When Does Insurance Total a Car?

Insurance companies don't randomly classify a car as a total loss after an accident. Before offering to replace your car or give you a cash settlement, they first use one of two formulas to calculate the damage ratio or total loss threshold, and then compare the results to state and company guidelines. A totaled car is one that meets or exceeds the numbers specified in those guidelines.

Total Loss Criteria

The three main criteria for determining whether your car is repairable or is a total loss are

  • repair costs
  • selling price at a salvage yard
  • cash value

Tip

Cash value refers to how much your car was worth prior to the accident. An insurance adjuster determines the amount by comparing your car to similar cars in your area, or by using auto-value guides such as Kelly Blue Book or NADA guides.

Damage Ratio vs. Total Loss Threshold Formulas

The specific criteria and formula an insurance company uses generally depends on whether state laws specify how much damage a car must sustain before classifying it as a total loss.

Insurers calculate the damage ratio in states that specify a specific percentage. The formula is "cost of repairs/cash value." For example, if repair costs are $4,000 and the cash value is $8,000, the damage ratio is 50 percent. Comparing the result to the state-specified percentage determines whether the car is considered totaled. As of publication date, the cutoff ratio in most states is 75 percent.

Insurers use the total loss formula in states that don't specify a percentage. According to this formula, a car is considered totaled if repair costs plus salvage value are greater than the vehicle's cash value. For example, a car with a cash value of $4,000 will be classified as totaled if repair costs are $5,000 and a salvage yard will pay $1,000 for the vehicle.

Tip

According to Gary Wickert, an insurance attorney, most insurers also consider practicalities in classifying a car as repairable or totaled. For example, a car approaching, but not exceeding, the damage guideline might be classified as totaled if repairing the vehicle doesn’t make sense.

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