What is Total Loss and What Does It Mean for Your Car Insurance?

What is Total Loss and What Does It Mean for Your Car Insurance?

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A damaged car is declared a "total loss" when the estimated cost of making repairs exceeds the actual cash value of the car. This type of claim is slightly different from other more minor claims, and requires a bit more effort on the part of the insured. Here's what you need to know about car insurance claims associated with a total loss.

Total loss claims and actual cash value

To get an insurance payout for a car that is a total loss, you must have either property damage liability (PD) or comprehensive or collision insurance in your policy.

PD is mandatory in every state, but the only way to receive a payout from it is to file a claim against another driver’s PD. For you to get compensation from PD, the other driver will also need to have been negligent in the accident.

The easiest and most sure way of getting payment for a total loss is through your own insurance company, which you can do through collision insurance. With collision claims, it does not matter whether you were at fault — though you will have to pay your deductible before the insurer will cover the claim.

Assuming you have these types of coverage in place — and that you are not injured or busy seeking medical care—your first step after the damage occurs would be to file a claim with your insurer as you would any accident. A claims adjuster will come to inspect the vehicle to assess the damage. It is here where the total loss designation will be made.

If the adjuster determines the cost to repair the damages to the car is more than it is worth to them—that is, repairs exceed the actual cash value, or ACV, of the car—then it is considered a total loss. What constitutes a total loss is not always simple, and how it's determined actually varies between states. Some states go by a "total loss threshold" (TLT), where damage only needs to exceed a certain percentage of a car's value to be determined a total loss.

About half of states use what is called the "total loss formula" (TLF), where if the sum of the cost of repair plus the salvage value of the car exceeds the car’s ACV, then it is considered a total loss.

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For example, if you were to crash a Toyota Camry valued at $4,800 in Oklahoma, at least $2,880 (60%) of damage would qualify the car as a total loss. If the collision happened in Colorado, however, there would need to be at least $4,800 worth of damage to be considered total loss.

What happens if your car is declared a total loss?

If you agree with your car being a total loss, here are a few things that auto insurance companies such as Geico and Progressive will require you to do:

  • Remove your license plates and personal items
  • Leave the key with the claims adjuster
  • Send in any additional keys
  • Fill out the associated paperwork
  • Contact the leasing company if you lease your car

The quicker you do all of these things, the faster and smoother the process will be. After a total loss designation, the car is usually taken by your insurance company, which then notifies the DMV that the car has been totaled. Depending on the state, the car will be declared "salvage," and any buyers who specialize in salvaging vehicles can purchase the car from the company.

If you want to keep the totaled car — for example, to repair it or for sentimental reasons — your company can allow it. If you go that route, you'll get less cash. Your payment will be the ACV minus the value of the car as salvage. Though totaled, a salvage car will still have some value in its parts and potential to be restored. Geico tells customers to also be aware that some states prevent drivers from keeping total loss vehicles, while others will require you to obtain a certificate that states the car is salvage.

If you disagree with it being a total loss: You may try to negotiate with the claims adjuster. For example, you might make a case that they did not fully account for any modifications you made. You will be required to submit documentation and any proof showing the car is actually worth more than previously determined. If you feel you are not adequately compensated, you may bring the case to a lawyer to fight on your behalf.

The amount you'll be compensated for a total loss is ACV, the same metric which is used to determine if the car is a total loss. The ACV of the car is determined by its pre-loss market value, less depreciation from when it was new. Ultimately, the ACV of your car will be determined by its wear and tear, and age along with other factors your insurer deems relevant. It is very different from the number you would find on Kelley Blue Book or edmunds.com. Most large insurers have their own method of determining ACV.

Once you agree to the value, the insurer will pay you that amount, if you owned the car. If your car is leased or financed, then the compensation goes back to the leasing or financing company.

If you total a leased or financed car, there is a good chance there is a decent amount left to pay. While the insurance company will pay you for the value of the car, it is very likely the value has depreciated, and does not reflect the value of the car, which you took a lease for. If you drive a leased vehicle, you should consider taking out gap insurance, which would cover you for any remaining balance in a lease.

Mark is a Senior Research Analyst for ValuePenguin focusing on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.