How Auto Insurers Calculate Total Loss Values

When a car is damaged in an accident, the insurance company will determine its value to decide whether to repair it or declare it a total loss. This process can be frustrating for customers, who often receive a lower payout than they expected. The valuation methods used by car insurers are usually kept confidential, but they typically consider factors such as the car's age, make, model, mileage, condition, and depreciation. This is known as the actual cash value (ACV) of the car, and it is used to calculate the total loss value, which is what the insurer will pay the vehicle owner. If customers disagree with the insurer's valuation, they can appeal the decision and negotiate a higher value by providing evidence of the car's worth, such as recent sales data of similar vehicles or independent appraisals.

Actual Cash Value (ACV)

When a car is involved in an accident and is deemed a total loss, the insurance company will pay the car owner the ACV of the vehicle. A vehicle is considered a total loss if the cost to repair it exceeds a certain percentage of its value, which can range from 51% to 80%. This threshold can be set by the state or the insurance company.

To calculate the ACV of a car, insurance companies consider various factors, including the year, make, and model of the vehicle. They also take into account depreciation, which is influenced by factors such as mileage, wear and tear, accident history, and the vehicle's age, make, and model.

It is important to note that the ACV of a car is negotiable, and car owners can dispute the insurance company's valuation if they believe it is inaccurate. They can gather evidence, such as maintenance records, repair receipts, and information about comparable vehicles in their area, to support their claim for a higher ACV.

Replacement Cost Insurance

When a vehicle is damaged in an accident, insurance companies will often declare it a "total loss" if the cost to repair the vehicle is higher than its actual cash value (ACV). The ACV is the amount of money that the insurance company determines someone would reasonably pay for the car, assuming the accident had not happened. This amount is often a fraction of what is necessary to replace the vehicle with a comparable one.

If you total your car shortly after buying it, you could wind up with negative equity in the car, depending on your financing deal. This means that the insurance payment may be less than what you owe on the vehicle. In this case, you may need to take out a loan or use your own funds to purchase a replacement vehicle.

Some insurance companies offer new car replacement insurance, which can provide peace of mind when driving a brand-new vehicle. This type of policy will help you recoup the full value of the car—not the depreciated value that a standard insurance policy would typically offer. New car replacement insurance usually requires that you also carry both collision and comprehensive coverage.

Total Loss Threshold

A total loss threshold is the point at which an insurance company is required to declare a car a total loss. This threshold is usually determined by state law, but in some states, it is set by the insurance company. The total loss threshold is the line between a damaged car that is worth repairing and a car that is too damaged to be worth saving.

There are two ways to calculate a total loss threshold: a simple percentage threshold and a total loss formula. The simple percentage threshold is the percentage of a vehicle's actual cash value (ACV) that repairs need to meet for the vehicle to be declared a total loss. For example, if a car is worth $10,000 and the state has a simple percentage threshold of 75%, an accident that causes $7,500 or more in damage would make the car a total loss.

The total loss formula (TLF) compares a vehicle's ACV to the total of its repair costs and its salvage value. Using the same $10,000 car as before, if the repair costs are $7,500 and the salvage value is $1,000, the car would not be considered a total loss because the total cost of repairs plus the salvage cost is less than the ACV of the car.

Some states use a percentage threshold to determine a total loss because driving a damaged car can be dangerous, and there is a possibility of hidden damage going undetected. By using a percentage threshold, states can prevent potentially damaged vehicles from being on the road.

The total loss threshold varies by state, and every state has its own rules about when a car should be declared totaled. In some states, it doesn't take much damage to total a car, especially if the vehicle is older. For example, California uses the total loss formula, while Texas sets its threshold at 100%, and Florida sets its threshold at 80%.

Independent Appraisal

An independent appraisal is one of the methods insurance companies use to determine the value of a total-loss vehicle. This is when insurance companies hire independent appraisers who specialise in evaluating damaged vehicles. These appraisers assess the condition of the car, review comparable vehicles, and provide a valuation based on their expertise.

The Appraisal Process

The appraisal process can be initiated by either the policyholder or the insurance company, and is usually done in writing. The two parties will each choose an impartial appraiser, who will then work together to select an umpire, or third appraiser. The role of the umpire is to render a binding decision when the two appraisers fail to agree on the value of the property or the amount of the loss.

When to Invoke the Appraisal Clause

The Appraisal Clause should be invoked when there is a significant difference between the insurance company's settlement offer and the amount the policyholder believes they are owed. Smaller differences are rarely worth the effort, as any proceeds gained will likely be spent on fees to complete the process.

Choosing an Appraiser

It is important to choose an appraiser who is impartial, experienced, and well-versed in the total loss appraisal process. An appraiser unfamiliar with the Appraisal Clause relating to a totalled vehicle can cause significant delays and even protracted litigation.

Agreed Value vs. Stated Value

Agreed value and stated value are two forms of valuation that allow you to insure items that most standard policies don't cover. They are often used for classic, antique, or modified vehicles, as well as other unique and high-value items like jewellery. While both types of valuation involve the insurer and the owner agreeing on the value of the item, they differ in how this value is determined and how it affects the payout in the event of a claim.

Agreed Value

Agreed value is a type of coverage where you and the insurer agree on the value of your item when you take out the policy. This value is guaranteed to be the amount you receive in the event of a covered loss, regardless of depreciation. Agreed value policies are ideal for items that are hard to value or replace, such as classic cars, collector cars, and jewellery. It is also suitable for items that are appreciating in value due to age or rarity.

To determine the agreed value, owners usually have to provide documentation, such as receipts for modified parts or upgrade receipts, and may need to have the item appraised. The insurer may also conduct its own assessment. Agreed value policies are typically more expensive than standard policies, and some insurers may set additional terms and conditions, such as capping the total miles driven in a year for vehicles.

Stated Value

Stated value, also known as stated amount, is a type of coverage where the owner states the value they believe their item is worth. This value may be based on documentation, such as receipts for modified parts or upgrades, and the owner may need to provide proof to support their stated value. The insurer will consider this stated value but is not obligated to pay this amount in full in the event of a loss. Instead, the payout will be based on the lower value between the stated value and the actual cash value (ACV) of the item at the time of the loss.

Stated value policies are often used to lower insurance costs by reducing the expected value of the item. They are ideal for modified vehicles, such as commercial vans and trucks, and vehicles with specialised parts, such as refrigeration systems or plows.

The key difference between agreed value and stated value is that agreed value guarantees a payout for the full agreed-upon amount, while stated value does not. With stated value, there is a chance of a lower payout because the insurer pays the lesser of the two valuations (stated value or ACV). Agreed value provides greater peace of mind, while stated value can help lower premiums.

Frequently asked questions