep your car totaled, but not drive it, you could potentially sell the usable parts or use them for another vehicle. You can also sell the damaged vehicle as is to a junkyard or donate it to charity.
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