When is a car totaled?
A totaled car is a vehicle that an insurer considers no longer repairable or too costly to repair. To put it another way, a car is totaled when the cost to repair it is more than its worth before the accident.
A totaled car doesn’t necessarily mean it’s completely destroyed. It could have extensive damage or look fine on the outside. It just means the cost to restore it back to a safe and functional condition is too much to justify. It’s more economical for the insurance company to offer a cash settlement. The insurance company will make arrangements to have the vehicle signed over to the salvage vendor. In most cases, the vehicle will likely be sold as parts.
How do insurance companies determine if a car is totaled?
After you file a claim, an appraiser will assess the damage to your vehicle to make this determination. They’ll assess the damage and determine your car’s actual cash value (ACV), which is what someone would have reasonably paid for it right before the loss occurred. Typically, they’ll consider factors like the car’s model, mileage, and condition, but the assessment process may vary from insurer to insurer.
Next, the appraiser will estimate the cost to repair your car, making it safe and drivable again.
If the repair cost exceeds 75% of the car’s ACV, the insurer considers it a total loss.
For example, let’s say your reliable five-year-old car is valued at $15,000 at the time of loss, accounting for depreciation. After being wrecked in an accident, your insurer estimates it would cost $16,000 to repair. For the insurer, it doesn’t make financial sense to pay more in repairs than the car is worth, so they’ll consider it a total loss.
Some insurers may even consider a car totaled if the repair costs fall below the car’s ACV by 20% to 30%. This threshold varies between insurers and provinces, so it’s important to check your policy conditions.
Does insurance pay for a totaled car?
The answer depends on whether your car is owned outright, financed, or leased.
If you own the car (you have no outstanding payments owing), you’ll receive an amount equal to the car’s ACV, minus any deductibles that may apply on your policy.
So, in the wrecked car example above, after the insurer takes possession of the car, they’ll offer you a cash settlement (minus any deductibles) equal to its pre-accident value, which would be $15,000.
So, applying the scenario above, if you owe $3,000 on your car loan at the time of loss and its ACV is $15,000, the insurer will pay $3,000 to the lender first. Since the settlement amount exceeds the outstanding loan balance, you’ll receive the remaining $12,000 (less your deductible if applicable) as compensation for the loss. You can use these funds to purchase a new car, or as you see fit.
Some insurance providers offer drivers the option of adding replacement cost coverage to their policies as an endorsement in exchange for a higher premium. In a total loss situation, your insurer would cover the costs of replacing your car with an entirely new one, usually the same model. If they can’t find your exact model, they’ll either:
- Look for an alternative that’s considered equal in value and has similar features and functionality.
- Offer the cash equivalent of that car’s current market value — as indicated on the endorsement.
Normally, replacement cost coverage does come with a higher payout compared to ACV. However, there might be exclusions on your policy that could limit the extent of this coverage. For instance, some insurers restrict replacement cost coverage to cars that are older than 3 years from the date they were delivered to the first owner. Others may also impose mileage restrictions, so cars driven above a certain mileage threshold would not be covered. These conditions may vary from one policy to another, so again, be sure to review your specific policy wording carefully.
