Most consumers are confused on when, and whether a vehicle involved in a collision is considered to be “total loss” for first-party insurance purposes. Just because the frame is bent or other seemingly minor and hidden damage occurs some older, functioning automobiles are being “totaled” much to the dismay of car owners. Even for insurance professionals who are going through the network of rules and regulations regarding “totaling” a vehicle under a policy is stressful. But it needn’t be all that complex!
A car is declared a “Total Loss” when the cost of repairs would exceed the actual cash value of the car. As this type of claim is slightly contrastive from other more minor claims, it requires a bit more effort on the part of the insured. At times, it is not always practical to repair a vehicle, even if the cost of repair is less than its Actual Cash Value. Insurance companies will typically consider such a vehicle to be a total loss, even though the repairs are only 75% of ACV.
The criteria for deciding when a car is a total loss and when it can be repaired vary from insurance company to insurance company and might even be dictated and controlled by state statute or regulation. In deciding whether a vehicle is totaled or not, insurance companies will calculate the total loss ratio (cost of repairs/actual cash value) or the damage ratio. This ratio is then compared to limits set either internally within the company and/or regulated and established by state law. It is also sometimes referred to simply as the damage ratio. Some states dictate how high this damage ratio needs to be (Total Loss Threshold (TLT)) to be able to declare a vehicle a “total loss” and be eligible for a salvage title or certificate. To total a vehicle, the total loss ratio must exceed the established percentage. If the TLT is not dictated by the state, an insurance company will usually default to something known as the Total Loss Formula (TLF) which is:
Cost of Repair + Salvage Value > Actual Cash Value
If the sum of the first two quantities is greater than the ACV, the car can be declared a total loss.