Each year, auto insurance companies declare millions of vehicles to be "totaled," meaning it's not worth the cost to repair them. It doesn't matter whether the car was damaged in a collision, during a flood or after a thief's joyride went bad.
It's hard to argue with such an assessment if your car was wrapped around a telephone pole or the gas tank exploded. But what if the damage was more cosmetic, such as major dents on the roof and hood from a hailstorm?
A vehicle is considered a total loss if the insurance company determines that the total cost to repair your car to pre-accident condition, plus fees for storage, salvage and a replacement rental car (if included in your policy), is more than a certain percentage of car's retail value. Insurers set their own allowable percentage, within state-mandated guidelines (typically around 60 to 75 percent), and use their own formulas to determine a car's value and estimated repair costs.
Thus, if your $4,500-valued 2002 Honda Civic sustains $1,800 worth of damage -- moderate bodywork and repainting these days -- it might be deemed totaled, even though the engine still runs fine. On the other hand, a late-model Mercedes could sustain far greater damage and still be considered salvageable.
What's worse, if the accident was your fault, or you must otherwise tap your own insurance (e.g., it was caused by an uninsured driver), you would only receive that $4,500 minus your deductible. Good luck finding a comparable car for that amount.
Other big losers when a car is totaled are people still paying off their auto loan. Since the lender technically owns the car, they'll get first crack at any insurance payment; and you'll still be responsible for paying off the loan balance.
As a preventative measure, you may want to purchase gap (guaranteed auto protection) insurance if you owe more than the car's retail value -- or if you rolled past debt into the new car loan balance. Gap insurance will pay the outstanding loan balance if your car is totaled or stolen. Most insurers will let you add gap insurance at any time.
Here are a few additional points you should know about when and why a car is declared totaled, and precautions you can take ahead of time to lessen the impact:
- Make sure the insurance appraisal includes the value of all extra features and aftermarket accessories, like heated seats, custom wheels or an upgraded audio system.
- Be prepared to show documentation of any major repairs or upgrades you made that might boost the car's value -- say you recently replaced the engine or bought new tires.
- Do your own research. Use independent pricing sites like Kelly Blue Book, Edmunds or NADAguides.com to determine your car's worth, factoring in its mileage, added features and overall condition before the accident.
- If your estimate is far off from the proposed settlement amount, ask whether your policy includes the right to hire your own appraiser for a second opinion. Most states have a procedure for settling such disputes. Understand, however, that no matter the arbitration outcome, you'll still have to pay your appraiser, and likely, a portion of arbitration costs.
- Make sure the insurer's totaled car value includes estimated sales tax to replace the car, as well as registration and title costs, since you wouldn't have incurred these costs if you didn't need to replace the car.
Some people decide they want to keep their totaled car, whether because they can live with the damage, it has sentimental value or they simply can't afford a replacement vehicle. Before you pursue that option, make sure you understand the potential downsides and how your state's Department of Insurance regulates totaled cars:
- You may be allowed to keep the car and repair it yourself, but the insurer will deduct from its payment the salvage amount it could have gotten, plus your deductible if the accident was your fault.
- Know the full extent of damages and what they'll cost to repair. Your mechanic brother-in-law may cut you a great deal, but if he uncovers hidden problems, you'll be stuck. (That's why insurance companies are so cautious.)
- You'll have to get a "rebuilt title" from the DMV certifying that the car is roadworthy. Always check first because some states don't allow rebuilt titles.
- It may be difficult to resell your rebuilt car, since many people won't risk buying a car that's been in a major accident. Plus, some insurance companies won't insure them or offer only limited coverage.
- Factor in replacement rental car costs, if needed, while the vehicle is being repaired.
Let's hope your car is never totaled, but it pays to know in advance what to do if it is.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.