totaled off car

How do insurers determine if a vehicle is a total loss?

Auto insurance can be tricky to understand, particularly when it comes to the insured value of your vehicle. The amount you paid for your vehicle and the amount you owe on your vehicle may or may not have much relationship to the insured value of your vehicle.

Here are some factors that determine the insured value of the vehicle and how an insurer determines if a vehicle is a total loss after a claim.

Depreciation plays a big role

On average, vehicles depreciate by 20% to 30% in the first year. Depreciation slows after the first year but during the first five years of ownership, it isn’t unusual to see the value of your vehicle drop by up to 60%.

One important thing to remember is that you’re insuring the value of the car as opposed to the amount you borrowed or the amount you paid. With almost all vehicles, depreciation reduces the insured value each year.

For example, a car that costs $35,000 new might be worth $28,000 after a year. In most cases, insurers base insured value on the value of comparable vehicles in your area. Depreciation rates can also vary by make and model. Some vehicles depreciate faster than others.

Calculating a total loss

Newer vehicles are less likely to be a total loss because the insured value is higher. Instead, let’s look at a vehicle that’s 5 years old. Many vehicles have depreciated by up to 60% at this point, meaning that a $35,000 vehicle (when new) might have an insured value of about $14,000 when it’s 5 years old.

While the insured value is probably around $14,000, an accident that causes less than $14,000 in damage might still cause the vehicle to be a total loss. This is because the costs of repairs are an estimate. It isn’t uncommon to find more damage when the body shop starts taking things apart to replace damaged parts.

Many insurers set a cutoff at 70% to 80% of the insured value to determine a total loss. In effect, they’re pricing in the cost of overruns and hidden damage. With an 80% cutoff, a vehicle insured for $14,000 might be a total loss at just $11,000 in damage. For insurers that set the cutoff closer to 70%, the vehicle might be a total loss with only $10,000 in damage.

A total loss can still be a paid claim

When a car is totalled, it doesn’t mean you’re out of luck. It simply means it isn’t economical to invest money in the repair – at least from the insurer’s standpoint. In most cases, if you’ve purchased coverage for the risk, you’ll get a payout on the claim. However, the insurer will probably keep the damaged vehicle. In exchange, you’ll be paid for the insured value of the vehicle minus your deductible. Many times, this payout is enough to get you started with another new or used vehicle, although you may have a car payment again.




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