Is Your Car a Total Loss? Here's How Insurance Companies Decide

Many years ago, I was in an accident and my car was badly damaged. So badly, in fact, that the insurance company declared the vehicle to be a total loss. That means they decided it was not worth repairing and, instead of paying to make fixes, they paid the actual cash value of the vehicle instead.

My car was clearly beyond repair, but that's not necessarily always the case, which raises the question: How do insurance companies determine if a car is totaled? The answer is that both policy language and state law can play a role in this choice.

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Key takeaways

Insurance companies have the flexibility to decide when a car is a total loss, and they usually specify how this is determined in the policy contract.
States typically require a salvage title when a vehicle has been in an accident and declared a total loss, and some states have a specific definition of "total loss" for these purposes.
Typically, if repairs exceed a certain percentage of the cost of the vehicle, then it will be declared a total loss — and may need a salvage title.

Total loss formula

First things first — the term "total loss" can be used in two different contexts.

Determining if an insurance company is going to pay for repairs or if the car is beyond repair. If it's beyond repairing, the insurer will total the car and pay its actual cash value instead of paying for repairs.
Determining if a car has a salvage title or not. A salvage title lets the public know that an insurance company has declared the car a total loss, so it's not roadworthy anymore. The car has significantly less value. Usually, auto loan lenders won't allow someone to borrow to buy a car with a salvage title.

Insurance companies can set their own rules and decide when a car will be declared a total loss for insurance purposes.

However, when it comes to determining if a car will have to get a salvage title because it is a total loss, some states leave it up to the insurance company to define what a total loss is, and others have a definition written into the law. If a state has it written into the law, the insurer can have a broader definition of what's considered a total loss, but not a narrower one.

Insurance company total loss formulas

There are three reasons a car could be declared a total loss by the insurance company.

It's so badly damaged that it physically can't be repaired. In this case, it's a constructive total loss. The insurer couldn't pay for repairs even if it wanted to.
It could be repaired, but it wouldn't make financial sense. This is the case when the cost of repairs and other expenses, like diminished value and rental car coverage, exceed the car's actual cash value minus the cost of selling it for salvage.
The damage is so extensive that the state says it has to be declared a total loss. This is the case only in states that have a specific legal definition of total loss that doesn't just defer to the insurance company to make the choice.

Since insurers set their own rules in many cases, the specific formula can vary. For example, some insurers will not repair a vehicle if the cost of doing so exceeds 51% of the actual cash value while others go all the way up to 80%.

Insurance companies outline their formula in their policy declarations page, so you can find out what the rules are for your insurance plan. It may include language like: "The limit of liability is the actual cash value of the property or the amount needed to repair it."

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State total loss formulas

State laws also define what a total loss is. Remember, these laws determine if a car must be considered a total loss for purposes of determining if it must have a salvage title, but if a specific definition is set by state law, insurers also have to abide by it.

Some of the states leave this decision entirely up to insurers, like Delaware. Others have a specific formula set by state law for when a car must be declared a total loss for purposes of getting that salvage title. Under M.S.A. § 168A.151(b)(c)(3) in Minnesota, the state requires that a late model vehicle (one newer than 6 years old) or a high value vehicle (one priced over $5,000) must be declared a total loss if the repair cost exceeds 80% of its value.

Even in Minnesota, where the state sets this specific definition, insurance companies can still set their own rules. However, those rules can only be more restrictive, not less restrictive, than the state's rule.

For example, an insurer could specify that cars will be declared a total loss once the cost of repairs exceeds 51% of the vehicle's actual cash value — but could not declare that a car will be considered a total loss only if repair costs exceed 90% of what it is worth.

Fair market value

When determining if a car should be totaled or not, it's very important to know the car's actual cash value. That's because insurers — and state laws — determine if a vehicle is worth repairing or not by comparing the cost of repairs to the car's actual cash value.

A car's actual cash value is the amount it was worth in its current condition before the accident, minus depreciation (or the reduction in value resulting from wear and tear). This is not what you paid for it, but rather what it would sell for based on its condition, mileage, driving history, and other similar factors. Your insurer may consider not just its condition but the cost of similar cars in your area to get an idea of what the ACV is.

ACV is very similar to fair market value, which refers to what you could sell the car for on an open market.

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How do insurance adjusters determine damage?

Insurance adjusters play a key role in determining if a car is totaled because they have a lot of responsibility for determining the extent of the damage to a vehicle. Adjusters typically come out to see your car and inspect the damage.

Insurance adjusters often want to pay as little as possible to save the insurance company money, so their estimates may be lower than the amount a body shop quotes for repairs.

To reduce costs, adjusters may estimate the price of repairs using third-party or after-market parts if these cheaper options are allowed under your policy language.

How much money will insurance pay for a totaled car?

While you should see insurance cover your car if the vehicle is totaled, you should know that you will only be paid the actual cash value or the amount of the car's worth. This could be less than the money you owe on an auto loan, and you may have to pay the difference unless you have GAP insurance.

FAQs

How long does it take for insurance to determine if a car is totaled?

The timeline for determining if a car is totaled can vary depending on how soon an adjuster is sent and how clear-cut it is that the damage is too extensive or too expensive to fix.

Is it better to have a car totaled or repaired?

Often, when a car is totaled, the money the insurer gives you is not enough to buy a comparable car since you are paid the car's actual cash value (what it's worth after depreciation) and not the replacement cost. As a result, some people would prefer to have the vehicle repaired.

However, if the car has been in an accident, that can reduce its value — and sometimes leave people feeling less safe in the car. So, other people would prefer the car to be totaled. There's no one right answer, and it's largely out of your control anyway since the insurer determines what's best.

Who gets the insurance check when a car is totaled?

If a car is totaled, the insurance company sends an insurance check. If you own your car free and clear, this check will come to you. If the car is leased, it will go to the leasing company, and if the car is financed, it will go to the financing company.

If the check to the leasing or financing company is for an amount larger than what you owe, you should be refunded the difference.

What do you do with a totaled car?

Usually, the insurance company will keep the totaled car. If you want to keep it for some reason, such as because it has sentimental value, you'll need to pay the insurer the cost of what it was worth.

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Bottom line

It's important to understand how insurance companies determine if your car is totaled so you will know what to expect after a serious crash that damages your vehicle. You should also be aware you'll have to pay back the full loan even if your car is totaled — so if the insurer pays less than what you owe, you're in financial trouble unless you have GAP insurance coverage.

Make sure you understand your policy terms and the coverages you have in place so you can make an informed choice.

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