How Car Insurance Treats a Total Loss

If your car is damaged in an accident and the cost to repair it exceeds the car's actual value, the insurance company determines that it cannot be repaired safely, or it meets other state requirements, it may be considered a total loss, or "totaled." Here's what you should know just in case.

What Is a Total Loss?

A vehicle must meet one of several criteria before it can be declared a total loss by an insurance company:

• The car's repair costs would exceed its cash value. According to State Farm, the actual cash value of a car is determined by its "year, make, model, mileage, overall condition, and major options—minus your deductible and applicable state taxes and fees."
• The insurer determines that it cannot be repaired in such a way that it is safe to drive.
• Other criteria for a totaled car are met under your state's auto insurance laws.

State insurance laws and individual insurers both have formulas for determining whether a car is a total loss. Many insurance companies use a "total loss formula," which states that if the cost of repairs plus the salvage value of the car exceeds what the car was worth before the accident, it is considered a total loss. Some states establish a "total loss threshold," which states that the damage must exceed a certain percentage of the car's value in order to be considered a total loss.

The threshold in New York, for example, is 75%. If the cost of repairs plus the salvage value of the vehicle exceeds 75% of its actual cash value, the vehicle is considered a total loss for insurance purposes.

Filing an Insurance Claim for a Total Loss

If your car was totaled in an accident caused by another driver, you can file a claim with that driver's insurance company. Your own insurance company may be able to assist you with the claims process. Except in New Hampshire, drivers are required to carry a certain amount of property damage liability coverage. (Under New Hampshire law, drivers who do not have insurance must demonstrate that they can cover any damage they cause.)

Most states require drivers to have at least $10,000 in property damage liability coverage, with many states requiring at least $25,000. Drivers can purchase more liability coverage than their state requires, and it is often recommended that they do so if they have assets to protect from a lawsuit.

If you were at fault (or there was no other driver), you will file a claim with your own insurance company. You must have collision or comprehensive insurance as part of your policy to do so.

Collision insurance protects your vehicle in the event of a collision with another vehicle or an object such as a tree or guardrail. Comprehensive insurance protects against damage caused by events other than a collision, such as fire, wind, flooding, vandalism, or a falling object.

Comprehensive and collision coverage are both optional. Both have deductibles, which are the portions of the bill you must pay before your insurer will pay its share. For example, if your collision insurance has a $500 deductible and your car is totaled in an accident, your insurer will deduct $500 from your insurance settlement.

Whether you were at fault or another driver, your insurance company will send a claims adjuster to inspect the damage to your car and determine whether it is a total loss.

If you disagree with the adjuster's assessment, the National Association of Insurance Commissioners (NAIC) recommends that you first try to resolve the issue with your insurance company. "If you and the insurer continue to disagree about claim handling or settlement, you should seek assistance from consumer services personnel at your state insurance department," says the NAIC. If that doesn't work and the amount of money involved is significant, you may want to consider hiring a private attorney or a public adjuster to assist you in pressing your case.

A Total Loss on a Financed or Leased Car

If you own your car outright and have no outstanding car loans, you can simply file a claim. When the insurer sends you a check, you can put it toward the purchase of another car or use it for other things.

If you still owe money on the totaled car, the situation becomes more complicated, especially if it is new. Because new cars depreciate rapidly in the first few years of ownership, it's not uncommon for the loan balance to exceed the car's actual value. So, in addition to the insurance company's payment, you may have to dip into your savings to pay off your loan.

Similar to leased cars, you may owe more on your lease than you receive in an insurance settlement.

One way to protect yourself is to purchase gap insurance for both loans and leases. It is intended to cover the difference between what the insurance company will pay and what you owe, as the name implies.