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
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.
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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.