Car accidents are stressful, but finding out that your car is totaled can make the situation that much more difficult. This is especially true if you love your car or have special memories attached to it.
If you’re in an accident and your car is badly damaged your insurance company may declare your vehicle a total loss, but what is a total loss, exactly? And how does your car insurance company decide the value of your vehicle in a total loss claim?
What is a total loss?
If your vehicle cannot be safely repaired or the cost of the repairs would be more than the car is worth, your insurance company will likely declare your car a total loss. This means the insurance company will pay you the value of your vehicle and take ownership of the car, likely selling it to a salvage buyer for scrap parts.
How is a total loss determined?
To determine the value of your car, your insurance company will use the actual cash value (ACV) of your vehicle. This information is based on the pre-collision value of your car and is not necessarily the same as your car’s book value, so don’t be surprised if the number is different from what you found online. You can negotiate with a claims adjuster if you feel like they significantly undervalued your vehicle, but there is no guarantee they will change their decision.
Once they have determined the value of your car, they compare it to the amount of money it would cost to repair your vehicle. If it costs more to repair your car than the ACV, your insurance will declare the car totaled. Your car may also be declared totaled if it can’t be repaired properly or if your state has restrictions on when a car must be declared totaled.
Some states use a total loss threshold, which is a point at which an insurance company must declare a car totaled. For example, Indiana requires insurance companies to declare a car totaled if the repair cost is 70% or more of the ACV of the car. Other states use a total loss formula, which is basically repair cost + salvage value > ACV. How and when your car must be declared a total loss is based on these state requirements.
How are you paid for a total loss?
If you were not at fault in the accident, the other driver’s property damage liability coverage will pay for your total loss. If it was an at-fault accident or you were the victim of a hit and run accident, your collision coverage would pay for your total loss. If you don’t have full coverage and the other driver has low levels of property damage liability coverage (or, worse, doesn’t have insurance at all) you will have to pay to replace your car out of pocket.
Who gets paid if your car is declared a total loss? That depends on whether or not you are financing your car.
If you own your car outright
If you don’t have any car loans, the insurance company will pay you directly. If you have a deductible it will be applied to the payment before it is sent. For example, if your totaled car is worth $4,000 and you have a $500 deductible, you can expect to receive a check for $3,500 from the insurance company.
If you have a car loan
If you have a loan on your vehicle, your insurance company will send any payment directly to your lender. If your car is worth less than the value of your loan you will still be held responsible for the difference. For example, if your totaled car is worth $4,000 and you have a $500 deductible, your insurance company will send a payment of $3,500 to your bank. However, if you still owe $5,000 on your loan you will owe your bank $1,500 for a car you no longer own.
What to do when you still owe on a totaled car
If the payment from your insurance company is less than you owe on your car, you are responsible for the remaining balance. You can simply keep making payments on your loan if you don’t have any other options, but there are things you can do to protect yourself from owing money on a car that no longer exists, such as:
Gap insurance - Sometimes referred to as a total loss policy or total loss insurance, gap insurance is a policy add-on that will pay off your loan if your car is a total loss. Your lender likely requires you to carry gap insurance if you are financing your vehicle
Negotiate your payment - As mentioned above, it is possible to negotiate the amount you receive on a total loss if you have some proof that your car is more valuable than the insurance company thinks it is, like if you can find a higher book value on sites like Kelley Blue Book or Carfax
Salvaging your car - Sometimes it is possible to get your car back from the insurance company if it has been totaled. If this happens the company will subtract the salvage value of your vehicle from your payment, but if your car still runs and you are able to make repairs yourself it might be worth it to you to keep the car until your loan is paid off
Why your total loss payoff is less than your loan
It can be confusing to find that you owe more than your car is worth. How can that be possible?
The biggest contributor to this problem is that cars depreciate in value very quickly, losing up to 20% of their value in their first year. If you suffer a total loss 12-14 months after purchasing a car you could easily find yourself with a significant amount left on your loan but a noticeable depreciation in the value of your car. Basically, you may have paid $25,000 for your car a year ago, but by the time you total it it’s only worth $20,000.
You may also be paying for more than the cost of your car in your loan. If you rolled over a loan from a previous car or had an extended warranty added to your loan, you increased your loan without adding any physical value to the car. If you suddenly find yourself with a total loss vehicle, your payment from the insurance company wouldn’t include any of the additional things you added to your overall loan amount.
If you’ve been in other accidents before or your car was otherwise damaged you could also be dealing with diminished value, which is another way of saying that your car is worth less because of previous damage, even if it was completely repaired.
How to get a new car after a total loss
Each insurance company will have their own process, but there are several basic steps to filing a total loss claim, including:
Report the claim
Schedule a damage inspection and reserve rental car if necessary
Review and finalize the settlement
Find your vehicle title
Collect your belongings and release your vehicle
Sign paperwork, turn over title, and receive payment
A car insurance claim can take a long time to settle, but now that you’ve gone through these steps, how do you get a new car? If you received a payment from the insurance company you can deposit it into your account and go shopping for a new car. If your payment went to your loan company you can find a new car and take out another loan. If you choose to get another car loan you may want to purchase gap insurance in case you face the same situation again in the future.