When your insurance company declares your vehicle a total loss, it can cause confusion and leave you feeling like you are coming up with the short end of the stick. If a total loss meant getting a replacement vehicle, many policyholders would be perfectly happy to see their old vehicles totaled. After all, that would mean no money out of their pockets and a car that hasn’t been in an accident. Unfortunately, when the insurance company declares a total loss, most policyholders pay more out of pocket than if the vehicle is repaired.

Out-of-pocket costs may exceed deductibles

When the insurance company pays to fix your vehicle, your out-of-pocket costs are limited to your deductible. If you carry a $500 deductible, that’s the amount you contribute to repairs. Most people can handle their deductibles with little difficulty.

When an insurance company totals your vehicle, they cut you a check for its value. You are responsible for replacing your own vehicle with the proceeds. To the detriment of the policyholders, cars depreciate. Because of this, the value of the vehicle usually falls below the cost of purchasing an equivalent replacement. Policyholders then find themselves needing to come up with much more than their deductibles.

How the claims process works

In terms of a claim for vehicle damages, insurance companies first calculate the actual cash value (ACV) of the vehicle. They determine this number based on the total price a seller would get for the vehicle, though the specifics of how they reach the ACV are proprietary and vary by insurance company. The ACV represents what the insurance company is willing to pay if they total the vehicle.

The insurance company then determines the cost of repairing the vehicle. Since the insurance company must restore the vehicle to a roadworthy, reliable condition, insurance companies may, in cases of severe damage, determine that the vehicle cannot be repaired at any cost. When mechanics determine repair is feasible, the company determines the repair cost and compares it to the ACV.

The insurance company declares a total loss when the repair cost exceeds the ACV. An exception occurs if totaling the car violates state law. Some states require insurance companies to total a vehicle only if the ACV is significantly below the repair value, while others have no restrictions. After completing these calculations, the insurance company informs the policyholder that it has declared the vehicle a total loss.

How does the process differ when a vehicle is financed versus owned outright

If the policyholder owns the vehicle outright, the insurance company cuts the policyholder a check for the ACV, provided the policy contained comprehensive coverage. If the policy covers liability only, the policyholder receives the ACV only if another driver is found at fault. Liability-only policyholders receive nothing when they are at fault.

For financed vehicles, the insurance company must use the ACV to pay the lienholder. The insured receives any surplus. If the ACV falls below the loan amount, the vehicle owner generally owes the finance company the difference.

What if you disagree?

Policyholders receive a report showing the ACV and the repair costs. With some research, policyholders can judge these estimates. In cases where the ACV is too low, the repair costs too high, or both, the policyholder can appeal the decision to total the vehicle. In cases where totaling the vehicle hurts the policyholder, this often helps.

When the ACV comes in so far below the repair cost that totaling the vehicle cannot be questioned, policyholders may still wish the appeal the ACV value if it seems low. A higher ACV equals a higher payout. Higher payouts leave the policyholder in a better financial situation whether the vehicle is financed or owned outright.