How do insurance companies value totaled cars?

Learning that your insurance company won’t foot the cost of repairs following a car accident can add insult to injury in an already stressful situation. Unfortunately, insurers deem damaged cars “total losses” all the time.

When they do this, they offer vehicle owners an amount that is equal to or less than the Actual Cash Value of the damaged vehicle. This amount is often a fraction of what is necessary to replace it.

But, how does an insurance company decide to total a car? How does insurance calculate the value of a totaled car? It’s important to understand how insurance companies determine the car value when totaled to avoid surprises and to get the most money for your car.

How is Total Loss Calculated

Generally speaking, a vehicle is calculated total loss if the insurer would have to pay more money to repair your vehicle than to replace it. To avoid making rash decisions, insurers use a total loss valuation formula, which involves adding the salvage value of a car to the total cost of repairs, less the deductible. If the sum is greater than the ACV, the insurance company will determine a car is totaled.

Though there are other means car insurance can calculate the totaled value of a damaged vehicle — including the Salvage Value and Replacement Cost Value (both of which are more forgiving than the ACV) — most insurers use ACV when valuing claims.

What is Actual Cash Value?

ACV, which many refer to as “fair market value,” does not refer to the actual value of your vehicle. Rather, it refers to the cost to fix or replace your vehicle minus depreciation.

When valuing your vehicle and determining whether to pay for repairs, the adjuster assesses your vehicle’s pre-accident condition, then researches how much those cars are going for in the current market. Next, they calculate the cost of repairs. If the adjuster determines that the cost of repairs outweighs the value of your pre-accident vehicle, your policy will not cover repairs. Instead, your insurance company will offer you a check in the amount of the calculated ACV and declares your vehicle a total loss.

How to Calculate the ACV of a Car

Insurers use various sources to calculate the Actual Cash Value of a vehicle. Those include but are not limited to the following:

• Value guidebooks
• Dealer surveys
• Sales taxes
• Digital pricing tools
• Cost of title and registration
• Sale prices by private parties

As you can imagine, differing sources often yield drastically different values.

Use our FREE online tool to compare rates now!

Can you negotiate ACV?

Though it may seem unfair to you to receive a totaled determination, know that you do have some control over how much money you receive from the insurance company, as ACVs are negotiable. For this reason, it is important that you understand your car insurance and take additional steps to secure your rights to the maximum amount of compensation.

If you do not wish to argue with the totaled determination but want to get more for your vehicle than what the insurance company offered, research vehicles of similar makes, models and mileage in your area. Collect price data and, if values are significantly greater than what the insurance company offered you, present them to the adjuster.

You should also get to work gathering repair quotes. Insurers typically gather quotes from a small handful of shops, which may inflate their rates. If you can get lower estimates and higher sales values than what the insurer could gather, you may succeed in garnering a larger check.

If you hope to undo the totaled determination, there are steps you can take to increase the value of your vehicle and decrease the total value of your losses:

• Obtain an independent appraisal
• Notify the adjuster of value-boosting aftermarket installations 
• Review prices of similar vehicles in your area
• Gather repair and maintenance estimates
• Provide proof of low mileage
• Inquire about errors and deductions on values

Unfortunately, even with this extra effort, you often cannot avoid a totaled determination. For example, even if the damage is minimal, if it involves flood damage, insurers will probably declare your vehicle a Total Loss. This is because water often leads to rust, engine damage and safety issues.

The Total Loss Threshold by State

Another factor that determines a car is totaled is the Total Loss Threshold. The TLT is essentially a percentage of the vehicle’s fair market value before an insurance company can declare it “Totaled.” If a vehicle meets this threshold, the company can issue an automatic “Totaled” declaration.

In some states, state law dictates what the total loss threshold for insurance is. In others, however, there is no such law. In these cases, the company sets the TLT. It is neither better nor worse for states to set the TLT, as in some states, it is as low as 70% of the vehicle’s ACV.

It is also important to note that when damage compromises a vehicle’s safety, an insurance company may not even consider repairs. So that you do not run into any surprises, it is important that you understand your company’s policies before you get into an accident.

How much do insurance companies pay out for totaled cars?

If you cannot avoid a totaled declaration, your next question may be, how much does it take to total a car? Unfortunately, the answer depends on the type of policy you have: a replacement value policy or a full value policy.

Replacement value policies tend to pay out far less than full value policies. Under a replacement value policy, if car is totalled, insurance is only obligated to pay you enough money to help you find an exact replica of your damaged vehicle. This means a vehicle with the same or similar amount of mileage and in the same or similar condition.

Under a full value policy, however, an insurer must pay you what your vehicle costs at full market value, regardless of the price Kelley Blue Book or other sources cite.

Final Considerations for Total Loss Vehicle Value

If your insurance company offers you an erroneously low amount of funds after declaring your vehicle a total loss, you can take steps to increase your pay out. To avoid unpleasant surprises following an accident, do your homework ahead of time, and be sure to understand the process of totaling a car, including each aspect of the policy you ultimately buy.