The aftermath of a car wreck or a damaging hail storm can leave you feeling helpless and confused. Besides worrying about how to carry on with your day to day life, you now have to work with you insurance company to determine the fate of your car. You may start asking yourself questions like “what exactly is a totaled car?” or “what criteria does the insurance company use to determine if a vehicle is a total loss?” Read on as we provide you answers and information help you navigate those turbulent times.
Let’s start by learning the language. Insurance companies use a variety of terms and formulas to aid in the decision of declaring a vehicle to be a total loss. Below are a few examples:
Actual Cash Value (ACV): the result of subtracting depreciation from the actual car replacement cost. To give you a general idea, vehicles depreciate approximately 15-20% each year during the first 5 years.
Salvage Value: represents the estimated resale value of the car parts (engine, transmission, tires, electronic components, wheels, body parts, etc.) and scrap metal.
Cost of Repair: as the name implies, this is the estimated cost to bring the car back to its fully operational condition. The cost of repair has a direct relationship with the vehicle damage level.
Hidden Costs: think of this as the unseen damages that lead to unexpected repairs. In a similar fashion to repair costs, this value is highly dependent on vehicle damage.
Total Loss Ratio: also known as “damage ratio” is the result of adding the cost of repair with the hidden damages and dividing it between the ACV. The result is expressed as a percentage.
Total Loss Threshold (TLT): some states command a minimum total loss ratio in order to declare a vehicle totaled. This value is expressed as a percentage and can vary from one state to the other.
Total Loss Formula (TLF): is the result of adding the cost of repair, the hidden costs, and the salvage value and compare it with the actual cash value. If the result is greater than the ACV the vehicle can be declared a total loss.
Now that you have a better understanding of the basic terminology let’s apply that knowledge.
How to Determine If a Vehicle is Totaled
A vehicle is considered a total loss when the cost to repair the vehicle exceeds its value. There are several factors in play including whether the vehicle can be repaired safely, the insurance company’s standards and individual state laws.
Below is a sample vehicle to illustrate how insurance companies calculate whether or not a vehicle is a total loss:
- Vehicle: 2016 Ford F-150 Super Crew Cab
- Replacement cost: $43,000
- Actual Cash Value (after depreciation): $18,500
- Cost of Repair: $11,000
- Hidden Costs: $1,500
- Salvage Value: $4,500
The first step of the calculation is the vehicle total loss ratio. The total cost of repairs consists of the repair cost plus any hidden damages or costs:
|Cost of Repairs||$11,000|
|Total Cost of Repairs||$12,500|
Total Loss Ratio: $12,500 ÷ $18,500 = 0.675
The damage ration is then calculated by dividing the total cost of repairs by the replacement cost of the vehicle. In this case, the damage ratio is 67%. This damage ratio is now compared with limits set by the insurance company and local legislation. For instance, the state of Florida has a Total Loss Threshold (TLT) of 80% which means this vehicle is not considered as a total loss under those laws. However, if the internal threshold of the insurance company is lower, say 65% then the car will be declared totaled.
As mentioned before, each state has its own criteria. For example, the state of Delaware works with the Total Loss Formula (TLF) instead of the damage ratio. Below is the TLF calculation for our vehicle:
|Cost of Repairs||$11,000|
Since the 2016 Ford F-150 ACV is $18,500, the vehicle is not declared a total loss according to the state of Delaware.
Other Factors to Consider
The human factor: although there are formulas and ratios to help determine damage, these calculations are still susceptible to human discretion.
Natural disasters: many insurance companies establish that vehicles damaged by a flood or other natural disasters are automatically declared as a total loss.
Unrepairable Vehicles: there are situations where the problem is not the amount of the repair cost but the impossibility of repairing the car.