Having your car totaled is an unpleasant experience that gets worse when you contemplate your obligation to pay off the loan on a car that your insurance won't pay to repair. Fortunately, insurance and finance companies are familiar with this problem. In most cases, you'll find that processing your claim and getting your loan paid off isn't the daunting experience you may have feared. In many cases, you'll pay nothing out-of-pocket, and may even get a check for your equity in the totaled car. In others, however, you'll have to pay the difference unless you have gap insurance.
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What Totalled Means
Insurance companies look at damaged vehicles from a mitigated cost viewpoint -- not whether the car is repairable, but whether the company's costs will be less if it writes off the car as a total loss than if it pays for its repair. Several factors enter into this evaluation. For one thing, totalling the car generally involves lower labor costs. The company can determine a total loss with a single inspection, but a repair estimate may be only the first of several interchanges between the consumer and the insurance company, each with its associated cost.
When the insurance company declares the car a total loss, they still expect to recover the salvage value of the vehicle. In some cases, this may be several thousand dollars. In practice, companies often write off a vehicle rather than repair it when the repair estimate exceeds 75 percent of the replacement cost.
No-Fault vs. Negligence
What happens once the car's been declared a total loss depends upon which state you live in. As of this writing, 12 states have some form of no-fault insurance: Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah. Generally speaking, in a no-fault state your insurance company will reimburse you for the replacement cost of your vehicle no matter who is at fault. Significantly, they also pay when it cannot be determined that anyone is at fault.
In other states, whose insurance company pays depends upon who's at fault. If it cannot be determined that anyone's negligence caused the accident, unless you carry separate collision coverage, it may be that neither insurance company will reimburse you for the loss.
Determining the Value of the Vehicle
When your insurance company declare your car a total loss, it will reimburse you for what it considers the fair market value of the vehicle. In some cases, you may be pleasantly surprised by the amount you'll receive. In others, you may not. When you don't agree with the insurance company's declaration of value, your options are few: you can accept the declared amount, initiate a bargaining process by contacting the insurance company's appraiser or customer service rep, or you can sue. You may get some satisfaction through bargaining. At other times, an insurance company will reopen the bargaining process after you file suit. If not, you'll have to prove your case in court.
When determining what to do when you're dissatisfied with the loss estimate, try to be unemotional and collect the relevant facts before proceeding further. Getting the average retail value of your car from one of the companies that provides this information, such as Kelley or Edmunds, is a good place to start.
When You Owe More Than the Car Is Worth
When you took out your auto loan, the sales agreement contained language giving your lender the right to collect what's owed directly from your insurance company. In most cases, your insurance policy carries similar assurances. When what you owe is less than the insurance company's declaration of value, you'll get a check for the difference. But if you owe more than the insurance company says the car is worth, you're responsible for the difference. In many cases, they will insist on immediate payment. For this reason, it helps to include gap insurance in your auto policy. It pays your lender the difference between what you owe and what the insurance company declares is the value of your totaled vehicle.