How do Insurers Determine if a Vehicle is a Total Loss?

Auto insurance can be tricky to understand, particularly regarding 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 many relationships to the insured value of your vehicle. Here are some factors that determine the vehicle’s insured value and how an insurer determines if a vehicle is a total loss after a claim.

Depreciation Plays a Significant 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 car’s value instead of the amount of the loan or the amount you paid. With almost all vehicles, depreciation reduces the market 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 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 five years old. Many vehicles have depreciation 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 five 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. It isn’t uncommon to find more damage when the body shop takes things apart to replace damaged parts.

Many insurers set a cutoff percentage to determine a total loss. For example, say your vehicle’s current value was $14,000. You get into an accident, and the damages will cost $11,000. Your insurer has set their cutoff to 70%, which means you are over the cutoff, and the vehicle is a total loss.

A Total Loss can still be a Paid Claim.

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

Are you interested in Replacement Coverage to protect the value of your vehicle? Start a quote to see if you’re eligible! Is your vehicle a couple of years old? Contact one of our advisors and ask if Optiom Replacement insurance may be a good fit for you!

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