How Does a Car Become Totaled?

Many auto policies provide coverage for physical damage, but sometimes the damage is enough to make the vehicle a total loss. We’ve all heard of totaled cars, and maybe even had one, but what does it mean for a vehicle to be totaled?

First, it’s helpful to understand how an auto insurance policy protects the value of the car. A standard auto policy provides “actual cash value” coverage. This means the insured value of the car includes a deduction for depreciation. This structure makes actual cash value roughly synonymous with market value, with the value tracking your actual loss risk. In other words, your risk matches the car’s worth, and that’s the value the insurer protects.

For example, if you buy a new car for $30,000, it might be worth about $24,000 a year later. Depreciation rates vary by make and model but are higher during the early years of a vehicle’s lifetime. After a year, the insured value of the car would be approximately $24,000. In an insured loss, this is the maximum the insurer will pay to repair the vehicle.

​After a year, you’re involved in a car accident. Fortunately, no one was hurt. But the damage to the car was extensive. Between body work, air bag replacement, and a series of sensors in the front bumper that need to be replaced, the repair estimate comes in at $20,000.

In this example, there’s still a difference of $4,000 between the insured value and the repair cost. Is the car totaled?

Mathematically speaking, the vehicle isn’t a total loss. However, in practical application, the insurer will probably deem the vehicle a total loss. Here’s why.

The repair estimate represents visible damage but may include some parts that should be replaced as a precaution. What the figure doesn’t include the damage that can’t be seen, the damage that only becomes apparent after the shop takes apart the car to do repairs. 

Insurers usually use a loss of 70% to 80% of the car’s insured value as a threshold to determine whether the car is a total loss or eligible for repair.
In the example above, the insurer would likely pay the actual cash value of the vehicle as a settlement, less the deductible. If the car has a $750 deductible, the insurer deducts this amount from the claim settlement. In effect, in a total loss, the insurer buys the car from you for its actual cash value (minus your deductible).

This insurance structure usually works well for most cars, but can leave a gap in coverage during the early years of ownership when a car depreciates faster than its loan balance shrinks. Some insurers offer gap insurance to provide better protection for vehicles that have a loan balance but which have negative equity.